Case Brief – Securities & (SEC) vs Ishan Wahi, Nikhil Wahi, Sameer Ramani

Details of Parties

1. Complainant – United States Security and Exchange Commission (SEC)

1. Defendants – (1) Ishan Wahi is a citizen of India, residing in Seattle, Washington on a work visa. Ishan was a manager in Coin base’s Assets and Investing Products group. (2) Nikhil Wahi, is a citizen of India, residing in Seattle, Washington. Nikhil is a senior product manager at Salesforce, Inc. Nikhil is Ishan’s brother. (3) Sameer Ramani is a close friend of Ishan and attended the University of Texas at Austin.

Brief Facts

• The case involves insider trading in crypto asset securities that Coinbase Global, Inc. listed on its trading platform. Coinbase is one of the largest crypto asset trading platforms in the U.S., with publicly announced listings of certain crypto assets on its trading platform since May 2020.
• From June 2021 to April 2022, Ishan Wahi, a manager at Coinbase’s Assets and Investing Products group, repeatedly tipped material, nonpublic information about the timing and content of Coin base’s listing announcements to his brother Nikhil Wahi and his close friend Sameer Ramani.
• Nikhil and Ramani used the information to trade ahead of the announcements, earning at least $1.1 million in illicit profits.
• Ishan violated the duty of trust and confidence he owed to Coinbase by tipping the information. Nikhil and Ramani traded based on material, nonpublic information that they knew, was reckless in not knowing or consciously avoided knowing that Ishan had provided in breach of his duty to Coinbase and for a personal benefit.
• Coinbase’s employee policies stated that material, nonpublic information included information about Coinbase’s decision to list a crypto asset and emphasized that employees should never disclose this information to others or tip others who might make a trading decision using it.
• As a manager at Coinbase, Ishan was entrusted with first-hand knowledge of the listings and acknowledged his duty to keep the information confidential. However, he repeatedly tipped the information to his brother and friend ahead of multiple announcements.

Allegations raised against the Defendant by the Complainant

1. 1. Allegations of Insider Trading
      • SEC alleges that Ishan, a Coinbase manager, misused confidential and material nonpublic information regarding the company’s listing announcements of certain crypto asset securities.
      • Ishan is accused of providing this information to Nikhil and Ramani, who traded on this information and gained a personal benefit from Ishan’s actions.
      • All three individuals, Ishan, Nikhil, and Ramani, are accused of acting with the intent to deceive and manipulate through the exchange of this information.
   2. Violation of Company Policies and Duty of Trust and Confidence:
      • Ishan is alleged to have breached Coinbase’s policies, which required him to maintain the confidentiality of the company’s material nonpublic information and prohibited him from using it for personal benefit or disclosing it to others.
      • He is also accused of violating the duty of trust and confidence he owed to Coinbase as a source of the information about the planned listings.

On the basis of the above allegations, and actions alleged herein, SEC has filed the complaint against the Defendants stating that they have committed insider trading and violated Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)] and Rule 10b-5 thereunder.

The matter at issue here is – Whether the defendants are liable for insider trading in violation of their duty of trust and confidence to Coinbase.

Block Legal Opinion

To understand the issue, we will have to first understand the meaning of insider trading as per the law. The Securities Exchange Act of 1934 deals with insider trading, the relevant sections are mentioned below-

SEC Rule 10b-5, states that it is illegal for any person to defraud or deceive someone, including through the misrepresentation of material information, with respect to the sale or purchase of a security. Rule 10b-5 covers instances of insider trading, wherein an insider or executive uses nonpublic information to influence share prices to their benefit:

Employment of Manipulative and Deceptive Practices

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,
(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

Other related provisions

15 U.S. Code § 78t–1 – Liability to contemporaneous traders for insider trading

(a)Private rights of action based on contemporaneous trading.

Any person who violates any provision of this chapter or the rules or regulations thereunder by purchasing or selling a security while in possession of material, nonpublic information shall be liable in an action in any court of competent jurisdiction to any person who, contemporaneously with the purchase or sale of securities that is the subject of such violation, has purchased (where such violation is based on a sale of securities) or sold (where such violation is based on a purchase of securities) securities of the same class.

15 U.S. Code § 78u–1 – Civil penalties for insider trading

a) Authority to impose civil penalties.

1. 1. • Judicial actions by Commission authorized.
        Whenever it shall appear to the Commission that any person has violated any provision of this chapter or the rules or regulations thereunder by purchasing or selling a security or security-based swap agreement while in possession of material, nonpublic information in, or has violated any such provision by communicating such information in connection with, a transaction on or through the facilities of a national securities exchange or from or through a broker or dealer, and which is not part of a public offering by an issuer of securities other than standardized options or security futures products, the Commission—

(A) may bring an action in a United States district court to seek, and the court shall have jurisdiction to impose, a civil penalty to be paid by the person who committed such violation; and

(B) may, subject to subsection (b)(1), bring an action in a United States district court to seek, and the court shall have jurisdiction to impose, a civil penalty to be paid by a person who, at the time of the violation, directly or indirectly controlled the person who committed such violation.

Rule 10b5-1 addresses the issue of when insider trading liability arises in connection with a trader’s “use” or “knowing possession” of material nonpublic information. Therefore, liability under the rule arises when a person trades “on the basis of” material nonpublic information, when the person purchases or sells securities while aware of the information.

Therefore, the liability under the SEC rule arises from the trade of securities on the basis of” material nonpublic information, but the question that emanates here is whether crypto asset security falls within the definition of security as per the law.

Federal securities laws define what security is. The definition of Security as per Section 2(1) of the Securities Act of 1933 is given below –

The term ‘‘security’’ means any note, stock, treasury stock, security future, security-based swap, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a ‘‘security’’, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

The definition includes “investment contracts.” i.e., if it constitutes an investment of money in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.

The Security and Exchange Commission (Complainant) in their complaint against the defendant has stated that “crypto asset security” refers to an asset that is issued and/or transferred using distributed ledger or blockchain technology – including, but not limited to, so-called “digital assets,” “virtual currencies,” “coins,” and “tokens” – and thus meets the definition of “security” under the federal securities laws.

Interestingly, as reported by Reuters, Ishan Wahi, has made a motion to dismiss the SEC’s complaint. Wahi argues that he was unaware that the Ethereum-based crypto tokens he traded would be defined as securities by the SEC. The ex-Coinbase employee, who has now pleaded guilty to conspiring to commit wire fraud, still maintained his stance even during the plea hearing in his criminal case, insisting that the relevant tokens were not securities.
In conclusion, the ongoing case of the classification of a particular cryptocurrency as a security or not holds great significance in determining the future of the cryptocurrency industry. The outcome of this case has the potential to shape the regulatory framework for the industry and also impact the way investors view and trade cryptocurrencies. The Securities and Exchange Commission’s definition of a security is crucial in deciding the fate of this case and will set a precedent for future cases involving cryptocurrencies. It is important to note that the classification of a cryptocurrency as a security will attract stringent regulations and oversight, which may impact its growth and widespread adoption. The crypto community is closely watching the developments in this case and eagerly awaits the decision. Regardless of the outcome, this case serves as a reminder of the need for clear regulations in the rapidly evolving world of cryptocurrencies.