The Wahi brothers were arrested Thursday morning in Seattle, the New York prosecutor’s office said in a statement. Their friend who is alleged to have participated in the scheme, Sameer Ramani, remains at large.
“Our message with these charges is clear: fraud is fraud is fraud, whether it occurs on the blockchain or on Wall Street,” Damian Williams, the U.S. Attorney for the Southern District of New York, said in a statement. “And the Southern District of New York will continue to be relentless in bringing fraudsters to justice, wherever we may find them.”
Coinbase CEO Brian Armstrong wrote on Twitter the company launched an internal probe in April after learning of potential insider trading. “As a result of our investigation we identified 3 suspects and provided this information to law enforcement. One person was a Coinbase employee who we terminated,” he wrote.
Federal prosecutors did not implicate Coinbase in any wrongdoing, and Williams thanked the company in his statement for cooperating with the probe.
But the case is inflaming tensions between Coinbase, the largest U.S.-based crypto exchange, and the Securities and Exchange Commission. The financial markets regulator contends many of the digital tokens listed by Coinbase and other crypto exchanges meet the legal definition of securities, akin to stocks, and the companies therefore need to register with the agency so it can better monitor them for fraud and abuse; Coinbase says the assets traded on its platform don’t qualify.
Former OpenSea executive charged in first-ever NFT insider trading case
On Thursday, parallel to the criminal charges, the SEC said it is suing the three men for violating securities law, arguing that “at least” nine of the 25 digital assets they bought and sold as part of the alleged scheme qualify as securities.
“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.”
Coinbase chief legal officer Paul Grewal called the SEC charges, and the agency’s argument that nine tokens on the platform constitute securities, “an unfortunate distraction.”
“We think they’re wrong, and the court process will prove that,” Grewal said in an interview, adding the company will consider whether to weigh in on the case as it proceeds. “It’s the SEC that’s the outlier here, and I think that’s abundantly clear from today’s events.”
The SEC in its complaint named the nine tokens — Amp, RLY, DDX, XYO, RGT, LCX, POWR, DFX, and KROM — and included a 38-page analysis of how each meets the definition of a security under federal law.
The agency’s move already has drawn a rebuke from a fellow market regulator. “The SEC’s allegations could have broad implications beyond this single case, underscoring how critical and urgent it is that regulators work together,” Caroline Pham, a commissioner on the Commodity Futures Trading Commission, said in a statement. “Regulatory clarity comes from being out in the open, not in the dark.”
The case is the second in as many months in which an employee at a prominent digital asset exchange is accused of abusing insider information. In June, federal prosecutors in New York charged a former executive at OpenSea, the largest platform for trading non-fungible tokens, with buying NFTs based on his knowledge they would soon be listed on the online marketplace’s homepage.
Federal prosecutors allege Ishan Wahi, the Coinbase manager, attempted to flee the country when the company uncovered his conduct. In early May, Coinbase’s director of security operations told Wahi to appear the following Monday at the company’s Seattle office to discuss its listing process. That Sunday evening, Wahi bought a one-way ticket on a flight to India scheduled to take off just before his meeting the next day, according to prosecutors.
In the hours before takeoff, he texted his brother and Ramani about the investigation and sent them a screenshot of the messages he received from the Coinbase security officer. Prosecutors said he was stopped by law enforcement prior to boarding.