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Coinbase insider-trading case ‘definitely part of a trend,’ law professor says

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Andrew Verstein, professor of law and faculty co-director of the Lowell Milken Institute for Business Law and Policy at UCLA, joins Yahoo Finance Live to discuss the former Coinbase manager being charged for insider trading and the legal implications for the crypto industry and the SEC regulatory framework.

Video Transcript

[MUSIC PLAYING]

- The Department of Justice yesterday charged an ex Coinbase product manager, along with two other individuals in a crypto insider trading scheme. The three, allegedly, used information on pending token listings to make about $1.5 million through illegal trades in at least 25 different crypto assets. Let's dive a little bit deeper into the implications of this with Andrew Vernstein, UCLA professor of law. As well as Yahoo Finance's, David Hollerith joining for this conversation.

Great to have you on the program today, professor. I want to ask you about your broad takeaways from the DOJ announcement yesterday. They say it's the first insider trading case they've brought forth together. What are the implications of this? Could you see more cases like this in the future?

ANDREW VERNSTEIN: I definitely see more cases coming like this. This is definitely part of a trend. It is the first case that the SEC has brought with DOJ and that makes it a big deal. But it's not the first case that the Department of Justice has brought, even this month. This is the second case this month. There was a case at OpenSea earlier in the month.

And the facts under both of these cases are pretty similar. They've got employees who are scooping the featuring of some product, or some digital asset and then they're trading ahead of it, themselves or their friends. I think we're going to see that fact pattern playing out at a lot of different platforms. And so prosecutors are going to have their pick of many more cases, if they want them.

DAVID HOLLERITH: Andrew, David Hollerith here. Thanks for coming on the show. Just to track back, there are two different lawsuits that have been filed. One from the DOJ and one from the SEC. Could you just give us a little context about the difference between the two charges being filed?

ANDREW VERNSTEIN: Yeah, both are insider trading cases, but American law doesn't have one statute called the Insider Trading Statute. In fact, you can prosecute insider trading lots of different ways. The SEC's only way to prosecute insider trading requires the SEC to show that it was a security-- that is, the thing that was traded. And so the SEC's case has a little bit more uncertainty over it because Coinbase, of course, asserts that none of the altcoins count as a security. And so the insider trading of those altcoins wouldn't count as something the SEC can prosecute.

So there's some uncertainty there. And the SEC has, itself, at times acknowledge that some coins don't count as securities, bitcoin and Ethereum, most importantly. That's very different from the DOJ's situation, where the DOJ doesn't have to show that something's a security to bring the case.

- Andrew, can we elaborate a little bit because insider trading even of it itself at the DOJ side of things is a bit nebulous as well when it comes to just, what is the statutory line that qualifies something for insider trading. I mean, when you look at this case, again, one person who was inside Coinbase at the time, knowing these tokens were about to be listed, tipping off family and friends about it so that they could benefit off that pop. I mean, is that though clear insider trading in this case?

ANDREW VERNSTEIN: That's clear insider trading. There's a really important Supreme Court case from 1987 where the facts are very similar. Federal prosecutors use the very same statute, the wire fraud statute, which says it's a fraud to-- it's a crime to commit a fraud using telephone wires or other kinds of communication wires.

They use that statute to prosecute an employee of the Wall Street Journal who told friends and family about what was going to be mentioned in the Heard on the Street column the next day. And they were able to trade on that for knowledge, that pop of interest that would come. That case went up to the US Supreme Court and was upheld. So that criminal prosecution was successful. Those facts are very similar to what we see here in these cases.

- Professor, it's Akiko here. I want to get back to that point you made about the lack of clarity around what is defined as a security. You said early on that you think that there will be other cases to come to follow this specific case at Coinbase. I mean, how does that lack of clarity on defining what a security is, how does that create a higher hurdle for these types of cases to come forward?

ANDREW VERNSTEIN: Well the SEC has to pick its cases carefully. It would be very embarrassing for the SEC to bring a case that depends on a security being established and then, oops, some judge says there wasn't a security there. The SEC has taken a pretty firm line insofar, as it has authority to prosecute things it thinks is a security, but it hasn't taken the next step and brought a difficult case before a judge to establish as a matter of law that the SEC is right that these things all count as securities.

DAVID HOLLERITH: Andrew, the use of Twitter in both the OpenSea insider trading case and this one with Coinbase, they both played prominently into the regulators investigations. And I was curious, given your own research, how much Twitter is playing a role in mapping out these cases for the regulators?

ANDREW VERNSTEIN: I think it's a fascinating new development. We used to think that prosecutors and the FBI and law enforcement were the only ones who could do a deep dive and find clandestine trading. That's part of the justification for the regime.

They've got wiretaps, they can meet you at the airport and catch you before you get on the airplane. We're seeing something interesting now, which is people who are connected to the company, or just citizen journalists, or people who are close to the industry are able to look at the blockchain and try to figure something interesting out and tip prosecutors off. So I think that's an interesting new trend.

- Andrew Verstein, UCLA professor of law, appreciate your time today. And our thanks to Yahoo Finance's, David Hollerith, as well, for joining in on the conversation.