The SEC filed insider trading charges against Ishan Wahi, a former manager of Coinbase, an online platform that let customers buy, sell, transfer, or store cryptocurrency. The commission also charged his brother, Nikhil Wahi, and his friend, Sameer Ramani.
The agency alleged that they made ill-gotten profits of more than $1.1 million by trading ahead of announcements related to certain crypto assets that would be made available for trading on Coinbase from at least June 2021 through April 2022.
“We are not concerned with labels, but rather the economic realities of an offering,” SEC enforcement chief Gurbir Grewal said in a statement. “In this case, those realities affirm that a number of the crypto assets at issue were securities, and, as alleged, the defendants engaged in typical insider trading ahead of their listing on Coinbase. Rest assured, we’ll continue to ensure a level playing field for investors, regardless of the label placed on the securities involved.”
The charges were filed with the U.S. District Court of the Western District of Washington’s Seattle Division on July 21, 2022.
Coinbase is one of the largest crypto trading platforms in the U.S. with more than 98 million users. Since at least May 2020, Coinbase started announcing on its blog or Twitter feed when it will begin listing certain crypto assets on its platform.
The SEC said the prices of crypto assets identified in the listing announcements typically go up quickly and significantly. The trading volume also skyrockets sometimes.
When he was at Coinbase, Ishan Wahi was a manager in Assets and Investing Products group. He had first-hand knowledge of what crypto assets Coinbase planned to support and when it planned to make listing announcements, the complaint states.
Coinbase’s employee policies state that material nonpublic information include “information about a decision by Coinbase to list, not list, or add features to a Digital Asset.” The policies emphasized that employees should never disclose sensitive information.
However, the commission alleged that Ishan Wahi repeatedly tipped his brother and his close friend with information about listings’ timing and content. The complaint notes that he communicated by phone and text, including phone calls and message that would not be captured in U.S. phone company records because he was using a phone with a non-U.S. phone number.
Thus, ahead of the announcements, Nikhil Wahi and Ramani allegedly bought at least 25 crypto assets and typically sold them shortly after the announcements for a profit. The SEC said at least nine of the 25 assets were securities, which the commission has the power to regulate and enforce its rules.
For example, the complaint said that on November 12, 2021, Ishan learned that Coinbase would soon announce the listing of POWR, a crypto asset security. Three days later, just minutes after receiving confirmation that POWR would be listed later that day, Ishan called Nikhil. Beginning at 2:52 pm ET—two minutes before the Coinbase listing announcement—a blockchain address Nikhil controlled bought 18,413 POWR for about $7,000. Almost immediately after the announcement, that blockchain address exchanged those tokens for about $10,050 in another crypto asset. As a result, Nikhil netted about $3,050.
“In nearly a year, the defendants collectively earned over $1.1 million in illegal profits by engaging in an alleged insider trading scheme that repeatedly used material, nonpublic information to trade ahead of Coinbase listing announcements,” Carolyn Welshhans, acting chief of the enforcement division’s Crypto Assets and Cyber Unit, said in a statement. “As today’s case demonstrates, whether in equities, options, crypto assets, or other securities, we will vindicate our mission by identifying and combatting insider trading in securities wherever we see it.”
In a joint statement on behalf of Ishan Wahi, Andrew St. Laurent with Harris, St. Laurent & Wechsler LLP and Marc Axelbaum with Pillsbury Winthrop Shaw Pittman LLP, rejected the SEC’s claims.
“Ishan Wahi is innocent of all wrongdoing and intends to defend himself vigorously against these charges and in the SEC action,” they said. “The allegations against him are without merit.”
Priya Chaudhry of ChaudhryLaw PLLC said that Nikhil Wahi is innocent.
He “is a decent, educated, honest young man who, like many Americans, invests in Cryptocurrency. The fact is that the government, including federal prosecutors, the SEC, and Congress, are woefully behind in understanding the technology or creating legislature around this lightning-fast, complicated area,” Chaudhry said. “It is no coincidence that on Tuesday, Congress grilled SEC Director of Enforcement, Gurbir Grewal, on his failure to regulate the crypto-world fast enough and today, these prosecutors arrest Nikhil Wahi. These prosecutors are trying to criminalize innocent behavior because they are looking for a scapegoat because so many people have lost money in Cryptocurrency recently. The government is embarrassed and arresting Nikhil Wahi is a knee-jerk reaction to save face.”
An attorney for the brother did not immediately respond to requests for comment. There is no known counsel for the friend, Ramani.
Regulatory Turf War
In the meantime, a commissioner of the Commodity Futures Trading Commission (CFTC) criticized the SEC in a rare statement against another regulatory agency.
Echoing SEC Commissioner Peirce’s sentiment that the capital market regulator is pursuing unfair charges against the crypto industry without providing clear rules of the road, CFTC Commissioner Caroline Pham said “the case SEC v. Wahi is a striking example of ‘regulation by enforcement.’”
“The SEC complaint alleges that dozens of digital assets, including those that could be described as utility tokens and/or certain tokens relating to decentralized autonomous organizations (DAOs), are securities,” Pham said. “The SEC’s allegations could have broad implications beyond this single case, underscoring how critical and urgent it is that regulators work together. Major questions are best addressed through a transparent process that engages the public to develop appropriate policy with expert input—through notice-and-comment rulemaking pursuant to the Administrative Procedure Act. Regulatory clarity comes from being out in the open, not in the dark.”
Separately, a major bipartisan crypto bill, which gives greater authority to the CFTC in regulating the crypto market, is currently stalled in the Senate. (See House Democrat Says SEC has Big Role in Regulating Crypto in the July 21, 2022, edition of Accounting & Compliance Alert.)
This article originally appeared in the July 22, 2022 edition of Accounting & Compliance Alert, available on Checkpoint.
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