Federal prosecutors have brought a case of insider trading in digital coins to court in Manhattan for the first time.
The arrest of Ishan Wahi on Thursday follows extensive investigations by New York prosecutors and the Securities and Exchange Commission. Wahi, who was in charge of listings at a Coinbase unit specializing in investment products, is also alleged to have violated the SEC’s anti-fraud rules.
“Today’s indictments are another reminder that Web3 is not a lawless space,” Manhattan U.S. Attorney Damian Williams said in a statement. “Our message is clear: Fraud is fraud is fraud, whether it occurs on the blockchain or on Wall Street.” He added that Coinbase has cooperated with the investigation. Web3 is an umbrella term for digital currency technologies.
Profit of more than 1 million dollars
Coinbase allows trading of more than 150 tokens, including many that have been added in recent months. Because the platform is considered the largest crypto exchange in the U.S., coins often experience a rush of interest – and a price spike – immediately after they are added.
According to the indictment filed Thursday in New York, Wahi tipped his brother Nikhil Wahi and his friend Sameer Ramani before tokens were listed on the exchange. Nikhil Wahi and Ramani allegedly used that information to trade dozens of tokens from at least June 2021 to April 2022 and made a profit of more than $1 million, according to the indictment.
The lawyer for Ishan Wahi, 32, declined to comment. Ramani, 33, remains at large, according to prosecutors.
Priya Chaudhry, the lawyer for Nikhil Wahi, 26, who was also arrested, said her client had done nothing wrong. “Prosecutors are trying to criminalize blameless behavior because they are looking for a scapegoat since so many people have lost money in cryptocurrencies recently,” Chaudhry said. “The arrest of Nikhil Wahi is a knee-jerk reaction by the authorities to save face.”
Coinbase chief legal officer Paul Grewal said the platform has “zero tolerance” for illegal behavior. He said Coinbase immediately launched an investigation when it learned of the insider trading allegations and initially suspended Wahi. He was dismissed on July 15, Grewal said.
Complaints on social media led to investigation
Manhattan prosecutors launched their investigation in April after complaints surfaced on social media about unusually well-matched investments in tokens listed on Coinbase. In mid-May, authorities barred Wahi from leaving the country.
According to prosecutors, Coinbase arranged to meet with Wahi in Seattle on May 16 as part of an internal investigation into the suspicious trading activity. The night before, Wahi purchased a one-way ticket on a flight to New Delhi.
About 35 minutes before the scheduled meeting, Wahi wrote Coinbase’s head of security that he “needed to fly back home” but that the meeting could be made up, the indictment says. Law enforcement officers intercepted him at the airport.
The SEC’s complaint, filed Thursday in federal court in Seattle, alleges that Ishan Wahi repeatedly communicated material confidential information to his brother and his brother’s friend via text messages and calls over a foreign phone. Nikhil Wahi and Ramani repeatedly acted on the basis of this information, the complaint states. The SEC says the case is the first for crypto insider trading. It is seeking civil penalties and restitution of amounts not yet quantified.
Insider trading as a particular problem in the crypto industry
U.S. authorities have tightened their controls on the crypto industry, which they say often operates in legal gray areas. Insider trading is seen as a particular problem in this regard.
After years of being cautious about listing tokens, Coinbase decided last year to significantly increase their number in an effort to regain market share it had lost to competitors such as Binance.
Although Coinbase has not been indicted, the cases could lead to additional scrutiny of the platform. Prosecutors praised the company for its cooperation in the investigation.
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