The MtGox Russian Recovery Offer: Why I’m Saying “No Thanks”

Daniel Kelman
5 min readAug 22, 2019

The following was originally posted in the MtGox Legal forum for discussion. I’ve since been asked by other creditors to share it publicly since not all creditors have access to MtGox Legal’s forum. This piece analyzes a contingency fee offer made by Russian lawyers seeking to represent MtGox creditors in collection recovery litigation.

Tl;dr, the terms offered by the”Russian Recovery” lawyers are unreasonable and I will not accept them. I also question their motives.

MtGox creditors are right to be skeptical. This is not the first time and probably won’t be the last time we have to consider an offer by someone trying to profit from us. This doesn’t mean we should dismiss their proposal outright, but it does mean we should carefully evaluate it. We have been given a deadline to accept an offer we are told is a something-rather-than-nothing proposition. The offer is short on specifics, so let’s look at what we aren’t we being told.

1. Attorney Ethics. The Russian Recovery lawyers have stated they will not disclose specific facts about the case because once they share them we are free to take them to a different law firm. News flash: that’s how the legal services market works. If a lawyer has a good case, they show it to their client and offer a fair price. If the client trusts the lawyer, the client then goes with the obvious solution staring them in the face. These lawyers have treated their engagement like it’s a mystery box, asking us to first gamble with a majority of our right to recovery before we can take their legal strategy out of its package. This is an unethical way to solicit clients, no legal engagement should this closely resemble a carnival game.

2. The DOJ’s Civil Case Against BTC-e & Vinnik. The Russian Recovery lawyers have been following BTC-e closely and I am sure they are aware that the US Department of Justice (DOJ) recently filed a civil action against BTC-e and Vinnik for money damages. This civil action is separate from any criminal action. It’s no secret the MtGox bitcoins were laundered at BTC-e. This begs the question of whether the Russian Recovery lawyers’ secret information is just advance knowledge of what DOJ has planned. Perhaps the DOJ is filing a civil complaint as a matter of course. But if anyone has knowledge about the whereabouts of BTC-e’s bitcoins I’d wager it would be the legal representative of the law enforcement agency that has spent the past few years investigating where those bitcoins went. Assuming US law enforcement seizes the BTC-e bitcoins, the Russian Recovery lawyers wouldn’t deserve a lion’s share of our cut for acting as vultures picking at BTC-e’s carcass.

3. The Trustee. If US law enforcement in fact seizes the BTC-e bitcoins, it’s likely that the Trustee would file an action on our behalf to claim whatever DOJ seizes. (Hopefully he wouldn’t settle like he did with DHS over the $5M seized from the Mutum Sigillum accounts). Any creditor having engaged the Russian Recovery lawyers would then share half their recovery with them while at the same time paying the Trustee from the other side of their claim as he bills the MtGox estate to do the work. The Trustee has also apparently been in contact with the Russian Recovery lawyers. It’s possible the Trustee has been in contact with the DOJ about their civil action against BTC-e. It’s possible the Russian Recovery lawyers are hit with a DOJ subpoena to disclose the information they’re sitting on. I’m admittedly speculating, but we have to pick a horse in this race and my bet is that there will eventually be more than one horse to bet on. I am not prematurely placing my bet on lawyers who have been acting in a manner that is, to put it politely, abnormal.

4. The Abnormal Engagement Agreement. I have seen the engagement agreement and it is indeed abnormal. Its abnormalities stem from the fact that contingency fee agreements are not legal in Russia (asking for 50% if you win is a contingency fee). The contingency fee issue explains another abnormality: why these lawyers haven’t offered to simply file a class action on our behalf (class actions exist in Russia). A class action is a lawsuit where many similarly situated plaintiffs become represented by a single plaintiff. The Russian Recovery lawyers could file a complaint on behalf of one creditor, then file a motion to nominate that creditor to represent all creditors as a class. If the court accepts the motion, all creditors would be represented by the Russian Recovery lawyers and each creditor would have to individually contact them to opt-out of representation. Why hasn’t this been done? Simply put, filing a class action would throw a wrench in plans to claim 50% of the winnings because contingency fees are not legal in Russia. A Russian court would not approve a contingency fee and these lawyers would instead only be making an honest $350 an hour.

5. Gouging Creditors. The Russian Recovery lawyers initially asked for something like 80% and their fee agreement didn’t clearly exclude sums already held by the Trustee. Let’s call this what it is: a blatant attempt to capitalize on the hopelessness that many MtGox creditors feel after five years of legal proceedings. This initial offer wasn’t the mark of honest lawyers looking to win clients’ trust. It was the mark of lawyers trying to take advantage of their potential clients’ distressed state to obtain an unfair deal from those same potential clients. The Russian Recovery lawyers must have known that battle-hardened MtGox creditors would never have trusted a random law firm asking for a full 80% of their bitcoins. So they hired Andy to ask.

6. Andy’s Role. Andy has previously done a lot of important work for MtGox creditors. But he has since sold his claim and been offered compensation by the Russian Recovery lawyers to procure our acceptance of their offer. To his credit he hasn’t hid this. But no matter how much we like him, Andy is our counter-party here. That affects how we should weigh his advice.

7. Conflicts of Interest. It would be negligent for me as a lawyer to ignore an appearance of impropriety when considering one’s advice. Lawyers are taught to use this simple standard to avoid and evaluate conflicts of interest. We should apply it here. Andy is sitting on two chairs; one as a trusted advisor on the governance board of MGL, another as a paid facilitator of the other party. Giving Andy the benefit of every doubt, it strikes me as likely that his conflicted position would, at the very least, cause him to be less motivated to question the veracity of the Russian Recovery lawyers and adequately vet the abnormalities in their offer. He is in fact advocating in favor of the offer. He has in fact placed himself in a position where his incentives are directly at odds with our own best interests. This makes it hard for me to afford much weight to his opinion here.