Second Circuit Vacates NFT Wire Fraud Conviction
Commentary by Kevin Harnisch
The US Court of Appeals for the Second Circuit vacated a conviction for wire fraud and money laundering involving the use of confidential information to trade non-fungible tokens ("NFTs").
As discussed in the decision, the defendant was responsible for selecting NFTs to feature on the homepage of a web platform that facilitated trading in NFTs—a placement that typically increased their value. The government alleged that the defendant used advance knowledge of those selections to buy and sell 15 NFTs for personal profit, generating approximately $57,000. A jury convicted the defendant based on evidence of these trades and testimony regarding the confidentiality of the featured NFT selections.
On appeal, the defendant challenged his conviction on two grounds. First, he argued that the jury instructions were flawed because they allowed conviction under the wire fraud statute without requiring proof that the NFT information had commercial value, and permitted a verdict based on unethical conduct rather than actual fraud. Second, he contended that the district court improperly excluded evidence regarding (i) whether others considered the information confidential; (ii) whether his confidentiality agreement had changed; and (iii) whether a co-founder had engaged in similar trading.
The Second Circuit agreed the jury instructions were erroneous because they allowed conviction for wire fraud without requiring proof that the misappropriated NFT information had commercial value or qualified as a traditional property interest. The Court found that the instructions improperly permitted the jury to convict based on conduct that was not fraudulent, even though it departed from general standards of honesty and fair play. Concluding that this error was not harmless, the Court vacated the conviction and remanded the case for further proceedings. The Court rejected the defendant's separate evidentiary arguments, finding no abuse of discretion.
In a partial dissent from the majority, a judge found that that the on-line platform's exclusive right to use confidential business information—regardless of proof of commercial value—can support a wire fraud conviction. The judge also maintained that the jury instructions accurately reflected precedent and that the conviction should have been upheld.
Commentary
This decision reinforces the common-sense notion that not all deceptive conduct with respect to corporate information constitutes wire fraud. Requiring criminal prosecutors to prove that the property in question had commercial value to its owner is what prevents prosecutors from using the federal wire fraud statute to attempt to incarcerate people who are simply dishonest or unethical.
There are many ways to demonstrate that intangible information has commercial value. For example, the Supreme Court has previously held that a newspaper's prepublication news information was commercially valuable for purposes of the wire fraud statute because such information was its "stock in trade" that was to be distributed and sold to people willing to pay for it. See Carpenter v. United States, 484 U.S. 19 (1987) (author of newspaper column on securities markets was properly found guilty of wire fraud and violation of securities laws where he sold information as to the timing and contents of his column before it became public).