To Catch a (Bitcoin) Thief

In the emerging cryptocurrency space, most investors store their assets in digital wallets, where—unlike traditional bank accounts—they earn no interest. In the last few years, cryptocurrency investors have increasingly sought to earn a yield on their cryptocurrency holdings by lending Bitcoin and other cryptocurrency to trading and lending platforms in exchange for interest.

One such platform, Cred, filed for Chapter 11 bankruptcy following a series of thefts and poor decisions. Its customers lost more than a hundred million dollars’ worth of cryptocurrency.

Certain of those customers were appointed to an Official Committee of Unsecured Creditors to act as fiduciaries on behalf of the unsecured creditor body, and they sought to recover their assets. All too often, bankruptcy cases stretch for years without any meaningful recovery for creditors, and cryptocurrency is notoriously difficult to trace. It was uncertain that the Committee would get any of their cryptocurrency back.

THE OBJECTIVE:

Following presentations by half a dozen law firms, the Committee chose a cross-practice McDermott team, experienced in both cryptocurrency and bankruptcy matters, to find and recover as much of their cryptocurrency as possible.

In working toward that objective,?Darren Azman?drew on his familiarity with bankruptcy proceedings from both sides, including practical experience in seizing assets.?Joseph B. Evans?contributed his years of experience in cryptocurrency law and complex technical knowledge.

THE OUTCOME:

Just two months into the engagement, the McDermott legal team secured an important early victory in the ongoing investigation. Working with top cryptocurrency tracing consultant CipherTrace, the team recovered nearly $6 million in stolen Bitcoin and other cryptocurrency from former Cred executive James Alexander.

Alexander misappropriated Bitcoin and other cryptocurrency days before he was fired from Cred. When the McDermott team began their investigation, Alexander had been ordered to freeze that Bitcoin in his digital wallet. McDermott asked CipherTrace to do regular maintenance checks on the digital wallet to ensure that Alexander complied with the freeze order.

During a maintenance check, CipherTrace discovered that Alexander had transferred 100 Bitcoin (the equivalent of approximately $5.8 million) in violation of the freeze order. Azman and Evans sprang into action, preparing an emergency motion for the immediate return of the Bitcoin and other cryptocurrency Alexander had taken from Cred. Along with the emergency motion, McDermott submitted a cryptocurrency tracing expert report—which typically takes months to prepare—expedited by CipherTrace. Within 48 hours, the Court held a hearing, where the McDermott team used their deep cryptocurrency knowledge to successfully parry Alexander’s attempts to confuse the matter with technical cryptocurrency-related jargon and excuses.

Following McDermott’s explanation of the situation and supporting evidence, the Court ordered Alexander to transfer the Bitcoin back to the Committee “within the next 30 minutes after this hearing is over”—an unprecedented result.

That evening, Alexander resisted the order with excuses ranging from illness and fear for his personal safety to a lack of technical savviness that rendered him unable to execute the cryptocurrency transfer. The McDermott team gave him a choice: They could go back to Court that evening and force his compliance, or he could join a recorded Zoom call, where McDermott and CipherTrace would direct him through the transfer of the cryptocurrency. Shortly before midnight, McDermott secured the Bitcoin and other cryptocurrency worth nearly $6 million.

MOVE FASTER:

The Official Committee of Unsecured Creditors was thrilled with the landmark victory, which resulted in recouping some of their stolen assets within just two months of hiring McDermott.

To recover the cryptocurrency from Alexander for their client, the McDermott team prepared an unprecedented emergency motion, relying on cryptocurrency tracing, expert reports and key blockchain-based arguments. They recognized that it was crucial to move quickly, and their speed, cryptocurrency savvy and pragmatic approach to the bankruptcy proceedings—focusing on recovering their client’s assets rather than chasing victories with no tangible results—helped drive the successful outcome.

After recovering the stolen cryptocurrency, McDermott continued to pursue Alexander. The team obtained additional fiat currency and extracted important information from Alexander during a series of Court-ordered depositions and other discovery. Following Alexander’s continued non-compliance, McDermott filed a motion seeking to hold Alexander in contempt, which the United States District Court for the District of Delaware granted. The investigation to recover additional assets for the Committee remains ongoing.