Until the Smoke Clears: Unanswered Questions Loom in Wake of Blaszczak Dismissal

Oct 11, 2023

by Richard A. Levan, Ryan J. Levan and Marc Durant

On July 24, 2023, following six years of intense criminal litigation, the Department of Justice dismissed the remaining conspiracy charges against David Blaszczak and two co-defendants in what initially was brought as an insider trading case. After two trips to the Second Circuit and an intervening Supreme Court decision, DOJ finally threw in the towel. [For our detailed treatment of the Blaszczak cases, CLICK HERE]

No one should breathe a sigh of relief, however.

As we indicated in our July 25th article, a dissent issued by Judge Walker in Blaszczak II raised concern that it was now easier for DOJ to prove insider trading-type conduct criminally under 18 U.S.C. § 1343 on a wire fraud theory than it was for the SEC to prove civil insider trading civilly under Section 10(b) or Rule 10b-5 because Section 1341 does not require proof of a personal benefit. His dissent sent tremors through the corridors of Second Circuit and insider trading jurisprudence as practitioners worried that much insider trading enforcement would pass from the SEC to DOJ.

To some extent that fear was justified.

In August, DOJ prevailed in a jury case involving non-fungible tokens (“NFTs”), in essence, an insider trading case brought without insider trading charges. USA v. Chastain, No. 22-cr-305 (S.D.N.Y.). In Chastain, the government alleged the defendant misappropriated crypto company OpenSea’s proprietary business information for the purpose of making trades resulting in convictions for wire fraud and money laundering. DOJ declined to pursue an insider trading charge, however, due to a concern over whether NFTs could be considered securities. Ironically, following Chastain, the SEC settled two crypto registration actions involving NFTs, finding that the NFTs in those cases constituted securities under the Howie test. See In the Matter of Impact Theory, LLC, A.P. No., 3-215585 (Aug. 28, 2023); In the Matter of Stoner Cats 2, LLC, A.P. No., 3-21655 (Sept. 13, 2023).

Similarly, in USA v. Wahi, 22-cr-392 (S.D.N.Y.), a case involving tipping by a Coinbase employee to his brother and a friend, DOJ and the SEC jointly prosecuted the three men for their activity.  While the SEC complaint charged conduct under Section 10(b) for insider trading, calling it “insider trading, pure and simple,” the criminal indictments only charged wire fraud and conspiracy to commit wire fraud.  See Press Release, U.S. Securities & Exchange Commission, Former Coinbase Manager and His Brother Agree to Settle Insider Trading Charges Relating to Crypto Asset Securities (May 30, 2023); Press Release, U.S. Attorney’s Office, S.D.N.Y, Former Coinbase Insider Pleads Guilty in First-Ever Cryptocurrency Insider Trading Case (Feb. 7, 2023).

Whether Chastain and Wahi are harbingers of a trend away from securities fraud claims in favor of simpler criminal statutes like wire fraud is subject to question.  One thing is clear, however: a defendant’s exposure to criminal prosecution for what previously would be charged civilly as insider trading has heightened dramatically. It is also now clearer than ever that SEC investigations require practitioners deeply experienced both in securities law and white-collar criminal defense. Expertise in both areas has become essential.

For more information on the issues discussed in this alert, please contact us.