Partial Victory for the SEC in Coinbase Insider Trading Case

U.S. District Court Judge Tana Lin has partially granted the SEC's request for a default judgment against Sameer Ramani in an insider trading case connected to Coinbase. The judgment includes a permanent injunction, civil penalties, and disgorgement of illicit gains, but not prejudgment interest. Coinbase is already facing its own legal challenges with the SEC but has been predicted to have a high chance of winning its lawsuit. Meanwhile, the Fantom Foundation secured a default judgment against Multichain in a bid to recover $122 million lost in a heist.

Judge Partially Grants SEC Judgment in Insider Trading Case

Judge Tana Lin of the U.S. District Court of Western Washington at Seattle has partially granted the Securities and Exchange Commission's (SEC) request for a default judgment against Sameer Ramani, a defendant implicated in an insider trading case tied to former Coinbase product manager Ishan Wahi. The case also involves Ishan's brother, Nikhil, both of whom were charged in July of 2022 with insider trading and wire fraud, relating to trades made on information about Coinbase's planned listings of certain cryptocurrencies.

Judge Lin agreed to the SEC's demands for a permanent injunction against Ramani, who is believed to have fled the United States and has not responded to court summonses, in addition to civil penalties and disgorgement of illicit gains. However, Lin did not support the SEC's request for prejudgment interest on those disgorged funds. It was alleged that Nikhil Wahi and Ramani profited around $1.5 million from their unlawful activities.

A major aspect of Lin's ruling involved the classification of certain cryptocurrencies as securities. The SEC contended that at least nine out of the 25 tokens traded by Nikhil Wahi and Ramani, based on Ishan Wahi's inside information, were indeed securities. These tokens include Powerledger (POWR), Kromatika (KROM), DFX Finance (DFX), Amp (AMP), Rally (RLY), Rari Governance Token (RGT), DerivaDAO (DDX), LCX, and XYO. Judge Lin agreed that these tokens were offered and sold as investment contracts and therefore should be considered securities under the law.

This decision has sparked quite the debate in the crypto community, with some legal experts questioning the judge's interpretation of the precedent set by SEC v. W.J. Howey Co., particularly the necessity of a "contract, transaction, or scheme" for something to be deemed an investment contract. Critics argue that without these elements, labeling these tokens as securities might not be as clear-cut as they make it seem.

Coinbase's chief legal officer, Paul Grewal, also weighed in on the matter, suggesting that the court's acceptance of the SEC's allegations without opposition could set a very concerning precedent for how digital asset legal disputes could be handled in the future.

In the broader context of the case, Ishan Wahi eventually pleaded guilty to the charges against him, striking a deal with the SEC, and was sentenced to two years in prison. His brother Nikhil received a 10-month sentence. Attempts to reach Ramani or his legal representation for comments were unsuccessful.

Coinbase vs. SEC

Coinbase itself is facing its own legal battle with the SEC. The SEC's lawsuit hinges on the argument that Coinbase, by staking customer assets, earning rewards, and returning them, is essentially offering and selling investment contracts, thus falling under SEC regulation. Additionally, the SEC accuses Coinbase of operating as an unregistered broker, a claim that Coinbase vehemently denies, pointing out the lack of a straightforward pathway for crypto exchanges to register for a license.

On the bright side, Elliott Stein, Bloomberg's senior litigation analyst, recently shared his belief that there is a strong likelihood that Coinbase could win its high-profile lawsuit against the regulator. Stein initially had some reservations about Coinbase's ability to counter the SEC's allegations, specifically those concerning its staking rewards program and operational structure.

However, his perspective shifted dramatically after a five-hour court hearing. He entered the courtroom with the belief that Coinbase might successfully dismiss the SEC's primary claims, and left with a conviction that Coinbase has a 70% chance of a full dismissal of the lawsuit.

Fantom vs. Multichain

In other legal news, the Fantom Foundation is taking legal steps to potentially recover $122 million lost in a heist from Multichain’s Fantom bridge in July of 2023. The Singapore High Court granted Fantom a default judgment against the cross-chain protocol Multichain on Jan. 30 for "breach of contract and fraudulent misrepresentations," after Fantom's accusation that Multichain mishandled its funds due to an exploit. The judgment empowers Fantom to seek the appointment of a liquidator to wind up the Multichain Foundation, very similar to Chapter 7 bankruptcy in the U.S., to oversee the recovery and distribution of the missing or frozen assets.

Fantom’s efforts to recover the stolen funds include filing a report with Singapore police, where the Multichain Foundation is incorporated, and initiating legal action against the company. The court's judgment currently pertains solely to Fantom's losses, but the foundation plans to use this legal victory to facilitate claims by all affected users against Multichain.

The court will now determine the damages owed to Fantom and demand repayment from Multichain, although Fantom anticipates the need for a liquidator due to Multichain's expected inability to pay. If a liquidator is appointed, they would have the authority to seize Multichain Foundation’s assets and recover funds to pay back creditors.

According to the blockchain security firm Beosin, the loss from the exploit totals $210 million, affecting users across multiple blockchains including Fantom, Ethereum, and Polygon due to unauthorized withdrawals. Speculation by Chainalysis suggests the incident might have involved compromised administrator keys, which could suggest a possible "inside job."

Additionally, Multichain co-founder Zhaojun He is also under active investigation in China and was arrested on unexplained charges two months before the exploit. Despite these challenges, his Telegram account showed activity in January, though it's unclear if it was actually him.