US appeals court overturns first NFT insider trading conviction

By Jonathan Stempel

NEW YORK, July 31 (Reuters) - A divided federal appeals court on Thursday overturned the fraud conviction of a former product manager at OpenSea, the world's largest marketplace for non-fungible tokens, in what prosecutors called the first insider trading case involving digital assets.

The 2nd U.S. Circuit Court of Appeals in Manhattan agreed with Nathaniel Chastain that erroneous jury instructions could have led to his conviction merely for acting unethically, by misusing information that had no real value to his employer.

Chastain, a 35-year-old Massachusetts native, had been appealing his May 2023 wire fraud and money laundering conviction and three-month prison sentence.

It isn't clear whether prosecutors plan to retry Chastain following Thursday's 2-1 decision.

A spokesman for U.S. Attorney Jay Clayton in Manhattan, whose predecessor prosecuted Chastain, did not immediately respond to requests for comment.

Non-fungible tokens, or NFTs, are unique digital assets, reflecting ownership of files such as artwork, other images, videos and text, and recorded on a blockchain.

Prosecutors said Chastain stole confidential information from OpenSea about which NFTs would be featured on its home page, secretly bought those NFTs, and sold them for a profit after they were featured and the price went up.

Chastain made about $57,000 from buying and selling 15 NFTs, court papers show. For each trade, he used an anonymous account into which he had transferred cryptocurrency, and transferred sale proceeds to his personal account.

Charges were unveiled in June 2022, after the NFT market had grown to about $40 billion annually.

Circuit Judge Steven Menashi said the trial judge erred by telling jurors a wire fraud conviction did not require proof Chastain stole information that had commercial value to OpenSea.

He also said the judge wrongly instructed jurors they could find Chastain schemed to defraud by departing from "traditional notions of fundamental honesty and fair play in the general and business life of society."

Menashi said if that were the test, "almost any deceptive act could be criminal."

Circuit Judge Jose Cabranes dissented and would have upheld Chastain's conviction.

The appeals court returned the case to U.S. District Judge Jesse Furman in Manhattan.

Alexandra Shapiro and David Miller, two of Chastain's lawyers, in separate statements said they were pleased. "This case was a miscarriage of justice," they said.

The case is US v Chastain, 2nd U.S. Circuit Court of Appeals, No. 23-7038.