Kleiman v Wright Update #1

Daniel Kelman
Jul 6 · 18 min read

To Whom It May Concern:

This letter serves as an update on matters taking place in Kleiman v. Wright in federal court the Southern District of Florida. On June 23, 2019 I published a letter setting forth my opinions as a lawyer about Wright’s contempt hearing and discussing possible outcomes. Now in possession of the transcript from the June 28 hearing, during which Wright’s testimony was concluded, I now provide an update.

The Legal Standard At Issue

Recall from my June 23 letter that the court must find three elements have been fulfilled beyond a reasonable doubt to hold Wright in contempt:

  1. Wright understood the nature of the order to produce the addresses and the order was clear;
  2. Wright failed to produce the addresses and comply with the order; and
  3. Wright willfully failed to comply with the order.

Keep this context in mind while reading what follows.

Overview of Arguments

The hearing opened with direct-examination of Wright by his own lawyers. They simply sought to demonstrate that Wright’s inability to produce the addresses was not willfull because Wright could not access the contents of the trust. Key slices entrusted with trustees have been lost and Wright has been possibly forever locked out of the trust since the key slices can not be located.

Kleiman’s lawyers cross-examined Wright and introduced several pieces of evidence. For a good synopsis see Kim Nilsson’s work. Essentially, Kleiman’s lawyers offer into evidence documents produced by Wright during discovery that that are shown to be altered through metadata analysis. Wright attempts to counter this by suggesting the documents have been forged before he produced them and that his server had been hacked by persons trying to frame him to steal his IP. At other times Wright professes ignorance about certain documents he states were handled by other people, which includes how his Tulip Trust created in 2012 could have fonts copyrighted in 2015.

Most notable to me is that the court intervened to question Wright directly on two occasions. The court’s questions established for the record each of the three elements required for a contempt verdict (see above). First, the court established Wright understood the nature of the discovery order (element 1). Second, the court established that Wright could have disclosed his arguments at any point during the previous six months but did not (element 3). (Note: element 2 was already clearly established since Wright had not produced the addresses). This is significant because it allows the court to find Wright in contempt without having to weigh any of the technical evidence presented by the parties.

Previously I stated that it appears Reinhart does not find Wright to be believable. Having firmly established grounds to find Wright in contempt Reinhart is now free to reach this decision without having to delve into Wright’s defenses. Wright’s evasive testimony on cross-examination does not appear to have done anything to change Reinhart’s mind.

Wright Argues Discovery Violations “Not Willfull”

In my previous June 23 letter I predicted that Wright would argue that he is physically unable to access the bitcoins in the trust. I also predicted that this would be the basis of Wright’s argument that his failure to produce the addresses was not willful.

Wright’s testimony confirmed both predictions as true. Wright acknowledged he was aware when he created the trust that he could be locked out of his bitcoins and never being able to access them if key slices held by third parties were lost. Wright argued that this is in fact what happened and that for this reason his failure to comply with the court order to produce the bitcoin addresses was not willful.

What follows is Wright’s direct-examination where his own lawyers ask him questions.

Q: So Dr. Wright, am I correct that it is impossible for you sitting here today to obtain a list of the public addresses that are the subject of this hearing?

A: Yes.

Q: If you could obtain a list, would you?

A: I would.

Q: It’s been stated that it doesn’t make sense on the surface that someone who could take steps, whatever steps they are, to obtain access to decrypt a file that ultimately allows the spenditure (sic) of the coins wouldn’t have the means to do so, that that simply, in our world as we understand it, doesn’t make any sense, and so therefore your position’s not credible, Dr. Wright. Do you agree with that statement?

A: No.

Q: Why not?

A: The physical control of the key slices was handed off to Dave, and he died without retaining information.

Q: Dr. Wright, can you please explain to the Judge exactly what was done, what this technical solution is that prevents you from obtaining now a list of public addresses so that you can comply with the Court’s order and provide them.

A: The Bitcoin that was mined at the time was done as a series of derivative keys. The way this worked was the Genesis key was added to a hash chain. The hash chain is basically a hash of values that an index using a HMAC, H-M-A-C, form of function multiplied by the curve generated G. There is a separate secret for the Genesis key and for the access chain. The access chain acts as an index for each of these keys. This allows separation of mapping where the keys were generated and spending. The access to gain knowledge of what was put in the access chain and to be able to generate those keys was given to Dave to distribute, and so that I wouldn’t be in trouble, was set so that after a period, in January of next year, a bonded courier is meant to return key slices.

Q: So the manner in which it was set up with Dave Kleiman potentially allows for the fragmented keys to come to you so that you can decrypt the file and obtain a list of the public addresses; is that right?

A: That is correct.

Q: What if it doesn’t happen?

A: Then I’ll work to make more money to pay back the debt that I’ve caused by creating this.

Q: So it’s possible, if I understand your testimony, Dr. Wright, that you may never access the coins for your beneficiaries at all.

A: If I don’t access them, I will keep inventing enough patents and other technology to fund what I was going to do in my fund another way.

Q: But my question is whether you agree that it is possible you may never gain access to the coins; is that correct?

A: That’s correct.

Q: It is possible that you may never be able to decrypt the encrypted file that would allow you to run the algorithm to produce not only the list of public addresses, but access the IP; is that right?

A: That is correct.

Q: It’s a pretty big risk that you took.

A: I didn’t see it that way at the time.

Q: Why?

A: I was ashamed of my invention.

Wright’s being “ashamed” for having created Bitcoin was offered as a justification as to why he recklessly deposited his bitcoins into a trust where the risk of losing them was glaringly obvious. Wright testified that he was ashamed of Bitcoin because it was being used to facilitate crime on the Silk Road. Wright infers that he wanted to distance himself from Bitcoin so badly that he did not care if the key slices were lost and the bitcoins thus forever inaccessible.

Q: Dr. Wright, could you please tell the Judge whether or not, if you could provide the public addresses at this point, you would.

A: If I could, I would have not given the first 70 addresses. I would have given every other address. The first 70 addresses associate me as Satoshi. I did not want to be associated with Satoshi. I left Bitcoin, or started leaving, in August 2010. I did not want to be associated with the public name Satoshi at all after that point. The problem occurred because in June 2010 people would start — who had been working on Bitcoin, decided, when I was pushing for a commercial application, to make the first commercial application as a heroin market. Martti Malmi set up the forum.

Wright next sought to bolster his claim that his failure to produce the addresses was not willfull by explaining to the court steps taken to obtain them. Wright stated he had the CTO of nChain and staff working to find a solution, which had taken time away from existing projects.

Q: Dr. Wright, have you taken any steps to ameliorate the situation or to try to recreate a list of the public addresses of the Bitcoin mined during the relevant time period in an attempt to comply with the Court’s order and demonstrate that the noncompliance is not willful?

A: Yes.

Q: What have you done?

A: I have taken high-end staff, including our CTO and others of nChain, who were working on projects, and have them instead analyzing how I told them I mined and what structure I used in the addressing, so that they can pull those addresses out with a slight probabilistic error at worst.

The direct-examination ended with Wright reiterating that the trustees in possession of the keys could not be contacted and he was in fact unable to access the addresses.

Q:There’s been a statement that you voluntarily encrypted the file and created this fragmented key system, where you’ve disseminated the risk with respect to the holdings of this, and since you did so voluntarily, you should be able to get those keys back. Is that an accurate understanding?

A: If certain other people were still alive, then I could approach them.

Q: Who are you referring to, Dr. Wright?

A: Dave Kleiman, for one.

Wright’s argument is thus that he is physically unable to unlock the trust and cannot be held in contempt for failing to do something he is physically unable to do. As explained in my June 23 letter, this is technically correct. But there still remains the argument that, even if what Wright says is true, he could be held in contempt for failing to make this argument for almost six months.

Indeed, US Magistrate Reinhart interrupted Wright’s cross-examination by Kleiman’s lawyer to directly ask Wright questions establishing this as fact.

The Court Intervenes to Question Wright

That US Magistrate Reinhart intervened during cross-examination to question Wright directly is significant. The court must make its decision based only on evidence in the court’s record. For Reinhart to ask Wright a direct question means his question’s subject matter will be crucial to the court’s verdict and he wants Wright on record as having answered it to support the verdict.

Reinhart intervened to question Wright on two occasions. On each such occasion Reinhart had a very specific and important reason for intervening: to establish the necessary elements for a contempt verdict against Wright.

Recall that the court must find the following three elements are true beyond a reasonable doubt to hold Wright in contempt.

  1. Wright understood the nature of the order to produce the addresses;
  2. Wright failed to produce the addresses; and
  3. Wright willfully failed to produce the addresses. Note that contempt can also be found by Wright’s willfully failing to provide a timely explanation why compliance with the discovery order was impossible.

Element (2) was clearly not in play since Wright had not produced the addresses. So to hold Wright in contempt the record must clearly show that Wright violated elements (1) and (3) beyond a reasonable doubt.

The Court Establishes Wright Understood the Discovery Order (Contempt Element 1)

During cross-examination it became apparent that Wright was setting up an argument that he did not fully understand the nature of the discovery order. Wright responded to a question from Kleiman’s lawyer by stating that bitcoins in question were not his and belonged Wright International Investments Limited, a company Wright owned but did not control.

If true, this would have allowed Wright to argue that the delay in his explaining it was impossible for him to access the trust was the result of Wright’s misunderstanding what was required of him in the discovery order (e.g. that he believed he only had to produce addresses of bitcoins he personally owned). Thus Wright would be able to attack a contempt verdict on appeal by showing that the first element of contempt (that the order was clear) was not proved beyond a reasonable doubt. Wright could argue he simply misunderstood the order, an honest mistake that caused delay.

Reinhart interrupted cross-examination to question Wright and put the matter to rest. Reinhart’s questions elicited responses from Wright clearly indicating Wright knew he was personally obligated to produce these bitcoin addresses. This focused the case back to the issue of whether Wright’s non-compliance was willful and foreclosed any argument that Wright did not understand the order.

Note that Reinhart even refers to Wright’s status as “a lawyer” to support the inference that he was competent to understand the nature of the discovery order. Wright tried but was unable to wiggle out of this line of questioning.

BY THE COURT:

Q: Dr. Wright, who owned Wright International Investments?

A: It was actually held by bearer shares at that stage and managed by Denis and his group.

Q: And who held the bearer shares?

A: Through a number of convoluted means, I controlled them.

Q: Okay. You’re familiar as a lawyer with the concept of care, custody and control?

A: Not in U.S. law.

Q: All right. Is it your position that you did not control these 821,050 Bitcoin?

A: No.

Q: And that that’s the reason you haven’t produced that list for me?

A: No, because the amounts were actually in the file that was encrypted.

Q: Okay.

A: So the rights to these were moved, but the actual Bitcoin was algorithmically generated so that they’re not able to move. So as it says in this —

Q: No, but what I want to understand, sir, is you said a second ago, these are not my Bitcoin, and I think what you were saying is that’s why you don’t think you have to tell me these things, even if you’re —

A: Definitely not, Your Honor.

Q: Is it your position that if you were technologically capable of accessing the necessary information about these Bitcoin, you would still not, under my order, produce that information?

A: No, Your Honor. If you ordered me and I could, I would do anything to do what you ordered.

Q: That’s not my question. My question is: Do you believe I have ordered you to produce this if you are capable, or are you saying to me —

A: Yes, I believe that.

Q: — that you don’t have to produce anything having to do with these 821,000 Bitcoin because they’re not your Bitcoin?

A: No, I believe that if I am in any way capable of getting access, that I must do everything in my power, jump through any hoop to do anything to get these to you. If there’s any way, if I can find — if I can go to everyone who Dave ever talked to, if I knew any details about any lawyer he had dealings with, if I could get any files that he left at his home and find any way to get them —

Q: Okay.

A: — I would, Your Honor.

THE COURT: I think you’ve answered my question.

The Court Established Wright Acted “Willfully” (Contempt Element 3)

In my June 23 letter I predicted that:

This is precisely what Reinhart zeroed in on when questioning Wright. Wright’s simple failure to inform the court of the impossibility of accessing the bitcoin addresses until this late stage is enough for the court to hold him in contempt. Wright willfully refused to provide answers to these questions at multiple occasions and wasted the court’s time for months.

In February, March and April Wright was asked to produce the bitcoin addresses. Not once did he make the argument that this was impossible. Why didn’t he? This is the essence of the contempt hearing. Assuming Wright is telling the truth about his technical inability to access the addresses, this hearing is first and foremost about Wright’s wasting the court’s time. The secondary issue is whether Wright’s account of events is believable. And if Wright cannot answer why it took almost six months to provide his explanation that he cannot access the addresses (he has yet to) it provides the court legal grounds to hold him in contempt (and may also color the way the court views Wright’s responses to the technical evidence).

The court has thus already established legal grounds hold Wright in contempt.

THE COURT: Can I interrupt for a second? Let me try it this way.

BY THE COURT:

Q: Dr. Wright, there’s an outermost encrypted file, correct?

A: Yes.

Q: Okay. How many slices do you need for that file?

A: Eight of 15.

Q: Who has them?

A: I don’t know.

Q: What efforts have you made to find them?

A: I’ve tried looking through documents, et cetera. The way it was set up was I gave slices to Dave, and he was directed to give them to bonded couriers that would send slices based on different events. One of those events was June 20, 2020, was one to be returned, or one set to be returned. I don’t know whether Dave set those up correctly. They used a DX service, which is bonded courier in this country, I guess, where you pay someone so that if an event happens, they will send the mail, a registered post for instance. I can’t ask Dave whether he did that correctly. To be able to tell the Australian tax office that I had zero control, I needed to hand over enough slices to Dave that I didn’t have control.

Q: Understood, but let me go back. For this outermost encrypt file, you say you need eight of 15. Do those have to be in a particular order or can they be in any order?

A: Those ones have to be in order.

Q: Okay. Where is that order kept?

A: With the —

Q: Where is the necessary information to know that order kept?

A: With the actual slice. They have a number indexing them for each one.

Q: Okay.

A: So it would be zero one number, zero two number.

Q: Okay. And how many of those slices were — did you keep?

A: Um, I have and can get a total of seven.

Q: Who else besides you and Dave do you know of who has slices?

A: I know Uyen potentially had some slices.

Q: Okay. Who else?

A: I don’t know. I was basically instructing Dave to make sure I didn’t know who he gave them to.

Q: Okay. And so you haven’t had contact with Uyen since 2016, correct?

A: That’s correct.

Q: So since 2016, you’d have known that you have no way to access these files, correct?

A: I believe —

Q: Until at least 2020, you have no ability to get to these files, is that what your testimony is?

A: Yes, Your Honor.

Q: Okay. And so you knew that fact on February 19th of this year, correct?

A: Yes.

Q: You knew that on March 14th of this year, correct?

A: Yes.

Q: And you new that on April 8th of this year?

A: Yes.

THE COURT: Okay. That’s all I have.

So on three separate occasions Wright had the opportunity to inform the court that he could not access the addresses. And on each of those occasions Wright declined to provide the explanation he now offers. The court will not have to stretch the facts to hold Wright in contempt.

Wright’s Responses to Kleiman’s Cross-Examination

As stated in my June 23 letter, it appears US Magistrate Reinhart does not find Wright’s case to be believable. Indeed, at the June 28 hearing Wright struggled to argue away various pieces of evidence introduced by Kleiman’s lawyers. Here we will discuss a single piece of evidence to demonstrate why the court does not find Wright to be believable.

(For a full exposé of the evidence adduced on cross-examination see Kim Nilsson’s work).

Wright was consistently evasive and had to be instructed by the court to answer questions at various times. This does not bode well for Wright, as the court has already established grounds to find Wright in contempt and has already stated it does not find Wright to be believable. Wright did not do much to change the court’s mind.

The discussion below concerns an email produced by Wright in discovery. The email from Dave Kleiman to Wright in 2011 purports to show Kleiman agreeing to send the bitcoins to Wright’s trust from the company Wright and Kleiman jointly owned. If authentic, the bitcoins the company Wright and Kleiman mined would have been transferred to Wright’s trust and Kleiman’s estate would not have a claim to them. However, Kleiman’s lawyers showed through metadata analysis that the email had been altered and was sent to Wright in 2014 after Kleiman had died. Obviously this is impossible and the inference is that Wright forged the document to claim these bitcoins. Wright essentially responded by trying to claim someone in his company was trying to frame him and had doctored the document before he produced it in discovery.

Wright began by laying the foundation that the email he produced in discovery could have been a forgery.

Q: All right. Dr. Wright, are these documents forgeries?

A: Um, I don’t know.

Q: Dr. Wright, you’re testifying directly before this Court. You submitted these documents, you swore to their authenticity, and now you’re saying you don’t know if they’re authentic, if they’re not forgeries?

A: Um, all I can say is they are documents that were — that look similar to ones that I’ve seen in the past that I haven’t had any access to that are in company files that have been in my basement for years.

Wright is then presented with the document and maintains it is not authentic because it is a PDF and not an email. Reinhart becomes frustrated by Wright’s attempt at evading the question.

Q: And then there’s a tag that says: “TouchUp TextEdit MP.” Do you see that?

A: Yes.

Q: Dr. Wright, did you edit the from field of this PDF in 2014?

A: What I’d like to say is —

Q: I’d like you to answer the question, Dr. Wright.

A: What you’re trying to do is lead me into something that is clearly false.

THE COURT: Dr. Wright —

THE WITNESS: You are creating —

THE COURT: Dr. Wright, excuse me. The question was simple: Did you change the from field or not. That’s a yes or no question.

THE WITNESS: This is not the document.

THE COURT: I think his question was: Did you change the from field on exhibit 2; yes or no. It’s a simple question.

THE WITNESS: This is not the e-mail, so, no.

Wright continued to refuse to answer questions about the document. Wright ultimately threw the document from the witness stand and Reinhart threatened to place Wright in handcuffs if he acted out again. Reinhart demanded Wright to answer the simple yes-or-no question, which finally resulted in a response from Wright.

Q: Dr. Wright, answer the question. Did you edit the from field of exhibit 2?

A: There is no — this is a printout of a e-mail made at a later time than the e-mail that you are falsely leading the Court to believe is real evidence that you are misleading them on.

Q: Yes or no, Dr. Wright. Did you edit the from field of exhibit 2?

A: There is no from field to edit. This is a printed later document that he is now misleading the Court on.

Q: Will you answer the question?

A: I have.

Q: Is the answer “yes”?

A: You are committing perjury by falsely putting in a document. That is not real evidence. You have created something.

THE COURT: Dr. Wright, you throw another document in my courtroom —

THE WITNESS: I’m sorry, Your Honor.

THE COURT: — you will be in handcuffs so fast your head will spin. Do you understand me?

THE WITNESS: Yes, Your Honor.

THE COURT: Okay. Now —

THE WITNESS: I apologize.

THE COURT: — answer his question, which is a simple question.

THE WITNESS: No.

Next, Kleiman’s lawyer offered evidence showing the return date on the email was edited to show a date in 2011 when it was in fact sent in 2014. Wright persisted with his “its-not-an-email-its-a-pdf” argument that Reinhart had just warned Wright about. Reinhart did not immediately intervene and waited to see if Wright would correct his behavior. Eventually, Reinhart grew frustrated with Wright’s continued evasiveness, called a break and instructed Wright’s lawyers to rein him in.

THE COURT: Okay. We’re going to take a five-minute break. Ms. McGovern —

MS. McGOVERN: Yes.

THE COURT: — Mr. Rivero, I suspect you need to have a conversation with your client about answering the questions —

MS. McGOVERN: Thank you, Your Honor.

THE COURT: — that are asked and not giving speeches.

MS. McGOVERN: Thank you, Your Honor.

After the break Wright continued being evasive in precisely the same manner that was agitating Reinhart.

Q: Dr. Wright, Dave Kleiman died in April 2013; isn’t that right?

A: That is correct.

Q: So he didn’t send this e-mail to you a year and a half after he died, did he?

A: That’s a PDF.

Q: Dr. Wright, do you know who sent this e-mail?

A: Again, this is a PDF. There are multiple copies.

What Happens Next?

There is a second hearing later this summer where expert testimony about the technical exhibits will be heard. After this hearing the court will issue its verdict. As discussed previously, this could result in fines or a six-month incarceration for Wright. The court can issue a default judgement to Kleiman or can issue the lesser remedy of preventing Wright from contesting these matters, which would all but hand the case to Kleiman.

Based on Wright’s performance at the June 28 hearing and the court having already established grounds for contempt against him, I don’t see this going in Wright’s favor.