Crypto Caselaw Minute #44–7/11/19
This week’s CCM is a veritable smorgasbord of crypto law delectation — from marital privilege and ICO discovery disputes, to the obligations of crypto-currency exchanges to ferret out fraudulent account openings, and more litigation from our pals down the street from Palley at the CFTC. Bon appetit!
Disclaimer: These summaries are provided for educational purposes only by Nelson Rosario and Stephen Palley. They are not legal advice. These are our opinions only, aren’t authorized by any past, present or future client or employer. Also we might change our minds. We contain multitudes.
(As always, Rosario summaries are “NMR” and Palley summaries are “SDP”. Image credit: https://pixabay.com/photos/smorgasbord-food-buffet-banquet-792906/ (Pixabay license)
In re Tezos Seurities Litigation, 17-cv-06779-RS, N.D. Cal., 7/19/2019, “JOINT LETTER BRIEF RE DISCOVERY DISPUTE CONCERNING ASSERTION OF MARITAL COMMUNICATIONS PRIVILEGE” [SDP]
If you are a fan of the murder mystery or police procedural genres you have heard the term “marital privilege” before. The plot device works like this — husband is charged with a crime, allegedly confesses to wife, who refuses to testify against husband based on marital privilege. The basic idea is that one spouse can’t be required to testify against another because as a matter of public policy we believe that marriage is important and we don’t want to discourage spousal communincation. In additiona to the testimonial privilege, which my hypothetical addressed, the marital privilege can also extend to discovery of communication between spouses — conversations, text messages, emojis etc. This marital communications privilege is what’s currently at issue in the Tezos class action litigation.
As a part of the discovery process in this case, Plaintiffs sent the defendants a series of document requests. You’ll recall that Kathleen Breitman and Arthur Breitman are both defendants in this case and also (as the last name suggests) happen to be married and also happen to be the founders of defenant Dynamic Ledger Services (DLS) and, respectivelym Chief Executive Officer and Chief Technology Officer. In responding to Plaintiffs’ document requests they refused to produce certain documents on the basis of marital communications privilege, which are listed on a privilge log attached to this particular court filing. The documents include subjects such as communications regarding website content, press inquiries, third party inquiries regarding “fundraiser” and a variety of other communications regarding the business of DLS and Tezos.
Plaintiff took issue with these objections. Defendants stood by them. This joint filing articuates each sides position about the dispute to the Court.
Plaintiffs argue that the communications are “purely business communications between business partners that would have occurred” even if they weren’t marrried, so the privilege doesn’t apply. Also, they aren’t confidential communications, Plaintiff argues, because the emails at issue are between “work emails” used by the Breitmans hat are owned, controlled and possessed by DLS. Alternatively, Plaintiffs argue that the Court should review the communications at issue “in camera” to “determine whether such communications were truly induced by the marital relationship or simply
business communications between business partners.”
Defendants argue in response that they had “no reason to believe their emails were not confidential. DLS has
no policy banning them from using work email for personal use, and does not give any third parties
access to their email accounts.” They also argue that there is no “business communications” exception to the marital privilege in the 9th circuit and that “It would be destructive to marital relationships if spouses were forced to disclose such private, confidential communications merely because those communications relate to business matters.” Furthermore, they say that they are not using the privilege to hide business agreements with others or “conceal facts about their property or
business transactions.”
Of course I don’t know how the Court will rule here. On the one hand, there are sound policy reasons for protecting marital communications, which the Breitmans’ lawyers have aptly briefed. On the other hand, highly relevant business communications in which there is no expectation of privacy may be difficult for the court to agree to withold. While Defendants object to an in camera review, I’d be surprised if the Court didn’t at the very least give the documents a read and make a decision about how relevant they are before ruling. It seems reasonable that the judge will want to know what is in these documents that the defendants are so eager to avoid letting him see. If produced, expect to see them treated as confidential and subject to a protective order that restricts their public production because, y’know, the ethos of trustless blockchain transparency apparently has no place in federal court litigation.
James Chen v. CIT Bank, N.A.; Gemini Trust Company, LLC; and Does 1–100 Inclusive, Cal Superior Court, Los Angeles County, 7/1/2019 [SDP]
Imagine stealing money from someone’s money market account and wiring it to Gemini to buy cryptocurrency. Actually, you don’t have to imagine it because that is allegedly what happened in this case.
Plaintiff says that in April 2018 he had over $263,799 in his accounts with CIT. He left the country and traveled to China and Australia and whil in Australia says he was in the outback and had no access to his email or or cell service.
While in the outback, Plaintifss lleges that “unknown individuals stole his identity and accessed his bank accounts with CIT. On April 24, 2018 unknown individuals transferred $263,799.28 from Plaintiff certificate of deposit account with CIT to Plaintiff’s money market account with CIT with account number ending in 9645 (“CIT Money Market Account”).” A few days later, wires in the amounts of $92,500 and $157,000 were made to Gemini. That money was allegedly used to purchase cryptocurrency by “unauthorized individuals” and not pliantiff.
In June 2018 Plaintiff says he discovered fraudulent activity in two other bank accounts and realied he had been locked out of his CIT account. CIT rejected a disute that he filed with them, and this lawsuit followed, naming both CIT and Gemini. As to CIT, plaintiff says that it was obligated under California to refund the wires because they were notified during the statutory notice period under Califronia law. Also, plaintiff says that CIT violated the Electronic Funds Transfer Act.
As to Gemmini, Plaintiff says that Gemini should have known given the amount of money transferred in 7 days “that they were dealing with impostors” and that their failure to do so was an unfair trade practice. The techincal term for this particular allegation is “pretty weak tea.” Now I suppose if Plaintiff can show that Gemini has weak AML/KYC processes and fraud prevention maybe this gets past a motion to dismiss. Gemini will probably argue — assuming that Plaintiffs claim is true — that they were fooled by a sophisticated criminal enterprise and aren’t liable for a crime that took place elsewhere.
CFTC v. Diamond Trading Investment House, et al., Case №4:18-cv-00807-O (N.D. Tex. filed June 28, 2019) [NMR]
You miss 100% of the shots you don’t take. In life, in sports, in business, and, yep you guessed it, in law. This recent order and default judgement out of the Northern District of Texas is a… well, it’s about what we’ve come to expect in this space. Before we dig in to the facts of the case let’s talk a little about default judgments.
You can probably infer from the name that a default judgment is a judgment that is entered by… default. This sort of thing happens when one party in a case moves for judgment in their favor, and the other party, typically, doesn’t respond. The Court metaphorically shrugs it’s shoulders and says “Cool, I guess you win. Next!” That last part doesn’t really happen, but it would be funny.
This case started on September 28, 2018, with the Commodities and Futures Trading Commission filing a complaint against Defendants John Doe 1 aka Morgan Hunt dba Diamonds Trading Investment House (“Hunt”) and John Doe 2 aka Kim Hecroft dba First Options Trading (“Hecroft”). The CFTC attempted to serve the defendants via their email addresses, and then when they never responded to the complaint the CFTC filed a motion, which the court has now granted giving the CFTC everything they wanted. There is one catch in all this. It appears that no one knows where the defendants are, or if it is multiple defendants, or just one person. What? How did this even get started then? Well, an aggrieved buyer alerted the CFTC to what the defendants were up to, and they were up to a lot.
Given that this is a default judgment the following alleged facts are taken as true by the Court. An individual referred to as L.M. in the order was a victim of fraud perpetuated by Hunt. Starting in 2017, Hunt took a variety of steps to create a fake forex trading business. One such step was a Facebook post that said “It’s the bitcoins diamonds exchange. Awesome profits generated from it.” A message that Hunt sent to L.M. described his investment strategy as ““the Bitcoins Diamonds Trust” and that it “guarantees a passive investment return of 40–60% after a 30 day trading cycle.”” L.M., who was on social security disability decided this was too good to pass up, and agreed to invest with Hunt.
Hunt proceeded to have L.M. start purchasing bitcoin, which he of course then had L.M. transfer to Hunt’s own bitcoin wallet. Hunt sent a series of fake trading return documents to L.M. showing profits. Then L.M. wanted to withdraw some cash, and things started to go south.
Hunt claimed that L.M. shouldn’t withdraw, because of tax implications related to the CFTC. Hunt apparently forged a CFTC document, using their logo and letterhead, to try and convince L.M. that he shouldn’t make a withdrawal. L.M. eventually got suspicious and contacted the CFTC himself, which set all of this in motion. What about Hercroft?
Well, Hunt is probably Hercroft. Why? Well, for one thing “[d]uring the Relevant Period, Hecroft used some of the same IP addresses to log
into his [gmail] account that Hunt used when logging into his [gmail] account and his “Morgan Hunt” Facebook page.” Hecroft ran a similar scam on a person named D.P. From the get go D.P. was suspicious of Hecroft and demanded proof of his identity, which Hecroft satisfied by providing a forged California driver’s license, and a fake trading license. Hecroft also produced a fake “Certified CryptoCurrency Expert” license he claimed was issued by the Blockchain Council. The Blockchain Council does not do licensing. D.P. was apparently satisfied and started transferring some bitcoin to Hecroft.
Eventually, D.P. wanted to withdraw funds and Hecroft sent the same forged CFTC document as was sent to L.M making the same false tax argument. As D.P. pressed the issue Hecroft started sending letters purporting to be from the General Counsel for the CFTC to dissuade D.P. from contacting the CFTC directly.
What happens now? The Court permanently enjoined Hunt/Hercroft, and anyone else who helped them, from engaging in these sorts of activities again. Hunt/Hercroft are also ordered to pay restitution and civil penalties. A process is laid out for them to comply with the order. Will Hunt/Hercroft comply? Probably not, and unfortunately the odds of L.M. and D.P. seeing their funds again seem to be pretty low.
