United States v. Chastain

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UNITED STATES OF AMERICA, v. NATHANIEL CHASTAIN, Defendant.

No. 22-CR-305 (JMF)

United States District Court, S.D. New York

April 17, 2023

OPINION AND ORDER

JESSE M. FURMAN, United States District Judge:

Trial is scheduled to begin on April 24, 2023. Earlier this month each side filed a motion seeking to preclude some or all of the other side's expert testimony. In particular Chastain

Defendant Nathaniel Chastain is charged with wire fraud and money laundering relating to his purchase and sale of Non-Fungible Tokens or “NFTs” on OpenSea, an online NFT marketplace. ECF No. 1 (“Indictment”) ¶¶ 1, 3. According to the Indictment, Chastain used confidential information he obtained by virtue of his position as a product manager at OpenSea to purchase NFTs shortly before they (or other NFTs made by the same creator) were featured on OpenSea's homepage and, shortly after they were so featured, sold them for a hefty profit. Id. ¶¶ 4, 8, 10, 12, 13. More specifically, the Government alleges that, in making these trades, Chastain “misappropriated OpenSea's confidential business information” - namely, the knowledge of which NFTs were going to be featured when on OpenSea's homepage - and, in so doing, committed wire fraud in violation of 18 U.S.C. § 1343. Indictment ¶ 13. The Government further alleges that, to conceal his involvement in buying and selling the featured NFTs Chastain transferred funds through anonymous Ethereum blockchain accounts and new Ethereum accounts without any prior history and, in so doing, committed money laundering in violation of 18 U.S.C. § 1956(a)(1)(B)(i). Indictment ¶ 15. moves to preclude the testimony of the Government's expert, Professor Daniel Taylor, see ECF No. 57, and the Government moves to preclude the testimony of Chastain's two experts, Professor Douglas Skinner and Dr. Matthew Edman, see ECF No. 61 (“Gov't Mem.”). At the heart of these motions is a dispute that first emerged in Chastain's motion to dismiss the Indictment: whether the Government is required to prove that “confidential business information” had “inherent economic value” to its owner (here, OpenSea) in order to establish that it is “property” for purpose of Section 1343, the wire-fraud statute. Although the Court did not need to resolve that dispute to rule on Chastain's motion to dismiss, see United States v. Chastain, No. 22-CR-305 (JMF), 2022 WL 13833637 (S.D.N.Y. Oct. 21, 2022), it is ripe for resolution now. For the reasons that follow, the Court concludes that the Government is not required to prove that the featured NFT information had inherent value to OpenSea but that such evidence can be considered by the jury in (among other things) evaluating whether the information was “confidential business information” and, thus, OpenSea's property. In light of that ruling, and for other reasons discussed below, Chastain's motion to preclude Professor Taylor's testimony is largely denied, and the Government's motions to preclude are granted in part and denied in part.

CONFIDENTIAL BUSINESS INFORMATION AS PROPERTY

The Court will begin with the parties' dispute over what the Government must prove to establish that the information about which NFT would be featured and when qualified as OpenSea's property. Section 1343, the federal wire-fraud statute, criminalizes the use of certain interstate communications for a “scheme or artifice to defraud, or for obtaining money or property by means of false or fraudulent pretenses, representations, or promises.” 18 U.S.C. § 1343. It is well established that “[a] scheme to deceive, however dishonest the methods employed, is not a scheme to defraud” within the meaning of Section 1343 “in the absence of a property right to interfere with.” United States v. Pierce, 224 F.3d 158, 165 (2d Cir. 2000). It is equally well established that “[c]onfidential business information” qualifies as “property” protected by Section 1343 even though it is “intangible.” Carpenter v. United States, 484 U.S. 19, 25-26 (1987). The question presented here is whether, to qualify as property, confidential business information must have some “inherent economic value” to its owner. Chastain, reprising arguments that he made in support of his motion to dismiss, argues that it must. ECF No. 58 (“Def.'s Mem.”), at 9-13; ECF No. 63 (“Def.'s Opp'n”), at 3-7; see also ECF No. 19, at 12-19. The Government, reprising is arguments in opposition to Chastain's earlier motion, argues that it need not. Gov't Mem. 20 fn.3; ECF No. 62 (“Gov't Opp'n.”), at 7-10; see also ECF No. 23, at 16-19. The Government has the better of the argument.

The Court begins with the Supreme Court's decision in Carpenter, which is the primary precedent upon which the Government here relies. In Carpenter, a columnist for the Wall Street Journal entered into a scheme in which he shared information “as to the timing and contents” of his market-moving column with traders so that they, in turn, could trade on the information and share the profits. 484 U.S. at 23. On appeal, the Supreme Court unanimously affirmed the defendant's wire-fraud convictions, holding that “the Journal's interest in the confidentiality of the contents and timing of the . . . column” qualified “as a property right” within the meaning of Section 1343. Id. at 25. “Confidential information acquired or compiled by a corporation in the course and conduct of its business,” the Court stated, “is a species of property to which the corporation has the exclusive right and benefit, and which a court of equity will protect through the injunctive process or other appropriate remedy.” Id. at 26 (internal quotation marks omitted). Quoting International News Service v. Associated Press, 248 U.S. 215, 236 (1918), for the proposition that “news matter . . . is stock in trade, to be gathered at the cost of enterprise, organization, skill, labor, and money, and to be distributed and sold to those who will pay money for it, as for any other merchandise,” the Court concluded that “[t]he Journal had a property right in keeping confidential and making exclusive use, prior to publication, of the schedule and contents of the . . . column.” 484 U.S. at 26.

Perhaps most significant for present purposes, the Supreme Court deemed it irrelevant that the defendants “did not interfere with the Journal's use of the information” and “did not publicize it and deprive the Journal of the first public use of it.” Id. “The confidential information was generated from the business,” the Court reasoned, “and the business had a right to decide how to use it prior to disclosing it to the public.” Id. More to the point, the defendants could not contend “that a scheme to defraud requires a monetary loss, such as giving the information to a competitor; it [was] sufficient that the Journal . . . [was] 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.” Id. at 26-27. In other words, it was enough for the Government to prove (1) that the information at issue was kept confidential by the Journal and (2) that it was “acquired or compiled . . . in the course and conduct of its business”; the Government did not have to prove more, let alone that the Journal had suffered any “monetary loss.” Id. at 26-27; cf. United States v. O'Hagan, 521 U.S. 642, 654 (1997) (relying on Carpenter to affirm a conviction for securities fraud where the defendant, a lawyer at a law firm, misappropriated information concerning a firm client, explaining that the information “qualifie[d] as property to which the company ha[d] a right of exclusive use”).

Assuming for the sake of argument that Carpenter left the door ajar for an “inherent value” requirement, two later Second Circuit decisions all but slammed that door shut. The first, United States v. Grossman, 843 F.2d 78 (2d Cir. 1988), involved a law firm associate who was convicted of mail fraud based on his misappropriation of confidential information pertaining to one of the firm's clients. On appeal, the defendant relied on Carpenter's quotation from Associated Press to argue that his firm “had no ‘property interest' in the [client's] confidential information because [the firm] (1) could not use the information for its commercial value or have the exclusive right to exploit it; and (2) did not gather the information through its own enterprise, organization, skill, labor and money.” 843 F.2d at 86. The Second Circuit rejected this argument as “specious.” Id. “In context,” the court explained, Carpenter's language “merely describe[d] the confidential information in that case; it [did] not require that all confidential information must be of the same nature to be considered ‘property.' Carpenter actually holds generally that, even though ‘confidential business information' is intangible, it ‘has long been recognized as property.'” Id. (citation omitted). With that, the court concluded that the law firm client's confidential information “clearly [fell] within the definition of property under Carpenter.” Id. (emphasis added). Moreover, that was true even though the law firm itself “could not commercially exploit the information by trading on it .... As several partners of the firm testified, maintaining the confidentiality of the information was of commercial value because, by maintaining confidentiality, the firm would protect or enhance the firm's reputation, with the result that it would not lose its clients and perhaps would gain more clients.” Id.

In the second case, United States v. Mahaffy, 693 F.3d 113 (2d Cir. 2012), the defendants, traders at several brokerage firms, disclosed confidential communications about client orders - transmitted over devices...