A federal judge ruled that secondary-market transactions for certain cryptocurrencies violated securities law. The catch: This was a default judgment. The defendant never showed up, and no one filed amicus briefs to oppose the Securities and Exchange Commission's motion for a default ruling.

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To be (a security), or not to be

The narrative

Judge Tana Lin, of the U.S. District Court for the Western District of Washington, ruled last Friday that Sameer Ramani violated federal securities law by using insider information to trade on cryptocurrencies that would be listed on Coinbase.

Why it matters

The ruling may have implications for the SEC's other cases against crypto exchanges like Coinbase, Binance/Binance.US and Kraken. While a default judgment ruling arguably has less precedential value than a ruling after a bench trial, or set of hearings where the various parties present their cases, it's still a ruling by a federal judge. And, it’s a ruling in the same circuit as other crypto-relevant cases.

Breaking it down

A federal judge ruled that Ramani, who was friends with a former Coinbase employee, traded securities based on insider knowledge.

The case dates back to 2022, when the Department of Justice alleged that former Coinbase product manager Ishan Wahi, his brother Nikhil and Ramani committed wire fraud and insider trading. Ishan Wahi would share information about Coinbase's future asset listings with his brother and Ramani, who then traded on those assets.

The Wahis pleaded guilty to DOJ charges and settled the SEC charges. On Friday, the SEC won its motion for default judgment against Ramani, the third and final defendant in the case, who never showed up to fight back.

While a number of groups filed friend-of-the-court briefs before the Wahis settled the SEC charges, the Friday ruling does not appear to reference or acknowledge those.

"Courts reviewing motions for default judgment must accept the allegations in the complaint as true," the judge noted.

"Taking the allegations in the FAC [first amended complaint] as true, the Court finds that: (1) Ramani traded on material nonpublic information that he knew was provided to him in breach of Ishan’s duty as a Coinbase manager; and (2) Ramani’s misconduct was in connection with the purchase and sale of securities," the judge wrote.

In the judge's view, the SEC had shown successfully – even with the caveat that the judge needed to accept the allegations were true – that Ramani had insider-traded with the purchase and sale of securities.

In her ruling, the judge listed the prongs of the Howey Test – the Supreme Court case that acts as a precedent for determining whether or not something is a security – and how the complaint met those requirements. But she said she based her analysis on the SEC’s complaint, citing rulings from previous SEC cases against LBRY and Terraform Labs.

"The issuers promoted the tokens based on their potential for investment returns, which they claimed derived from the promised efforts of the promoter’s management team to create, develop, and maintain an ecosystem that would increase the demand for a token, and thus its price," Judge Lin wrote, referencing the complaint in her analysis of one of the Howey prongs. "A number of issuers even posted their tokens’ daily price on their websites. Any objective investor would therefore have expected to profit from trading in the tokens."

While Ramani himself did not appear, Judge Lin referenced his co-defendants in the Department of Justice case against Ishan and Nikhil Wahi.

"Ramani’s co-Defendants have largely admitted many of the allegations in pleading guilty in the parallel criminal proceeding," she wrote.

Judge Lin also – importantly – noted that her analysis applies to secondary-market sales.

The SEC has already submitted the ruling as supplemental authority in its cases against Binance.US and Coinbase, referencing the line on secondary market sales.

"In Wahi, the court held that a defendant who purchased certain crypto assets on trading platforms purchased securities because the assets were offered and sold as investment contracts under SEC v. W.J. Howey Co.," the SEC wrote in a notice to Judge Amy Berman Jackson, who oversees the Binance.US case.

Attorneys for Coinbase pushed back against the SEC's use of the default judgment ruling, writing that none of the amicus parties who had filed briefs earlier in the case moved to oppose the SEC's motion for default judgment.

Gary DeWaal, senior counsel with Katten Muchin Rosen, LLP – one of the law firms representing Binance.US in its defense against an SEC suit – told CoinDesk that Judge Lin had not had the opportunity to have the issue briefed by anyone on the defendant's side.

Having those amicus briefs earlier in the case probably didn't help much.

"The judge probably reviewed [those], but it's not as strong as actually having a party of interest," DeWaal said. The judge did not have the chance to hear from the defendant (who did not mount a defense or show up, and is believed to have fled the country).

In a statement, an SEC spokesperson said the commission was "pleased with the district court’s holding in SEC v Wahi that crypto asset transactions in secondary markets can be transactions in securities."

"On Friday, the court specifically held that Howey applies in that context and that Ramani’s trades of certain crypto assets on secondary market platforms were transactions in investment contracts," the statement said. "We will continue to hold accountable those who violate the federal securities laws, including with respect to crypto assets in the secondary markets."

Stories you may have missed

• Craig Wright Accuses Critics of Bugging His House, Spoofing Emails to Bring Him Back to Court: Craig Wright testified in court again in his ongoing case with the Crypto Open Patent Alliance. Things were said. Closing arguments begin next week.
• U.S. Department of Energy Will Start Comment Period on Miner Survey Proposal: The Energy Information Administration has agreed to end its emergency survey and instead put it up for a 60-day public comment period before issuing it.
• Hong Kong's Markets Regulator Issues Warning Against Crypto Exchange BitForex: The Hong Kong Securities and Futures Commission warned that crypto exchange BitForex, which went offline last month after losing $57 million under mysterious circumstances, is not a licensed entity in the city.
• SEC Overstepped Bounds in Kraken Lawsuit, State AGs Charge: A group of state Attorneys General signed onto an amicus brief in the SEC's case against Kraken, arguing the federal regulator is trying to supersede state authorities and rules in its pursuit of crypto trading intermediaries.

This week

Wednesday

• 15:00 UTC (10:00 a.m. ET) Federal Reserve Chair Jerome Powell will testify before the House Financial Services Committee.
• 15:00 UTC (10:00 a.m. ET) CFTC Chair Rostin Behnam will testify before the House Agriculture Committee.
• 15:00 UTC (10:00 a.m. ET) The CFTC Global Markets Advisory Committee sponsored by Commissioner Caroline Pham will meet. Around 2:00 p.m. ET, the committee will discuss and vote on a proposed digital asset taxonomy.

Thursday

• 15:00 UTC (10:00 a.m. ET) Federal Reserve Chair Jerome Powell will testify before the Senate Banking Committee.

Elsewhere:

• (Politico) Outgoing House Financial Services Chair Patrick McHenry (R-N.C.) is loudly and clearly critiquing his party's leadership, Politico reports. Viewers of last week's HFSC markup saw this firsthand, when McHenry opened his comments by questioning the shortened House work-week and noting the effect that would have on the markup itself (which discussed fewer bills than initially planned).
• (Deutsche Welle) More than 1,000 human trafficking victims involved in pig butchering scams were freed from compounds in Myanmar by Chinese, Thai and Myanmarese authorities.
• (The Guardian) The government of Malaysia is in talks with Ocean Infinity to start a new search for Malaysian Airlines Flight 370 (MH370), which disappeared 10 years ago this Friday.
• (The New York Times) X's (formerly Twitter) former executives have (somewhat predictably) sued current owner Elon Musk for not paying them their severances after he took over the social media company.

If you’ve got thoughts or questions on what I should discuss next week or any other feedback you’d like to share, feel free to email me at [email protected] or find me on Twitter @nikhileshde.

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See ya’ll next week!