According to federal prosecutors in Manhattan,  three men engaged in trades over a period of ten months using advance information about fourteen listings on Coinbase, and earned approximately $1.5 million in illicit gains.

Three counts of wire fraud and one count of wire fraud conspiracy were filed against the men.

According to documents filed on Thursday, federal authorities have filed criminal and civil accusations against a former Coinbase employee and two other men in an insider trading case involving sensitive knowledge regarding bitcoin assets that were due to be listed on Coinbase's exchange.

Former Coinbase Employee at the Center...

Ishan Wahi, who was a member of the Coinbase team that placed assets on the exchange at the time, allegedly disclosed private information about when certain bitcoin assets will be published to his brother Nikhil Wahi and his brother's friend Sammer Ramani.

The brother and friend would purchase shortly before the listing went public, and then sell shortly after.

Ishan and Nikhil Wahi have been arrested - while Sammer Ramani, who resides in Houston, Texas, but is believed to have escaped to India, is wanted by investigators.

It began with a tweet from an individual who noticed strange behavior...

Ishan, who works at a cryptocurrency exchange, may have forgotten that the blockchain is public, as their action was quickly spotted and posted by a Twitter user...

""Found an ETH address that bought hundreds of thousands of dollars of tokens exclusively featured in the Coinbase Asset Listing post about 24 hours before it was published, rofl"

To their credit, Coinbase treated this matter seriously.

Coinbase Conducts an Investigation...

The source of the leak was found when Coinbase launched an internal probe in April in response to the tweet.

Coinbase CEO Brian Armstrong states, “We have zero tolerance for this kind of misconduct and will not hesitate to take action against any employee when we find wrongdoing” 

A lawyer for the former Coinbase employee asserts that his client is innocent of any misconduct and plans to fiercely defend himself against these claims.

Although this is unconfirmed, it appears that the suspects used Coinbase to fraudulently purchase the coins they were purchasing based on insider information from Coinbase.

My belief is that it was as simple as connecting the surname of the individual who purchased these coins at a suspicious period with the surname of his sibling who worked there.

While he has removed all social media profiles, we were able to obtain this image of former Coinbase employee Ishan Wahi.  We also discovered he co-founded something called 'The Teacher App'.

SEC Sparks Debate with their choice of criminal charges...

This case is trigging debate as the SEC has charged the defendants with a crime connected to fraud in the trading of securities, but whether all the tokens involved are securities is an issue far from settled.

Classifying crypto as securities is basically stating that they are identical to stocks. But what's being debated is that many coins, such as those associated with DAOs, might not be securities. While in the case of coins from a private corporation with a CEO and staff - many may qualify.

However, many argue (and The Global Crypto Press Association officially supports this position) that many coins function more like commodities, like trading gold and silver.

Coins and stocks can have one massive difference - many coins exist without a company behind them. Whether oversight comes from a DAO or other type of foundation that lacks official ownership, or even coins created by a private company but once launched, are truly decentralized - these may begin as securities if they hold a presale, then transform into something else once the company loses control (often called renouncing) to decentralization.

Even with these unresolved issues, the SEC's decision to charge them with a felony based on the assumption that all tokens involved are securities means that if they succeed, they will establish a legal precedent for designating cryptocurrencies as securities.

It is the responsibility of elected officials to discuss and determine such matters; however, the SEC appears to be attempting to reach its own conclusions.

It bothered Coinbase CEO Brian Armstrong so much that he addressed it in a blog post: "No assets listed on our platform are securities, and the SEC charges are an unfortunate distraction from today’s appropriate law enforcement action."

Even more surprising, and rare, is to have a commissioner from another regulating agency publicly agree with Armstrong's opinion that these are the wrong charges - CFTC Commissioner Caroline .D Pham posted a full page letter on Twitter accusing the SEC of "regulation by enforcement" - in other words, attempting to settle debated laws by charging people with crimes and seeing if they stick. 

This and another case involving NFT's are the first ever crypto insider trading cases.

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Author: Ross Davis
Silicon Valley Newsroom
GCP | Breaking Crypto News