Recently, Coinbase’s chief legal officer (CLO) Paul Grewal criticized a US court ruling in favor of the Securities and Exchange Commission (SEC). The judge labeled certain crypto assets traded on secondary markets as securities. The ruling is part of the insider-trading lawsuit against Coinbase’s former product manager and some of his relatives.
In 2022, the SEC presented charges against Coinbase’s former product manager Ishan Wahi, his brother Nikhil Wahi, and a close friend Sameer Ramani for securities violation for insider trading of certain crypto asset.
The SEC alleged that the former Coinbase employee “tipped off” his brother and friend about the exchange’s upcoming listing announcements, which he took part in coordinating. Last year, Ishan and Nikhil Wahi settled their charges with the US regulator while Ramani seemingly fled the country.
Crypto Asset’s Trading In Secondary Markets Labeled As Securities
The most recent development in the case involves a third party accused by the SEC. The Wahi brothers’ friend, Sameer Ramani, allegedly saw $817,602 in illicit proceeds from illegally trading the tokens tipped by Ishan Wahi.
Wahi’s friend remains at large, as he has not appeared before the court or answered the First Amendment Complaint (FAC). After being granted a notion for alternative service, the SEC notified Ramani and his criminal counsel directly by email and WhatsApp.
The SEC proceeded to seek entry of default, as the court document reads:
Despite being served pursuant to the Court’s Order, Ramani has neither entered an appearance in this matter nor responded to the FAC. Accordingly, on October 19, 2023, the SEC sought entry of default (Dkt. No. 113), which the Clerk of Court entered on October 26, 2023 (Dkt. No. 114). The SEC now moves for a final default judgment against Ramani.
As a result, the court has issued a default judgment based on the evidence presented by the SEC. According to the US regulator, the tokens traded by Ramani were investment contracts and, therefore, securities, as “each involved the investment of money, in a common enterprise, with a reasonable expectation of profit derived from the efforts of others.”
As the document states, the court’s analysis remains the same and extends to the tokens traded by Ramani on secondary markets:
The Ninth Circuit has explained that whether an instrument purchased in a resale market is an investment contract depends on the “economic reality of each transaction” and a determination of “what investment package was actually offered.
The court considers that the issuers of the tokens traded by Ramani continued to suggest the “profitability of their token as the tokens were traded on secondary markets,” and “thus, under Howey, all of the crypto assets that Ramani purchased and traded were investment contracts.”
Coinbase’s CLO Criticizes SEC’s Strategy
Paul Grewal, Coinbase’s CLO, expressed his opinion on the matter in an X (former Twitter) post. Grewal was asked about his opinion on the SEC’s ruling by an X user, to which he replied, “I don’t think much of it at all.”
The CLO explained in an X thread that this ruling doesn’t necessarily mean much as “default judgments aren’t contested.” As a result, the judge must take everything said by the complaint as true, “no matter how far-fetched or plain wrong it is.”
All of this is to say that in seeking default the SEC was pushing against a completely open door. It’s an example why courts generally do not give collateral estoppel effect to default judgments in other cases. They are not worth anything as precedent or persuasion. 5/6
— paulgrewal.eth (@iampaulgrewal) March 3, 2024
As the court documents state, the judge only considered the SEC’s fillings due to the lack of opposing evidence presented to the claims. Grewal criticized the SEC’s “insidious” strategy of “pushing against a completely open door.”
The CLO states that the SEC’s seeking of default judgment means that “the people with the greatest incentive and access to information that blows their arguments out of the water never have the chance.”
