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Former Coinbase product manager Ishan Wahi and his brother are looking to get the insider trading charges leveled against them dropped, as their lawyers argue they did not have the “culpable state of mind necessary to commit securities fraud.”
A court filing released Tuesday showed lawyers arguing that the Securities and Exchange Commission (SEC) is trying to gain regulatory jurisdiction over the crypto industry via the enforcement action against the former Coinbase employee and his 26-year-old “kid brother.”
The SEC’s complaint alleges that the Wahis illegally traded “securities” under the Exchange Act, but cryptoassets cannot be deemed securities as they are not “investment contracts,” the lawyers said. As per the Howey Test, an asset can be classified as a security if it is determined to be an investment contract.
“But here there are no contracts, written or implied,” they wrote. “The developers who created the tokens at issue have no obligations whatsoever to purchasers who later bought those tokens on the secondary market. And with zero contractual relationship, there cannot be an “investment contract.”
The Coinbase insider trading case is expected to be a landmark one, as it could determine which cryptoassets can be termed as securities. Coinbase itself has denied that the nine tokens the brothers traded — AMP, DerivaDEX, DFX Finance, LCX, Kromatika, Powerledger, Rally, Rare Governance Token and XYO — are securities.
The Wahis’ counsel further stated that neither the SEC nor Coinbase’s legal team considered the tokens at issue to be securities before the allegations were put forth. And so, the SEC should arrive at that decision before consequences are imposed, they added.
“The SEC’s parade of one-off enforcement actions against the likes of Kim Kardashian, DJ Khaled, Floyd Mayweather Jr., and now Ishan and Nikhil Wahi is—by contrast—a process designed to produce more heat than light,” they said.
Both brothers, along with their friend Sameer Ramani, were accused of trading at least 25 cryptoassets based on confidential information between June 2021 and April 2022, bagging them profits worth over $1.1 million.
Notably, Ishan Wahi and Nikhil Wahi had both initially pleaded “not guilty” to wire fraud, but Nikhil Wahi resorted to a plea bargain in September.
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