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Former Coinbase manager seeks to dismiss watershed insider trading case

Former Coinbase manager seeks to dismiss watershed insider trading case

Lawyers are asking a judge to dismiss a case against their client, a former Coinbase manager and his brother, arguing that the tokens involved are not securities. 

In an 81-page brief, lawyers from five law firms said the Securities and Exchange Commission was “wrong” to say that nine digital assets were securities, comparing them to Beanie Babies and baseball cards — after the agency charged Ishan Wahi, 32, for insider trading, along with his brother and a friend.  

The lawyers argue that all nine tokens are utility tokens necessary for the use of the networks that created them, making the case one that could have broader implications for Coinbase and other exchanges listing those assets in the U.S. 

“None of the tokens were like stock — something that sits as an investment with no practical utility. Rather, the very object of each token was to facilitate activity on the underlying platforms and, in so doing, enable each network to develop and grow,” the lawyers said.  

The SEC charged Ishan Wahi, the former Coinbase product manager, in July for insider trading. The agency alleges Ishan Wahi tipped off his friend and brother, Nikhil Wahi, about which tokens were going to be listed for trading on Coinbase — and in the process made over $1 million.  

The lawyers say the digital assets in question were sold on the secondary market and add that there is not an investment in money — all pointing to those nine assets not being securities.  

The long arm of the SEC

The SEC uses the Howey Test, a 1946 U.S. Supreme Court case, to help determine whether cryptocurrencies are securities. The ruling established that “an investment contract exists when there is the investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others,” SEC Chair Gary Gensler has said.  

The lawyers argue that the SEC’s moves could have broader implications. 

“In addition to holding Ishan and Nikhil Wahi liable for actions nobody could have anticipated would violate the securities laws — indeed, even Ishan’s publicly traded employer was convinced these tokens were not securities — it would establish sweeping SEC jurisdiction over an industry without any input from Congress,” the lawyers said.  

The SEC also did not “adequately allege scienter,” the lawyers continued. Scienter is the intent or knowledge of wrongdoing. 

If the SEC shows the tokens satisfies the Howey definition, its complaint “fails to adequately allege scienter,” the lawyers said. “Because the SEC cannot establish that the Wahis had the culpable state of mind necessary to commit securities fraud, the amended complaint must be dismissed,” they said.  

If the judge denies the motion to dismiss then the case would proceed, unless there is a settlement. 

The motion to dismiss was jointly filed by attorneys from Greenberg Traurig LLP, Harris St. Laurent & Wechsler LLP, Jones Day, Chaudhry Law PLLC and Allen Hansen Maybrown & Offenbecher in the U.S. District Court, Western District of Washington.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.

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Author: Sarah Wynn