A former product manager for Coinbase and his brother have reached a settlement with the U.S. Securities and Exchange Commission (SEC) regarding charges of insider trading involving crypto asset securities.
The SEC filed a complaint against the brothers in July 2022. According to the filing, Ishan Wahi shared confidential information about crypto assets and upcoming listing announcements with his brother Nikhil Wahi and friend Sameer Ramani, despite Coinbase’s policies prohibiting such activities. This occurred between June 2021 and April 2022.
The @SECGov just entered a proposed settlement in their case against Ishan Wahi, the former Coinbase employee, which is a complete surrender and shows the weakness in the SEC's theories about secondary market trading of crypto
This is a meaningful development for the industry
— Rodrigo (@RSSH273) May 30, 2023
Case break down
Both Nikhil and Ramani are accused of purchasing a minimum of 25 crypto assets, nine of which were securities (AMP, RLY, DDX, XYO, RGT, LCX, POWR, DFX and KROM), then subsequently selling them shortly after for a profit of approximately $1.1 million.
“While the technologies at issue, in this case, maybe new, the conduct is not,” said Gurbir S. Grewal, director of the SEC’s Division of Enforcement, in a statement.
“The federal securities laws do not exempt crypto asset securities from the prohibition against insider trading, nor does the SEC.”
Subject to court approval, Ishan and Nikhil have consented to permanent injunctions preventing them from violating Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. The brothers have agreed not to dispute allegations. They will also disgorge their illicit profits.
Previously, the Wahi brothers had requested the motion to dismiss the case before a judge. While admitting guilt to the criminal charges, Ishan expressed his belief that none of the involved tokens qualified as securities.
Coinbase chief legal officer Paul Grewal responded to the charges by asserting that the crypto exchange never lists securities on the platform. Grewal accused the SEC of pursuing a “regulation by enforcement” approach. The firm also expressed disappointment that the court will not have the opportunity to consider the motion.
In a separate criminal case, Ishan and Nikhil pleaded guilty to wire fraud conspiracy brought by the Department of Justice. Ishan is facing a two-year sentence and must forfeit 10.97 ether (approximately $20,900) and 9,440 USDT. Nikhil is serving a 10-month sentence and must forfeit $892,500.
Meanwhile, Ramani remains at large. He is believed to be in India despite being a U.S. citizen.
The SEC clarified that it would not pursue any further penalties following the prison sentences of the Wahi brothers.
Today's SEC settlement (i) doesnt admit any legal conclusions about the security status of tokens; (ii) doesnt require Wahi to pay any additional penalties (in addition to those due for separate criminal case); and (iii) includes immaterial injuction not to violate Section 10(b) pic.twitter.com/qHOfcaIVk2
— Rodrigo (@RSSH273) May 30, 2023
Accusations involving crypto assets
The case has garnered significant interest due to the SEC’s heightened involvement in regulating the crypto industry.
SEC Chair Gary Gensler has previously said that most cryptocurrencies are considered securities, excluding Bitcoin — a classification that many participants in the crypto industry are challenging. Instead, they seek customized regulatory frameworks for digital assets instead of trying to fit the industry into traditional financial regulations.
Through lawsuits like the one against the Wahi brothers, the regulatory body argues that numerous digital assets qualify as securities and thus fall within its jurisdiction.
However, lawyers representing the brothers presented a different argument in their filing. They argued that the nine cryptocurrencies in question were not securities because they were sold on the secondary market.
The SEC is increasingly eyeing many crypto firms, but Coinbase, in particular, is under scrutiny. This is evident from the Wells notice the company received, which suggests that formal charges may be brought against its five management members.
Coinbase has been accused of violating securities laws. Although not directly involved in the SEC’s allegations against the Wahi brothers, Coinbase submitted a brief in support of the Wahi brothers’ motion to dismiss the charges.