Crypto Caselaw Minute #29–3/28/2019
Default judgments, trademark disputes, and crypto indictments. This week’s CCM covers the waterfront, and we’re pleased to have Susan Joseph join use with a guest post on the Cabbage Tech criminal case. [As always, Rosario summaries are “NMR” and Palley summaries are “SDP.” This week’s guest post is from Susan Joseph and is denoted “SJ.”]
Disclaimer: These summaries are provided for educational purposes only by Nelson Rosario [twitter: @nelsonmrosario] and Stephen Palley [twitter: @stephendpalley]. 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. (Picture credit: https://pixabay.com/photos/seagulls-bird-coastal-1530565/; CC0 Creative Commons).
Wenqing Liu v Jun Chen, 2019 N.Y. Misc. LEXIS 1134 *; 2019 NY Slip Op 30662(U) (March 15, 2019)[SDP]
If you don’t respond to a lawsuit a court will enter a default judgment against you. That’s what this order concerns — a request for a default judgment in a case involving “EtherDEG”, a so called decentralized cryptocurrency exchange incorporated in the British Virgin Islands.
According to the opinion, the Plaintiff alleges that in the go-go days of the last crypto-currency boom, December 2017 to be precise, “he was appointed the CEO of EtherDEG and was granted an annual salary of $125,000, an 11.25% equity stake, and the right to receive commissions (he does not allege how much) from EtherDEG’s initial coin offering (which occurred on January 15, 2018).” He was then allegedly kicked out by the Defendant, a Chinese citizen.
Plaintiff filed the lawsuit almost a year ago, on April 30, 2018. Per the opinion, Plaintiff claims to have served EtherDEG with the complaint on its registered agent in BVI, but neither EtherDEG nor Jun Chen responded or filed any opposition papers.
One of the things Plaintiff asked the court to do is issue an Order permitting him to deposit EtherDEG cryptocurrency which he claims is worth 2.25 million USD into the court’s “registry” so the court can say who owns it.
What is a Court registry exactly? It can be a safe deposit box, a bank account, a locked file drawer. What’s unclear here is how Plaintiff figures his “EtherDEG would be” held by a state trial court in Manhattan and in a footnote the court says “it expresses no opinion at this time as to whether this is possible.” (Private keys in an envelope? Hardware device? Software wallet? Is a Court really gonna wanna tangle with this? If I were asking a court to hold crypto in a registry I’d be excruciatingly detailed about what this means exactly).
Plaintiff also seeks 10 Million dollars but even though the Defendant hasn’t answered the Court seems skeptical of this claim, noting that “[t]he basis for seeking this amount from EtherDEG for breach of contract is unclear as plaintiff’s annual salary was only $125,000. The claim to compel delivery of stock is not a claim for monetary, damages and this cause of action does not seek unpaid commissions (see Dkt. 18 at 1 [“EtherDEG’s breach of contract caused me to lose at least $10,000,000 in compensation, including but not limited to the destruction of the value of my equity”]).” (Practice note — while it’s possible under limited circumstances, it’s very hard to prove fraud and breach of contract at the same time if the alleged fraud is really just a rehash of the contract claim).
Anyway … there’s a basic problem with the Default Judgment motion which is that the Court wasn’t convinced that Plaintiff could prove liability or damages. Per the Court, under New York law, default judgments aren’t rubber stamps for liability once jurisdiction is established. So, the Court denied the motion and told the Plaintiff to present a more detailed explanation of liability and a precise explanation of what contract terms governed and were breached.
Ares Management LLC v. Starlight Capital Group, Inc., et al., Case No. Civ-1:19-cv-00894-RBJ (D. Colo. March 25, 2019) [NMR]
What do you think of when you think about the most valuable companies in the world? Chances are you think about their brand. The distinctive imagery surrounding that company that is often evoked by the company’s logo and/or name. Companies invest a considerable amount of resources into brand development. One way that they protect that brand is through filing trademarks. Once a company receives a trademark they then have a duty to enforce that trademark if they think people are misusing the mark in some fashion. This newly filed complaint deals with this exact issue. An established financial services firm is suing a blockchain startup for trademark infringement, unfair competition, and other matters.
Plaintiff, Ares Management LLC is a global asset manager that claims to have $131 billion of assets under management. Ares claims to have used the mark and trade name ARES since at least 1997 for their financial services and product offerings. In addition, they also claim to have at least 105 famous marks (whether a mark is considering famous is dependent on a variety of factors related to public perception of the mark) around the world that make use of the Ares name. The defendants, Starlight Capital Group, is a crypto startup that is allegedly launching a crypto exchange, ARESCOIN, as well as a couple of other offerings that have the name Ares in them. The plaintiff alleges that Starlight is also the owner of several websites that utilize the name Ares in the domain name.
One of the key points in a trademark infringement dispute is whether someone is using your mark “in connection with goods and/or services in a manner that is likely to cause confusion, deception, or mistake about the source of the goods and/or services.” So, if the average person would be confused about the source of the goods/services.
Why would someone be confused about the source of goods and services? Well, for example, if two names or logos look similar that might cause confusion. This is largely the approach that the plaintiff has taken here. To bolster their argument they included some screenshots. Actually, they included a ton of screenshots from the company website, Facebook, Medium, Steem, Twitter, YouTube, Reddit, Vimeo, and a screenshot from each website named in the complaint. The crux of the issue is that Ares alleges that Starlight Capital not only used their name, but also the same font, and the same color scheme in their ARESCOIN logo.
This is the beginning of this lawsuit, and there are some issues that are outstanding in the complaint such as the actual location of the sole named human defendant, Nicholas Flint, who is listed as a founder of the project. Starlight Capital has some time to respond to the complaint and attempt to mount a defense against the trademark issues raised; however, fair use arguments or First Amendment arguments probably won’t apply. It will be interesting to see their response.
United States of America v. Patrick K. McDonnell (E.D. NY filed March 26, 2019) [SJ]
Patrick McDonnell, aka Jason Flack, was arrested on March 26 after the US Attorney’s Office of the Eastern District of New York unsealed a nine-count indictment charging him with wire fraud. This is the second case stemming from a set of facts that a court previously ruled were civil fraud in 2018.
In the civil fraud case, the CFTC sued McDonnell for deceptive and fraudulent practices in connection with bitcoin and litecoin cryptocurrency advice and
trading. The CFTC won and judgment was entered in the amount of $1.1 million (penalties and restitution) and a permanent trading ban was imposed.
The nine count indictment sets out a litany of allegations that directly echo the facts already proven by the CFTC that led to last year’s civil judgment. They allege a period of criminally fraudulent activity spanning from May 2016 through January 2018. Specifically, they allege that Patrick McDonnell fraudulently induced potential customers and customers to part with their fiat and virtual currency in exchange for trading advice, additional cryptocurrency purchases and trading to be conducted under McDonnell’s direction. McDonnell’s customers sent monies via cash and bank wires, and sent cryptocurrency via wire transfers. After receipt of the funds, McDonnell disappeared.
Per the indictment, communication and solicitation were allegedly accomplished via email, social media, phone calls, advertisements, and internet sites. A variety of services and memberships were offered including subscriptions, trading group memberships, and advice. The types of services, advice and products offered included offering virtual currency at below market rates, providing escrow services, and managing invested funds. False account statements claiming profitable investments made were provided to bolster these offerings when the reality was the funds were misappropriated in a combination of personal use, and to cover tracks in a Ponzi scheme manner.
McDonnell also allegedly operated a website with a chatroom called “Coin Drop Markets” together with an associated Twitter account. He shut down these accounts and the website after multiple requests from customers for refunds. None of those customers received refunds. In total, the government alleges that at least ten victims were defrauded of a total of $194,000 worth of US fiat, bitcoin, litecoin, eth classic and verge.
The criminal indictment specifies 9 wire fraud violations which are federal offenses, and gives notice that upon conviction, the government will seek forfeiture of any property or proceeds directly or indirectly gained from these offenses. For instance, if certain assets were purchased with the misappropriated funds, those assets would be forfeited. If no assets exist that can be traced to the misappropriated property, the government will look to other assets McDonnell has and seize them. The US government does not take kindly to those who criminally misappropriate property.
We live under a system where the standard for proof in a civil fraud case and a criminal fraud case differ. It is more difficult to prove fraud in a criminal action than civil fraud. Every civil fraud does not constitute or lead to a criminal conviction. However, a fraud judgment in a civil case establishes certain levels of proof regarding facts, and often a potential criminal case will be further investigated based on the facts already discovered and proven in the civil case. It was entirely predictable that further investigation would follow the civil judgment, and criminal prosecution would ensue once it was discovered that federal law (wire fraud) was violated. It remains to be seen whether McConnell will be convicted.
