Crypto Caselaw Minute #55–9/27/19
This week’s Crypto Caselaw Minute starts out with an update on the never-ending CSW saga, an attempt to get one’s innocence that didn’t work, and we take a look back at a case that deeply influenced the crypto industry from the beginning.
Disclaimer: Crypto Caselaw Minute is provided for educational purposes only by Nelson Rosario and Stephen Palley. These summaries are not legal advice. They 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”. Our Image credit: https://pixabay.com/photos/dog-smile-outdoor-paste-variety-1558962/(Pixabay license).
Kleiman v. Wright, “Order on Joint Motion for a 30-Day Extension” Case №18-cv-80176-BLOOM/Reinhart, S.D. Florida, 9/17/2019 [SDP]
The Kleiman v. Wright litigation is a case study in how you can lose a case by breaking rules and pissing off federal judges. The wheels started to come off the bus for Craig Wright earlier this year when in June Magistrate Judge Reinhart ordered him to appear to testify in a hearing to show cause why he should not be held in “civil and/or criminal contempt.”
The Court rejected almost of all of Wright’s arguments about why he hadn’t complied with disovery obligations, including his argument that “encryption is hard.” I predicted at the time that Wright would be sanctioned and that this would ultimately lead to the case settling, in part because the Court would heavily lean on Wright to do so.
Several months later, and several more Court orders finding that Wright flaunted discovery obligations and wasn’t truthful — from two judges — this all came to pass. A joint motion filed on September 17 reported to the Court that the parties had reached a settlement in principle and asked the Court to give them time to finalize things.
As I pointed out at the time, when federal judges start to question your veracity it’s not a good thing, and I predicted sanctions and settlement would follow:
While I’d like to claim oracular skills if you do this for a living it wasn’t all that hard to predict. Federal judges hate liars and rule breakers and will give litigants a certain amount of leeway until they don’t. That’s what happened here. The Court had entered an Order that was pretty much case ending for Wright, severely sanctioning him and giving him very little basis to defend the case, and basically calling him a liar. While it wasn’t completely impossible to come back from this it was practically so, and settlement was really the only rational resolution,
Anyway, as a postscript to this, the Court ruled on the motion for additional time by giving the parties 30 days but otherwise keeping the case schedule intact. And perhaps as a way to keep pressure on Wright to settle the Court says that Kleiman’s motion for attorneys fees (which would be inevitably be granted) must be filed by October 20, 2019 and pre-trial motions by January 17, 2020, suggesting that the Court will not hesitate to push the case to a trial (which Kleiman would most likely win) early next year if the parties don’t wrap their settlement up pronto.
Just like this case tells us very little about the identity of Satoshi, we are unlikely to learn anything about the terms of the settlement. It’s likely to be a condition of the settlement agreement they remain confidential, which is typical.
USA v. Shamo, Case №2:16-CR-631-DAK (Dist. Utah ordered September 20, 2019)
Sometimes, prosecutors mess up. They don’t exactly have the evidence they think they have, or they don’t accurately portray it, or a lower court misinterpreted what was relevant to a criminal matter. It happens far too often in our system when you are innocent until proven guilty. Thankfully, we have the appeals process, and you can file motions to try and make arguments that you were treated unfairly, and so on. That’s good! Here, Shamo filed a motion for acquittal to try and get to freedom town, and it did not work. Okay, what’s this case about?
Aaron Shamo was convicted on August 30, 2019, in the district court of Utah for “ engaging in a continuing criminal enterprise, three counts of aiding and abetting the importation of a controlled substance, possession of a controlled substance with intent to distribute, manufacture of a controlled substance, and two counts of knowing and intentional adulteration of drugs while held for sale,” according to a press release associated with the conviction. What Shamo did was run a Dark Web storefront that allowed people to buy drugs with bitcoin. The buyers were individuals and other dealers around the country who could leverage Shamo’s contacts in China to get fentanyl and other opioids. After federal agents were able to gather evidence on the operation Shamo and his co-conspirators were indicted, and ultimately convicted.
This order in the case has to do with a motion for a judgment of acquittal, ie, trying to overturn Shamo’s conviction. Shamo’s attorneys filed the motion after he was convicted by a jury, and the judge in this case has now denied the motion.
Shamo’s attorneys attempted to argue that there was insufficient evidence to sustain two of his convictions. Their reasoning? First, his attorney’s argued that he should not be convicted of engaging in a continuing criminal enterprise, and the judge cites a bunch of evidence presented at trial, that, umm, well, you can see:
Defendant conducted extensive internet searches related to the drug distribution organization, he emailed and texted co-conspirators with directions and oversight, and he controlled the full Pharma-Master account on AlphaBay and the Bitcoin wallets associated with it. Moreover, investigators obtained texts and emails from co-conspirators that corroborated co-conspirators’ testimony regarding the individuals’ roles in the organization. This evidence demonstrated that Defendant organized, supervised or managed far more than five subordinates. The seized packages and computer information related to Pharma-Master’s operations on the AlphaBay marketplace also provided evidence of the scope of the operation.
Yeah, that sounds a lot like a continuing criminal enterprise to basically anyone and everyone. The second count they moved to acquit was related to his conviction for a death caused by fentanyl. The judge completely shut that down by pointing out that a toxicologist testified to the victim having fentanyl in his system, and that Shamo’s product was found at the scene. Alcohol and other drugs in the victim’s system could not have caused the respiratory failure that caused the victim’s death, but fentanyl could.
Shamo’s attorneys may appeal the case, but this motion failed for what looks like fairly obvious reasons. The Dark Web remains a thriving marketplace for illegal things that are seemingly more easily purchased with crypto.
US v. Budovsky et al., Case №13-cr-368 (DLC) (S.D.N.Y. filed September 23, 2015)[NMR]
Contrary to what some people believe Bitcoin and crypto were likely not created by aliens, nor did they drop from the sky. Instead, the technology was the culmination of a decades long process to create digital cash. E-Money. Bit Bucks. You get the picture. Many cypherpunks and fellow travelers envisioned a world of near constant digital surveillance (spoiler alert) and wished to create something akin to physical cash, but for the digital realm. (Sidebar: Have you ever noticed that no one will blink an eye when you refer to the Internet, et al. as a “realm,” or domain, and the like, but as soon as you start talking about Michigan Ave as part of the realm people look at you like you’ve read too much GRRM?) Anyways, this case is from awhile ago, but it was a big deal when the indictment came down, and the story of Liberty Reserve highlights many issues that crypto has yet to solve.
The astute student of crypto knows the story of Liberty Reserve, but for those who don’t here’s the skinny. Liberty Reserve was a payments process that utilized a digital currency of its own creation. Since it was founded in 2006 it utilized a central counterparty, itself, to make sure that people could not double spend funds. Human beings have used counter-parties for millennia to manually solve the double spend problem, so to speak. People could add funds to their accounts with Liberty Reserve and then the bank would convert said funds to one of their digital currencies that would mirror a fiat currency and money could be sent anywhere. All you needed to get started was a name, DoB, and email address. Bingo bango, you’re off to the races. As you can probably guess, this got the attention of regulators.
The founders of Liberty Reserve had in fact already been convicted of running an unlicensed money transmitter business out of New York called “Gold Age Inc.” that functioned as exchange for an earlier digital currency called “e-gold.” As alleged in the complaint, the defendants sought to avoid regulation by US authorities by setting up shop in Costa Rica for Liberty Reserve. The plan did not go as expected.
The Costa Rican authorities eventually determined that Liberty Reserve was under their jurisdiction and informed them that they needed a license to exchange money. As part of the application process the authorities determined that there was no know your customer process, or anti-money laundering safeguards in place. Instead of putting those in place the Liberty Reserve team setup a portal for regulators to view transactions that the Liberty Reserve team could fake as needed. They would ultimately be denied a license in 2011. At that point most people would probably stop. Instead, Liberty Reserve claimed they were sold to another company, and continued operating underground.
A multi-year investigation by law enforcement in over a dozen countries culminated in charges against the founders in 2013. The press release from DoJ at the times reads “Liberty Reserve Allegedly Processed At Least 55 Million Illegal Transactions For At Least One Million Users Worldwide Facilitating Global Criminal Conduct.” That’s something regulators will notice.
At one point, the principal founders attorneys filed a motion to dismiss (which you can read at the link above)the indictment in part arguing that there was no nexus to the United States. That argument didn’t fly with the judge in the case who noted that in a motion to dismiss an indictment the allegations are taken as true, and here there were allegations of over 200k users in the US and $13.5 mil that moved through the SDNY. Yeah, that’s a nexus.
When the dust settled the principal founder received 20 years, and most of co-founders pled guilty presumably for reduced sentences. Trying to make some that avoids regulation is a bad idea. Trying to make something that is unregulatable may not be a bad idea, but it is something different. The intent is what matters. That’s not legal advice, but if you think that financial regulators around the world don’t cooperate and won’t notice your attempts to avoid their reach you are sorely mistaken.
