Key Takeaways
In United States v. Chastain, a significant decision on the scope of the federal wire fraud statute, a split panel of the U.S. Court of Appeals for the Second Circuit vacated the convictions of a former executive of an online non-fungible token (NFT) marketplace who was charged with wire fraud and money laundering[1] based on his alleged misuse of confidential company information to trade NFTs for profit. The government will now need to decide whether to retry Nathaniel Chastain.
Background
The defendant was employed by the company that operated an NFT marketplace. As part of his responsibilities, Chastain selected particular NFTs that would be featured on the marketplace website. When an NFT was featured on the website, its market price increased. Chastain purchased NFTs he knew would soon be featured and later resold them at higher prices after they were featured. He generally conducted this trading using anonymous accounts, and he had made comments to others suggesting that he viewed his profiting on featured NFTs as unethical.
After the prosecution adduced these and other facts at trial, the district court instructed the jury on the property element of wire fraud, stating in relevant part that:
A company’s confidential business information is a type of property. Information is confidential business information if it was acquired or created by a business for a business purpose, and the business both considered and treated that information in a way that maintained the company’s exclusive right to that information. … You may … consider whether the information had economic value to the employer, but the government is not required to prove that the information had such value.[2]
The district court also instructed the jury on the “scheme to defraud” element, stating in relevant part that:
Fraud is a general term that includes all efforts and means that an individual may devise to deprive another of money or property by trick, deception, swindle, or overreaching. … You may find the existence of a scheme to defraud if you find that the conduct of the defendant was deceptive or if you find that the defendant conducted himself in a manner that departed from traditional notions of fundamental honesty and fair play in the general and business life of society.[3]
The jury found Chastain guilty of both wire fraud and the related money laundering charge. The district court sentenced him to three months of imprisonment and three years of supervised release.
Majority Opinion
The majority opinion, authored by Judge Steven Menashi and joined by Judge Richard Wesley, held that the district court’s jury instructions on property and fraudulent scheme were erroneous. Because the majority was “not ‘convinced that the error[s] did not influence the jury’s verdict,’”[4] it vacated Chastain’s convictions.
To start, the panel held that, contrary to the district court’s instructions and the government’s argument on appeal, prosecutors must demonstrate that any misused confidential business information had “commercial value” to the victim company in order for such information to be considered “property” under the wire fraud statute (18 U.S.C. § 1343).[5] The panel grounded its holding in U.S. Supreme Court decisions, including Carpenter v. United States, 484 U.S. 19 (1987)—which upheld the wire and mail fraud convictions of a Wall Street Journal reporter who had misappropriated confidential prepublication content of articles to profit in the stock market—as well as Second Circuit precedent. The panel emphasized that not all confidential business information qualifies as the sort of “traditional property interest” protected by the federal fraud statutes. Rather, according to the panel, the governing precedents reflect that, for confidential business information to be protected by the statutes, it must be akin to a trade secret or otherwise have commercial value to the business.
The panel also found that the district court erred in instructing the jury that it could find Chastain had engaged in a scheme to defraud if his behavior merely “departed from traditional notions of fundamental honesty and fair play….”[6] The majority held that under Supreme Court and other precedent, a scheme to defraud requires conduct by a defendant that goes beyond mere breach of a fiduciary duty or other unethical behavior and that the district court’s contrary interpretation of the law would improperly broaden the reach of the federal fraud statutes to criminalize “‘almost any deceptive act.’”[7]
Finally, the panel concluded that the district court’s erroneous instructions prejudiced Chastain.[8] The panel noted that, although there was some evidence that an employee trading in featured NFTs might cause people to lose trust in the company, there was substantial evidence suggesting that featured NFT information was “tangential” or “unimportant” to the business of the NFT marketplace and that the company “lacked a commercial interest in its confidentiality.” The panel also noted that there was evidence that Chastain believed he had acted unethically and that a jury note suggested it had also concluded the defendant acted unethically by trading on featured NFT information. In short, the panel concluded that it could not rule out the possibility that the jury had convicted Chastain on the theory that the confidential NFT information was property even though it lacked commercial value to the company and that the defendant’s unethical behavior sufficed for a scheme to defraud.
Dissenting Opinion
Judge José Cabranes would have affirmed Chastain’s convictions. He argued that the majority imposed an unduly narrow reading of the Supreme Court’s decision in Carpenter v. United States and the Second Circuit’s prior precedent. His position relies largely on Carpenter’s pronouncement that “it is sufficient that the [Wall Street] Journal has been deprived of its right to exclusive use of the information, for exclusivity is an important aspect of confidential business information and most private property for that matter.” Judge Cabranes contends that this statement means “either confidential business information need not have commercial value to qualify as property under the wire fraud statute, or confidential business information is, by definition, commercially valuable.”[9] He also concluded that the district court’s definition of fraudulent scheme was proper because it adhered substantially to definitions of fraud contained in Second Circuit precedent.
Implications of the Chastain Decision
As noted, the government will need to decide whether to retry Chastain. But before it makes that decision, it may try to get the panel decision overturned. Given the split panel and the importance of the issues—particularly the question of whether prosecutors in fraud cases must show that misused confidential business information has “commercial value” to the business—the government may seek an en banc review of the decision by the full Second Circuit. The government might also file a petition for certiorari to the Supreme Court, though the lack of a clear circuit split on the commercial value issue makes it questionable whether such a petition would be granted.
So long as the Chastain decision stands, it certainly creates a heightened standard of proof for wire fraud prosecutions in the Second Circuit based on misappropriation of confidential business information. That said, prosecutors in such cases will now focus on developing evidence that confidential information has real commercial value to the business, and prosecutors are likely to be successful in obtaining such evidence in many cases. In circumstances where the U.S. Department of Justice (DOJ) believes a fraud prosecution is warranted but where such evidence of commercial value is difficult to obtain, the DOJ might bring such cases in other circuits, where possible.
Given the somewhat conflicting evidence on commercial value in the Chastain case, the government might be able obtain more and stronger evidence of commercial value if it decides to retry the defendant. Similarly, in potential future cases involving alleged “insider trading” in NFTs, prosecutors may be able to obtain sufficient evidence that the misappropriated confidential information was commercially valuable to the NFT marketplace. All told, while Chastain is an important decision that will be helpful to defendants in certain fraud prosecutions, it does not mean that parties will be free to trade on confidential information relating to NFTs.
Endnotes
[1] Wire fraud served as the predicate crime for the money laundering charge.
[2] Decision at 9-10.
[3] Id. at 10.
[4] Id. at 22 (quoting United States v. Moses, 109 F.4th 107, 114 (2d Cir. 2024)).
[5] Id. at 13-19.
[6] Id. at 20-22.
[7] Id. at 21 (quoting Ciminelli v. United States, 598 U.S. 306, 315 (2023)).
[8] Id. at 22-25.
[9] Dissent at 2 & n.4.
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