U.S. Judge Enters Default Ruling Against Ex-Coinbase Insider, Says Secondary Market Sales Are Securities Transactions

• Trading of certain crypto assets on a secondary market, such as Coinbase, are securities transactions, a U.S. court ruled on Friday.

• The court took this critical position in a default judgment against Sameer Ramani, one of three accused in the insider trading case.

In an insider trading case involving Coinbase’s former product manager Ishan Wahi, his brother Nikhil Wahi, and their friend Sameer Ramani, a U.S. court ruled on March 1, that the trading of certain crypto assets on a secondary market, which Coinbase is, are securities transactions.

“The court’s analysis remains the same even to the extent Ramani traded tokens on the secondary market,” the ruling said. “... Each issuer continued to make such representation regarding the profitability of their tokens even as the tokens were traded on secondary markets. Thus, under Howey, all of the crypto assets that Ramani purchased and traded were investment contracts.”

The court took this critical position in a default judgment against Ramani. A default judgment is given when the defendant fails to respond to a court summons or does not appear in court.

“Ramani appears to have fled the country to avoid criminal prosecution for the actions alleged in this case,” the filing said.

In May 2023, the SEC settled charges with Ishan Wahi and Nikhil Wahi in what it has called the “first-ever insider trading case involving cryptocurrency markets.”

However, while this or some action against Ramani was expected, the judgment assumes extra significance because the crypto industry and Coinbase (COIN) have been arguing that many cryptocurrencies are not securities and hence, those that don't meet the securities definition wouldn't fall under the SEC's jurisdiction. The SEC Chair Gary Gensler has often argued that the vast majority of cryptocurrencies are securities and that crypto exchanges need to register with the SEC.

This is also not the first time a U.S. court has adjudicated whether sales of certain cryptocurrencies are unregistered securities, whether on secondary platforms like exchanges or not.

In July, Federal District Judge Analisa Torres ruled that while Ripple violated federal securities laws in selling XRP to institutional investors directly, it had not done so by making XRP available to retail customers through programmatic sales to exchanges.

However, in Dec. 2023, Judge Jed Rakoff disagreed with Judge Torres in the Terraform Labs case.

The court ruled to prohibit Ramani from future violations, a civil penalty of twice the amount of proceeds Ramani is calculated to have gained, which was a total of $1,635,204, and disgorgement of the identified proceeds amounting to $817,602. However, the court denied the SEC’s request to impose prejudgment interest.

Read More: Opinion: What’s Uniting the SEC’s Crypto Cases

Nikhilesh De contributed reporting.

CORRECTION (March 4, 2024, 18:08 UTC): Clarifies Coinbase's position that not all crypto tokens are securities.