Opinion on Current Issues in Kleiman v. Wright

To Whom It May Concern:

I am a lawyer licensed in New York, a solicitor licensed in Hong Kong, and a foreign-registered lawyer in Taiwan. I have been in private practice focused on Bitcoin and cryptocurrency related matters since 2013.

This opinion letter discusses the matter of Kleiman vs. Wright in US federal court in the Southern District of Florida. On June 16, I commented “he’s fucked” in reply to a Tweet by “Dr. Peter McCormack” (@PeterMcCormack) referencing a court order compelling Dr. Craig Wright (‘Wright”) to produce certain bitcoin addresses. This letter expands on that comment.

No one has paid me for this opinion. I do not have inside knowledge of any aspect of the case unless otherwise indicated. I simply want to provide non-lawyers following this case with some insight.

I. Background

Ira Kleiman (“Kleiman”) has sued Wright for billions of USD alleging Wright stole from the late Dave Kleiman a sum of bitcoins the two mined during Bitcoin’s earliest years. Wright is well-known for claiming to be Satoshi Nakamoto, Bitcoin’s creator. Wright’s claim to be Satoshi is heavily disputed due to Wright’s refusal to provide evidence for this claim, such as cryptographically signing a message with any of Satoshi’s known keys. It is for this reason Kleiman’s action against Wright has attracted public attention.

Wright has been ordered by the court to produce a list of the bitcoin addresses where the bitcoins he and Kleiman mined are held. Wright has claimed this is impossible because those bitcoins were placed into a “blind trust” in 2011 and he does not have access to it since the trust requires him to contact a number of trustees that are unreachable. The court’s June 14 order indicates that it believes Wright does have the power to contact these trustees and access the trust, and ordered a hearing on June 28 as to whether Wright should be held in contempt of court for failing to produce the bitcoin addresses in discovery.

Contempt of court is a powerful remedy available to judges to ensure litigants comply with the court’s rules and orders. Judges would be powerless to administer cases without it. Wright may face imprisonment or fines. The court also has the power to award Kleiman judgement for Wright’s violation of the discovery order.

II. Legal Strategies Used by Kleiman and Wright

A. Kleiman’s Strategy

It appears obvious that Kleiman’s legal team does not believe Wright to be Satoshi. I base this on their legal strategy and on information of which legal team must be aware. Their legal strategy seems to be focused on exposing that Wright is not trustworthy, which also necessarily puts Wright’s claim to be Satoshi to the test. For instance, Kleiman’s legal team has called into doubt whether the “blind trust” actually has the bitcoins in question, or even exists.

On its face this is a somewhat peculiar strategy since Kleiman’s claim to damages largely disappears if the billions of USD worth of bitcoin never existed and was just made up by Wright. It is worth noting, however, that Wright’s claim to be Bitcoin’s creator has allowed him to procure tens of millions USD in investment for various ventures. The current market cap of BSV, the token backed by Wright’s camp, is close to $4B USD. Investors have a lot of money riding on Wright’s continued claim to be Satoshi.

It is on this basis that I believe the real strategy pursued by Kleiman’s legal team may be to seek a confidential settlement from Wright for far less than the billions sought in court. In essence, pay me or get exposed. Much depends on what Kleiman is willing to settle for.

B. Wright’s Strategy

Wright’s legal team must know they are on the verge of losing the case in Florida. Wright’s argument is less a legal one and more technical: that he is physically unable to access the trust.

US Magistrate Reinhart has indicated he does not believe Wright’s lawyers and thinks they have been misleading the court for months. At a hearing on May 6 Reinhart questioned Wright’s lawyers over details related to the “blind trust”, which revealed Wright’s lawyers knew nothing about it. Reinhart opined that this trust along with Wright’s inability to provide even basic information about it was “facially incredible”. If their claims and evidentiary submissions in the months prior were truthful, Wright’s lawyers should have already had at least had basic details about the trust (e.g. the names of trustees and legal terms in the trust documents).

An affidavit signed by Wright on May 8 was filed in response to Reinhart. Wright provided a sworn statement about the trust, stating the names of the trustees, which include Wright himself as a trustee. It is noteworthy that all of the trustees are either dead, unreachable, dissolved, in liquidation or controlled by Wright. Wright is essentially lone remaining the trustee of his own trust. He appears to be preparing the argument that he is unable to access the trust information since the unreachable trustees have keys needed to access it. In essence, this also means he would be locked out of accessing the bitcoins the trust holds.

Moreover, at least one of the trustees, CO1N Ltd. (dissolved in 2017), appears to have only come into the picture in 2014, well after the trust was formed. A blog post released June 20 contains research showing that the company was likely purchased in January 2014 by Wright. The post further states that Uyen Nguyen (one of the other trustees Wright cannot reach) was appointed as a director in 2012 when the company was a dormant shelf-company. Kleiman’s lawyers are sure to be all over this and on June 28 Wright may have to respond as to how CO1N, Ltd. came into the picture and how Uyen Nguyen could have been appointed as a trustee at such time.

Given US Magistrate Reinhart’s tone toward Wright’s lawyers at the May 6 hearing and the wording in his June 14 order, it is not a stretch to say he does not find Wright to be believable. His June 14 order makes clear he does not believe that Wright cannot contact the trustees to gain access to the trust. At the least, Wright’s failure to take affirmative steps to locate and contact these trustees for months is enough for the court to rule he has violated the discovery order and hold him in contempt. And if the court does not believe Wright, the Federal Rules of Civil Procedure allow the court to effectively hand the case to Kleiman as punishment for Wright’s violation of the discovery order.

If no settlement is reached and Wright cannot produce the list of bitcoin addresses as ordered by the court, Wright will almost certainly lose the case to Kleiman. Losing to Kleiman will be potentially disastrous for Wright’s ventures and those invested in them. There is certainly a risk that settlement can not be reached since the June 18 mediation hearing ended by noting simply that the parties are at an “impasse”. If Wright loses in this way he will surely appeal and the case could be settled during the appeal process.

III. Legal Consequences for Wright’s Violation of the Discovery Order

What follows is a discussion on what may happen to Wright if he does not produce the bitcoin addresses as required by the court’s order to compel. In US Magistrate Reinhart’s June 14 order he cited two sources of authority for dealing with Wright’s discovery violations: 28 USC § 636(e)(6)(B) and Federal Rule of Civil Procedure (“FRCP”) 37. Let’s deal with those first, then we will discuss application of the US federal contempt statute, 18 USC §401 (see endnote 1).

A. 28 U.S.C. § 636(e)(6)(B)

The order to compel was issued by US Magistrate Bruce Reinhart. A magistrate is not a “full” judge and does not possess powers to hold those before him in contempt. This statute simply gives the magistrate power to refer the issue to a judge who has those powers, which in this case is US District Court Judge Beth Bloom.

B. FRCP 37

Federal Rule of Civil Procedure 37 governs how Judge Bloom will handle this matter. Rule 37 discusses when a judge can hold persons in the courtroom in contempt and subsection 37(b) specifically authorizes contempt for failure to comply with a court order. Rule 37(b)(2)(A) sets out remedies for where a party refuses to comply with an order to produce discovery, which here is Wright’s refusal to produce the bitcoin addresses. Remedies include:

(ii) prohibiting the disobedient party from supporting or opposing designated claims or defenses, or from introducing designated matters in evidence;

(vi) rendering a default judgment against the disobedient party; or

(vii) treating as contempt of court the failure to obey any order except an order to submit to a physical or mental examination.

If Wright cannot produce those bitcoin addresses, subsection (vi) empowers Judge Bloom to award a default judgement to Kleiman for the billions of USD he has asked for. Before we even get to the issue of whether Wright may be held in contempt, FRCP 37 permits the judge to rule in Kleiman’s favor for Wright’s violation discovery orders. This possibility should be enough to make Wright’s investors interested in the upcoming June 28 hearing.

Given the tone US Magistrate Reinhart took at the hearing on May 6 and in his June 14 order, it seems likely FRCP 37 will work to Kleiman’s benefit on June 28 if those addresses are not produced.

C. 18 USC §401

Judge Bloom can also hold Wright in contempt of court for violating the discovery order to produce the bitcoin addresses. Contempt of court under §401 is a criminal offense punishable by fine or imprisonment. The US Constitution requires a trial by jury for serious offenses and in the contempt context this has been held to be punishments exceeding six months imprisonment or a $100,000 USD fine (see endnote 2). Judge Bloom thus has the power to send Wright to jail for months without the need for a separate jury trial.

i. The Statute and Legal Standard

Let’s look at the relevant portion of §401’s text, §401(3).

A court of the United States shall have power to punish by fine or imprisonment, or both, at its discretion, such contempt of its authority, and none other, as —

(3) Disobedience or resistance to its lawful writ, process, order, rule, decree, or command.

Here, §401(3) comes into play for Wright’s disobedience/resistance to the court’s order to produce the bitcoin addresses. Federal courts have held (see endnote 3) that the following elements must be proved beyond a reasonable doubt to find an accused in violation of §401(3):

(1) The court made an order of reasonable specificity;

(2) The accused violated that order; and

(3) The violation was willful.

It is clear that the order to produce the bitcoin addresses was specific and it will also be clear Wright has violated that order if he does not produce them by the June 28 deadline. So much for (1) and (2). The case comes down to (3) and whether Wright’s violation was willful.

ii. Wright’s Lawyers Will Argue “Not Willful”

Wright’s lawyers argued on May 6 that failure to produce the addresses at that time was not willful since the trustees are located in different places and the trust is complex. Indeed, Wright’s May 8 affidavit appears to argue that it is impossible to access the trust because it requires keys held by several trustees who are either dead, unreachable or are corporate entities that have been dissolved or are in liquidation.

Wright has not stated in public records how many of the trustees are needed to access the trust’s encrypted files. The entity-trustees that are in liquidation should have court appointed liquidators controlling them who would have access to the trust’s encryption keys; the dissolved entity-trustees would have taken steps to distribute company property upon dissolution. Wright has not been clear about what efforts Wright has made to contact the trustees, which Reinhart expected him to have done months ago.

That Wright is now the subject of a contempt hearing on June 28 indicates Reinhart does not believe his story. At the very least, Reinhart believes Wright has for months willfully avoided contacting the trustees of the “blind trust” to escape his discovery obligations. Reinhart may well believe the trust does not exist at all. And the issues related to the trustee CO1N, Ltd. may raise further doubts as to Wright’s credibility at the June 28 hearing.

Wright’s explanation may create enough reasonable doubt for a defense lawyer to get him off with a jury, but if Judge Bloom does not buy Wright’s story she can still sentence him six-months in jail and hand a verdict to Kleiman.

iii. Potential Consequences for Wright’s Lawyers

Lawyers can also be held in contempt under §401 where they “deliberately or recklessly disregarded his obligation to the court” (see endnote 4). US Magistrate Reinhart’s tone at the May 6 hearing indicated he was not pleased with Wright’s lawyers and did not believe their statements that they knew nothing about the “blind trust”. This was a warning to them. The lawyers procured an affidavit from Wright on May 8 that likely saves them from any contempt, as they are not in control of their client’s statements and are taking measures to procure the discovery ordered by the court.

IV. Conclusion

The foregoing has been provided merely to give some insight to those following the case as to legal issues taking at play.

Regards,

Daniel Kelman

1. There is a second contempt statute at 18 USC §402 that is not ripe for discussion
2. The Supreme Court has explained that “crimes carrying a sentence of more than six months are serious crimes and those carrying a sentence of six months or less are petty crimes.” Codispoti v. Pennsylvania, 418 U.S. 506, 512 (1974). See generally United States v. Twentieth Century Fox Film Corp., 882 F.2d 656 (2d Cir. 1989), cert. denied, 493 U.S. 1021 (1990)(holding that no criminal contempt fine in excess of $100,000 can be levied against a corporation without a jury trial). There is no right to a jury trial in a civil contempt proceeding despite the fact that civil contempt sentences can be quite harsh. See International Union, United Mine Workers of America v. Bagwell, 114 S.Ct. 2552 (1994) at 2557.
3. See United States v. Turner, 812 F.2d 1552, 1563 (11th Cir. 1987); see also In re Levine, 27 F.3d 594 (D.C. Cir. 1984), cert. denied 115 S.Ct. 1356 (1995)(stating that “the disobedience must be willful”); United States v. Ryan, 810 F.2d 650, 654 (7th Cir. 1987)(requiring that the defendant must have been aware of the order).
4. DeVaughn v. District of Columbia, 628 F.2d. 205, 207 (D.C. Cir. 1980).