Coinbase Ex-Manager Convicted Of Insider Trading Is Crypto’s Last Legal Hope

Ishan Wahi, a former Coinbase executive, pleaded guilty this year to giving his brother and a college friend business advice that generated nearly $1.5 million in illicit profits. An Indian immigrant, he could serve more than three years in prison and be deported after serving his sentence.

But Mr. Wahi is still battling the Securities and Exchange Commission, which sued him because it claims some of Coinbase’s assets were securities. The outcome of this civil case is unlikely to change Mr. Wahi’s future, clouded by his lawsuits and likely imprisonment. But it could affect how digital assets are regulated in the US

In a motion seeking an early dismissal of the case in federal court in Seattle, Mr. Wahi’s attorneys argue that the SEC has no role to play because Coinbase’s digital assets are not securities. Prosecutors charged him with conspiracy to commit wire fraud, not securities fraud.

Opposing the SEC in lawsuits like the one against Mr. Wahi has become the crypto industry’s best hope for fending off the commission’s campaign to regulate digital assets. The industry hopes that federal judges will find crypto to be too different from traditional stocks and bonds to fall under the rules written for Wall Street.

Since Coinbase is also the target of an SEC investigation, Mr. Wahi’s outlook is aligned with that of the company, even though it fired him and cooperated with investigations into his role in the tort. ‘initiated.

Last week, SEC staff told Coinbase that they would likely recommend enforcement action against the company regarding the listing of assets that regulators consider to be securities, among other alleged violations, according to the company. If the SEC sues Coinbase, the outcome could force the company to stop trading some of the digital assets it offers to its users and potentially impair industry growth.

The regulators’ civil case against Mr. Wahi, already underway, is expected to unfold before any broader lawsuit against Coinbase is resolved, and its outcome could set a precedent for assets the SEC can oversee.

“This goes beyond the impact of previous enforcement cases where the whole thing came down to that early stage in a token’s life, when the company exchanges it for cash,” said Nick Morgan, a Los Angeles attorney whose nonprofit organization, Investor Choice Advocates Network, represents people fighting against what he calls the SEC’s overreach. “The Wahi case has a much greater impact because they are by definition secondary transactions and not initial.”

Coinbase faces the prospect of an SEC lawsuit.


Michael Nagle/Bloomberg News

Mr. Morgan’s ICAN group is one of several organizations that have filed amicus curiae briefs supporting Mr. Wahi’s arguments. The Chamber of Digital Commerce and the Blockchain Association, two crypto trade groups, also filed briefs attacking the SEC case. Coinbase asked the judge to allow the company to submit its views.

An SEC spokesperson declined to comment. A Coinbase spokeswoman declined to comment but pointed to recent statements on Twitter from Paul Grewal, the company’s chief legal officer. The SEC could have created “practical and lasting solutions like developing rules or registration options” for the industry, Grewal wrote, but instead filed a “misguided lawsuit.”

The law firm Jones Day is representing Mr. Wahi against the SEC and filed a motion to dismiss the case in February. Coinbase is not paying Mr. Wahi’s lawyers, according to two people familiar with the matter. A Jones Day spokesperson did not respond to repeated messages asking who is funding his work.

In their motion, Jones Day’s attorneys claim that the SEC’s efforts to police crypto violate the Major Issues Doctrine recently adopted by the Supreme Court. The standard prevents regulators from writing rules or taking other actions that are of great economic or political significance without what the majority of justices consider to be explicit direction from Congress.

Jones Day also attacks the SEC’s reliance on a 76-year-old Supreme Court test known as Howey to regulate many crypto projects. The Howey case provided a definition of an “investment contract,” a type of security that may be regulated by the SEC.

“The SEC cannot use the term ‘investment contract’ as a blank check to be cashed each time it seeks to expand its regulatory reach,” wrote Jones Day and other attorneys for Mr. Wahi in memory.

During his plea hearing on the wire fraud charges in February, Mr. Wahi admitted to tipping his brother and Mr. Ramani, but said he “relyed on statements from Coinbase and ‘others that these cryptocurrencies are not securities’. He apologized and said he would lose “all the life I’ve worked hard to build for the past 17 years”, according to court transcripts.

Mr. Wahi is expected to be sentenced in May. Her brother, who pleaded guilty to the criminal charges, was sentenced in January to 10 months in prison and ordered to forfeit $892,500 in business gains.


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Supporters of the SEC’s crypto enforcement campaign say a court shouldn’t view Mr. Wahi as a sympathetic defendant. “This is just the latest example of the crypto industry’s scorched earth litigation tactics against any attempt by the SEC to enforce the law,” said Dennis Kelleher, managing director of Better Markets, a group which is pushing for stricter financial regulation.

Defendants who plead guilty to insider trading charges generally do not contest related civil allegations by the SEC. “The admitted facts in the criminal case are quite unattractive,” said Morgan, who previously worked as an SEC attorney.

Coinbase is also seeking to intervene in Mr. Wahi’s case with a friend of the court brief. According a copy of the SEC enforcement noticeknown as the Wells opinion.

“The SEC’s allegations in this case are based on the agency’s erroneous assertion that Coinbase listed digital assets that are securities,” the company’s attorneys wrote in a filing submitted last week.

Write to Dave Michaels at [email protected]

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