English Court Demonstrates Sophisticated Approach in Cryptocurrency Fraud Case


7th August 2020

In support of a blockchain-based investment dispute, the Claimants obtained a freezing injunction arguing that the investment was a sham.

The Claimants’ lawyer’s evidence in support of the injunction was put in “trenchant” terms; saying that it concerned “…one of the latest cryptocurrency shams…[and] the sooner this Court and the Serious Fraud Office investigate it, the fewer victims the sham will make…The sham is operational and seeks to defraud cryptocurrency investors…by making fraudulent misrepresentations about the nature and intentions of the Defendants’ business….” and in their skeleton argued that the Defendants: “…never had any intention to perform any of the expected or intended activities…”

When the injunction was challenged by the Defendants, it was continued but the Claimants had a close shave with material non-disclosure and the Court demonstrated a sophisticated, objective, approach to cryptocurrency fraud cases.

Material Non-Disclosure – But Injunction Continued

Notwithstanding the stridently stated case that the investment was a sham, when seeking the injunction, the Claimants’ solicitor did not state in his supporting evidence that he had acted for one of the Defendants in setting up the investment, or that his fees had not been paid by the client-Defendant.

This omission formed the basis of a challenge by the Defendants.  In principle, an injunction (or any order) obtained without notice to the target may be discharged for material non-disclosure by the applicant, regardless of the merits of the injunction.  This applies to any material facts or legal arguments which are important to the Court’s decision on whether to grant the order in the first place.

In this case, the Judge agreed that there had been “substantial” material non-disclosure.  After all, if the Claimants’ evidence is that the investment was a sham, it seems fairly obvious that the Court should be told that the person giving that evidence was involved in its set up.

However, the Court also has discretion to look past material non-disclosure in the interests of justice, and allow the injunction to stand.  It did so in this case because it found that (a) the omission was innocent and (b) the missing information would not likely have changed the outcome.

Innocence

Even though the Claimants did not expressly accept that there had been an omission, it was enough for the Judge in this case that he “saw no reason to doubt” that the reasons were genuine.

No Change to Outcome

Although apparently not specifically brought to the Court’s attention at the time, the Claimants’ original injunction application contained evidence that another law firm had been substantially involved in setting up the investment.  The Judge found that the involvement of a law firm could counter-act the Claimants’ case that the investment was a sham.  Therefore, it was unlikely that the outcome would have been any different had the full picture of their solicitor’s involvement been put in evidence.

This was a close shave for the Claimants and the Court’s decision was no doubt influenced by the merit it saw in the Claimants’ case – albeit at this interim stage.  Whilst the injunction was continued, it will be interesting to see how the Court handles costs.

Court Demonstrates Sophisticated Approach to Alleged Cryptocurrency Fraud

The Claimants’ case, as quoted above, emphasised that the intended investment platform was to be based on blockchain technology, describing it as “the latest” cryptocurrency sham.  However, the English Court took a (characteristically) objective view.

The Judgment

The Judgment on this point is worth quoting for those working in the crypto asset space: “though cryptocurrencies and similar offerings have attracted their fair share of fraud, many honest start-ups are small operations with unsophisticated operators who struggle to attract investment – those who put money into these ventures do so as risk capital, with potentially high rewards should the start-up hit the jackpot.  I fully accept that when allegations of fraud are made by disappointed investments in start-ups, considerations like these have to be taken into account.”

This should be reassuring to the cryptocurrency community.  There is wrong-headed scepticism from some quarters that cryptocurrencies are inherently suspicious – not so the English High Court.

Blockchain Optimization SA & Another v LFE Market Ltd & Others [2020] EWHC 2027 (Comm)

Authors Alexander Shirtcliff and Catherine Levi

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