Ex-Coinbase Manager, Two Others Indicted In Alleged $1.1 Million Crypto Insider Trading Scheme

Topline

U.S. authorities on Thursday arrested a former Coinbase employee and two others for allegedly using confidential information from the popular crypto brokerage to commit insider trading—marking the first case of its kind in the nascent cryptocurrency industry.

In one instance, the ex-manager allegedly called his brother “just minutes” after receiving … [+] confirmation that a token would be listed—allowing him to buy the asset and then “almost immediately” bag thousands of dollars in profit once the announcement went live.

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Key Facts

The U.S. Securities and Exchange Commission on Thursday announced the insider trading charges against Ishan Wahi, a former Coinbase product manager, his brother and a friend, alleging Wahi repeatedly told his brother, Nikhil Wahi, and a friend, Sameer Ramani, about the timing and content of upcoming token listings on the platform.

In a parallel action, the Department of Justice charged the three with wire fraud conspiracy and wire fraud, saying in a statement that Nikhil Wahi retrieved the confidential information from a private Coinbase messaging channel reserved for a “small number” of employees with direct involvement in the listing process; they were arrested in Seattle on Thursday morning.

As a product manager, Nikhil Wahi helped coordinate the platform’s public listing announcements, including what crypto assets or tokens would be made available for trading, and the SEC said he engaged in the scheme from at least June 2021 to April 2022 despite Coinbase warning its employees not to trade on the basis of the confidential information.

Ahead of the announcements, Nikhil Wahi and Ramani allegedly purchased at least 25 crypto assets—at least nine of which were securities—and then sold them shortly after the announcements, generating more than $1.1 million in illicit profits as part of the scheme, the SEC alleged.

In one instance, Ishan allegedly called Nikhil “just minutes” after receiving confirmation that the Ethereum-based POWR token would be listed on Coinbase, allowing Nikhil to buy about $7,000 of the crypto asset two minutes before the announcement and then “almost immediately” realizing a profit of $3,050 upon selling the tokens once the announcement went live.

Crucial Quote

Though certain cryptocurrencies’ classification as a security has long been debated, the SEC’s Gurbir Grewal said in a statement the “economic realities … affirm that a number of the crypto assets involved are securities,” giving the agency jurisdiction, and pledged to double down on enforcement actions involving crypto-crimes “regardless of the label placed on the securities involved.”

Chief Critic

In a blog post after the indictment, Coinbase CEO Brian Armstrong hit back at the SEC’s assertion that some of the crypto assets are securities, noting the DOJ did not bring securities fraud charges and saying: “No assets listed on our platform are securities, and the SEC charges are an unfortunate distraction from today’s appropriate law enforcement action.” He also noted the company conducted a rapid investigation of the matter after some people brought forth allegations of frontrunning.

Surprising Fact

Though the group allegedly tried to conceal their purchases by using accounts held in the names of others and transferring funds through multiple anonymous blockchain wallets, the suspicious trading drew the attention of Coinbase’s security director, the SEC wrote in its complaint. On May 11, the company emailed Ishan to schedule an interview with its legal department in connection with an “ongoing company investigation into Coinbase’s asset listing process.” Ishan then sent a screenshot of the interview request to his co-conspirators and said he needed to speak with them urgently. He never showed up for the interview and instead tried to “fly back to India overnight,” the SEC complaint alleges.

Key Background

The SEC called Thursday’s enforcement action its first involving cryptocurrency insider trading, but federal prosecutors have waded into the nascent digital asset space before. Last month, Nate Chastain, a former high-ranking employee at buzzy nonfungible token (NFT) marketplace OpenSea, was indicted for fraud and money laundering. Prosecutors alleged Chastain, then OpenSea’s head of product, engaged in insider trading by buying dozens of NFTs before they were featured on OpenSea’s homepage and then sold them shortly after for between two and five times the purchase price.