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In Jones vs. Persons Unknown and Others[1] the High Court has handed down several interesting decisions in the developing field of crypto fraud litigation.

After ruling in favor of the plaintiff for allegations of deception and unjust enrichment against fraudsters, the court then ruled that a crypto exchange controlling the wallet containing the plaintiff’s stolen Bitcoin was a constructive fiduciary. The court ordered the fraudsters and the exchange to return the Bitcoin to the plaintiff.

The decision that an exchange is a constructive fiduciary in these circumstances remains controversial and will likely be tested in future contested litigation where stolen funds were deposited and then withdrawn from an innocent exchange. Disputed cases can also explore whether and under what circumstances stolen crypto assets can be traced through intermediary accounts, especially when they have been mixed with other assets that are not part of the fraud.

Background

The plaintiff, Mr. Jones, was the victim of large-scale crypto fraud. Fraudsters have created a fake online crypto trading company called Extick Pro (“EP”) promising high returns to clients. Mr Jones opened an EP account in 2019 and over the course of a year transferred 89.61616088 Bitcoins to the EP platform (worth around £1.5m at the date of the judgment) .

Mr Jones did not manage the account himself, but rather gave trading instructions to a so-called EP representative. The platform signaled Mr. Jones that large trading profits were piling up in his account. In fact, the fraudsters operating the EP platform had stolen the Bitcoin. After several largely unsuccessful attempts to withdraw his funds, Mr Jones instructed lawyers and investigators to recover his assets. Investigators traced the stolen bitcoin to a wallet on the Huobi trading platform but were unable to identify the people who committed the fraud.

Mr. Jones initiated proceedings to recover and repair the stolen Bitcoin, based on deception and/or unjust enrichment against the fraudsters. Mr. Jones also sued Huobi as an implied Bitcoin trustee.

Initially, Mr. Jones obtained global freezing orders against the fraudsters, as well as Huobi, seeking to secure funds that remained in the fraudsters’ wallets. The fraudsters and Huobi did not engage in the litigation and it appeared that, despite the injunctions, the amount of Bitcoin held in the wallet was decreasing.

Mr. Jones asked the court:

  • summary judgment against the fraudsters for deception and unjust enrichment, on the grounds that they had no reasonable grounds to defend the claim;
  • an order to deliver (i.e. return) the stolen Bitcoin traced to the wallet on the Huobi platform;
  • pursuit of property and non-property interim measures already obtained;
  • permission to serve out-of-court orders; and
  • service authorization by alternative means against fraudsters and Huobi, namely by airdropping non-fungible tokens (‘NFT’) into the wallet of fraudsters controlled by Huobi.

The judgment of the High Court

Mr. Nigel Cooke KC granted summary judgment in favor of Mr. Jones, finding that:

  1. Fraudsters were responsible for deception and unjust enrichment

Noting that no rebuttal evidence was submitted by any of the defendants, the judge concluded that Mr Jones’ evidence was compelling and sufficient to establish the allegations of deception and unjust enrichment against the fraudsters.

  1. Huobi held the embezzled funds in interpretative trust for Mr Jones

The High Court has previously considered whether a crypto exchange can hold crypto assets on a constructive trust in cases such as D’Aloia versus Unknown and others[2] (as mentioned earlier on here). However, in these cases, the issue arose in the context of applications for service of out-of-jurisdiction proceedings and only required rulings that a plaintiff had a “good arguable case,” rather than final rulings on that point.

As such, this is the first case where a determination has been made that an exchange is holding stolen crypto assets on a constructive trust. The judge made this decision on the basis that Huobi was the controller of the wallet into which Mr. Jones’ Bitcoin was paid and that there was no evidence that Huobi or any other party had any ownership interest in the Bitcoin that would outweigh Mr. Jones’ interest.

  1. Scammers and exchange must return stolen Bitcoin to Mr. Jones
  1. Freezing and property injunctions should be extended after judgment to facilitate judgment enforcement
  1. Mr Jones could serve the orders outside his jurisdiction

The judge found that Mr. Jones was able to satisfy various gateways allowing for out-of-court service of orders on the basis (among other things) that he had suffered losses in England and, against Huobi as as a constructive fiduciary, the claim arose out of events in England.

  1. Mr. Jones could mean the orders by NFT

Following the reasoning in From Aloia, the judge concluded that there were exceptional circumstances that allowed an alternative service by NFT, namely that the identity and location of the fraudsters were unknown. Therefore, no traditional means of service was deemed likely to be effective and service by NFT was more likely to bring lawsuits and orders to the attention of fraudsters.

Regarding Huobi, the judge felt that service by NFT was appropriate because it was important that the order come to his attention as soon as possible because Bitcoin can be dissipated easily and quickly.

comments

The imposition of a constructive trust on a crypto exchange holding misappropriated assets is significant as the first such final decision in England. However, Huobi did not contest the proceedings, possibly because the balance of Bitcoin in the wallet available to respond to a judgment apparently exceeded the value of the claim. In future contested cases, the court will have to examine in more detail how exchanges receive and process crypto assets, and exchanges are likely to raise various defenses that have not yet been fully explored, for example that:

  • as bona fide buyers for value and acting in good faith, exchanges are not constructive fiduciaries, as they were not part of the underlying fraud, nor were they notified in any manner actual or implied fraud; and
  • Exchanges cannot be held liable for unjust enrichment because they provided value for the services they provided.

If these arguments were successful, a victim would still have ways to recover misappropriated assets that remain in wallets held by an exchange (or would be able to enforce a judgment for damages against those assets), but would not be able to recover from the exchange itself the value of assets that were originally deposited in wallets controlled by the exchange but later withdrawn (unless the victim establishes any fault on the part of the exchange) ‘exchange). This result is analogous, for example, to the position of other third parties who have innocently received misappropriated funds.


[1] [2022] EWHC 2543 (Communication)

[2] [2022] EWHC 1723 (Ch)

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