RECOVERING STOLEN CRYPTO ASSETS - the interesting case of D’Aloia v Person, Persons Unknown & Others
This ground-breaking 2022 English case (followed up in November 2022 by LMN v BITFLYER & OTHERS) shows that those losing their cryptocurrency now to investments scams may well have new and better court-based options for redress and recovery which could assist them significantly in recovering the misappropriated crypto assets.
THE MISAPPROPRIATION OF MR D'ALOIA'S CRYPTOCURRENCY
In D'Aloia v Person, Person Unknown & Others [2022] EWHC 1723 (Ch), this year, Fabrizio D’Aloia, an Italian engineer who owned an online gambling company Microgame, sought to get back around £2M of cryptocurrency which he claimed he was scammed of by ‘persons unknown’ between December 2021 and May 2022.
He applied to the English High Court for interim injunctive relief, disclosure, and ancillary orders against a number of defendants, claiming that he was fraudulently misappropriated of the cryptocurrency (USDT and USDC).
The evidence he presented suggested that he was scammed by persons unknown who had acted behind a website named www.tda-finan.com, for the transfer of USDT and USDC from his Coinbase and Crypto.com wallets. The website and its logo suggested they were related to a genuine US-regulated business, TD Ameritrade. It turned out though that tda-finan and the email address it used for correspondence with its clients originate from Hong Kong and was not connected in any way with TD Ameritrade.
Fabrizio had made several deposits in USDT and USDC into wallets in the platform related to tda-finan.com which were duly recorded on the website. On that basis, he had engaged in crypto trades via using the tools for this tda-finan had provided. These trades appeared to have been recorded on the website.
In February 2022, the website showed that his open trades had closed and when he tried to withdraw from his account, his account showed up as being blocked.
Thereafter, when he communicated with the platform using the email address, tda@58mal.com, which tda-finan has given to him, to identify the problem, he was requested, or tricked into making further deposits for a number of reasons which, on reflection and in fact, turned out to be fraudulent.
In May 2022, when Fabrizio felt sure that he was the victim of a fraud as despite his further deposits, his account was showing zero, he sought the assistance of a firm of solicitors. He had also instructed an intelligence investigator which, in June 22nd 2020, produced a report showing that those behind tda-finan.com were most likely to be dishonest persons using a scam website for cheating investors out of their investment funds.
The investigator also found that 2.175 million of USDT and USDC had been sent on to many private crypto addresses and exchanges which appeared to be under control of a number of the collaborating defendants. However, some of the wallets to which the transfers were made, were held with the crypto exchange platform, Binance.
Fabrizio with his solicitors then went to the English High Court for interim measures for his claim for fraudulent misrepresentation, deceit, unlawful means conspiracy, and unjust enrichment on the basis that the "lex situs" (legal situation of an asset) of the crypto is the domicile of its owner and showed that at all relevant times he was domiciled in England.
Fabrizio also claimed that a constructive (or implied) trust applied in his favour against the defendants as they controlled platforms whereby, according to his expert, the crypto assets could be traced.
THE FINDINGS AND ORDERS OF THE COURT
The court found that as the USDT and USDC paid over to the fraudsters were legally located in England which means that a claim by him upon the fraudsters would be governed by English law (per Butcher J (para 13) in Ion Science Limited & Duncan John v Persons Unknown, Binance Holdings Limited, Payment Ventures Limited (unreported) [2020] (Comm)) which was further supported by the provisions of the Rome II Convention, Art.4.1 (which binds the UK) which sets out the law applicable to contractual obligations) in the setting of the claimant.
In regard to Binance, the court found that there was not enough evidence produced to show that it had enough control over the wallets where the crypto was deposited, for a trust of any kind to exist. But that was not to say, that upon further evidence from the claimant, this could not be imposed.
However, the court said that upon the interim injunction being granted upon the defendants, Binance would become a constructive trustee in respect to the crypto assets lost through its platform.
As the judge, Mr Justice Trower, found that Fabrizio had a serious issue (in accordance to the strict tests applied for the award of the orders sought) to be tried in respect to his claim of fraudulent misrepresentation and deceit, unlawful means conspiracy and unjust enrichment against persons unknown, he granted Fabrizio the freezing injunction sought as well as permission to serve proceedings on persons, or persons unknown by using an NFT which would be "airdropped" into the tda-finan wallets where he had made his first transfers. Apart from a similar judgment being made in June 2022 by the New York Supreme Court in LCX AG v JOHN DOE NOS. 1-25 this is the first time that this kind of permission for the service of proceedings via NFT has been granted in England and Europe and the second time that this kind of order has happened anywhere in the world.
The judge also granted a Banker’s Trust order against the Exchanges. This kind of order (usually against a bank, or other party) that holds misappropriated assets, or through which such assets pass and seeks to assist the victims of fraud to trace and locate the misappropriated assets. The order is only made where it can be shown that there is a real prospect that the disclosure will assist in the defrauded party's claim.
IMPLICATIONS OF THE JUDGMENT
The implications of the judgment are wide-ranging, and its constructive trust element could apply to fiat currency frauds whereby national banks have been negligent, or complicit in the frauds perpetrated upon third parties by their clients.
Furthermore, the case also opens the door to other forms service of proceedings by utilizing digital technology.