The Claw of Gox: former customers' clawback exposure

[eldentyrell]

It's starting to look like the gox situation was a bitcoin version of the Madoff affair.  Company loses (or simply doesn't earn) money, inflates ledger balances to compensate, everything falls apart.

The Madoff case involved a very, very, very large clawback of payouts made to investors before things came apart.  This was based on the premise that as a fractional reserving scheme those payouts were actually "stolen goods" comprising other customers' deposits.  A lot of people were very upset about this.  In some cases they clawed back withdrawals made several years before the collapse.

Since gox "got the AML/KYC religion" this means that -- at the very minimum -- anybody who withdrew fiat from gox is exposed to a major clawback risk.

In theory people who withdrew BTC are at risk too, but I suspect the authorities will focus on the fiat withdrawals.

Edit: the Zeek Rewards situation is probably a more accurate template for how this will play out.

[g27wr]

What's MtGox?

[eldentyrell]

What's MtGox?

A new altcoin.  You should try mining it.

[ArticMine]

Madoff Trustee's Clawbacks Blocked http://online.wsj.com/news/articles/SB10001424127887323300004578558001425243308. There is also a critical difference here. In a ponzi scheme the early investors who cash out actually profited from the illegal scheme, so clawbacks make sense. In the MTGox case, there is no profit from the malfeasance since a trader could have used another exchange with the same results.

Edit: Search Google for "Madoff Trustee's Clawbacks Blocked" if one runs into paywall issues. If they want the Google ranking then they have to "pay" for it.

[solex]

In the MTGox case, there is no profit from the malfeasance since a trader could have used another exchange with the same results.

I agree. This thread is FUD on steroids.

[eldentyrell]

Madoff Trustee's Clawbacks Blocked http://online.wsj.com/news/articles/SB10001424127887323300004578558001425243308.

Read the article; its title is wrong.

The judge ruled that the Madoff trustee can't demand money from the banks who served as intermediaries.  Technically that's not even a clawback, so the article's title is just wrong.  It should be "Madoff Trustee's Lawsuits against Banks Blocked".

Also, that article six months old; since then, something happened (higher court appeal?) and JP Morgan settled, offering $2.6 billion.  A few weeks ago: 2014-01-29 Some Madoff Investors Shun J.P. Morgan Settlement.

Here are some better articles:

* Madoff Trustee Gets a Green Light on Clawbacks
* Madoff clawbacks "just" $2.6 billion

As of a month ago (source):

The majority of recovery efforts focused on “clawing back” funds from investors that were fortunate enough to receive distributions exceeding their principal investment.  Picard ultimately filed hundreds of these proceedings, better known as “clawback suits,” seeking the return of billions of dollars in “false profits.”  Thus far, Picard has recovered billions of dollars from the clawback lawsuits, including $5 billion alone from a suit filed against Jeffrey Picower, a longtime Madoff investor and acquaintance.

In the MTGox case, there is no profit from the malfeasance since a trader could have used another exchange with the same results.

BTC on Gox were trading at a 10-15% premium over all other exchanges for many months.

But I don't think this matters.  Madoff investors could have put their money in the S&P 500 and made something like 7%.  They definitely didn't exempt 7% CAGR ( = almost 100% over a decade) from the clawback.  The fact that you could have profitably invested your money somewhere other than the ponzi scheme doesn't really matter.

[ArticMine]

Madoff Trustee's Clawbacks Blocked http://online.wsj.com/news/articles/SB10001424127887323300004578558001425243308.

Read the article; its title is wrong.

The judge ruled that the Madoff trustee can't demand money from the banks who served as intermediaries.  Technically that's not even a clawback, so the article's title is just wrong.  It should be "Madoff Trustee's Lawsuits against Banks Blocked".

Also, that article six months old; since then, something happened (higher court appeal?) and JP Morgan settled, offering $2.6 billion.  A few weeks ago: 2014-01-29 Some Madoff Investors Shun J.P. Morgan Settlement.

Here are some better articles:

* Madoff Trustee Gets a Green Light on Clawbacks
* Madoff clawbacks "just" $2.6 billion

As of a month ago (source):

The majority of recovery efforts focused on “clawing back” funds from investors that were fortunate enough to receive distributions exceeding their principal investment.  Picard ultimately filed hundreds of these proceedings, better known as “clawback suits,” seeking the return of billions of dollars in “false profits.”  Thus far, Picard has recovered billions of dollars from the clawback lawsuits, including $5 billion alone from a suit filed against Jeffrey Picower, a longtime Madoff investor and acquaintance.

In the MTGox case, there is no profit from the malfeasance since a trader could have used another exchange with the same results.

BTC on Gox were trading at a 10-15% premium over all other exchanges for many months.

But I don't think this matters.  Madoff investors could have put their money in the S&P 500 and made something like 7%.  They definitely didn't exempt 7% CAGR ( = almost 100% over a decade) from the clawback.  The fact that you could have profitably invested your money somewhere other than the ponzi scheme doesn't really matter.

I read the article. The clawbacks against JP Morgan and the litigation against the other banks is based upon the banks allegedly being complicit in the scheme. The clawbacks against early ponzi investors are based upon their profit from the scheme. As for those who recently sold BTC at MTGox for fiat (and could profit from the artificial spread), unless they got some special treatment, for the most part did not get their fiat out. This is more like trying to go after those depositors of a failed bank who withdrew their funds before the bank failed, and had no inside information. Good luck with that.

Edit: There may well be a case against those who had any kind of "special treatment" from MTGox or were in any way related to the principals of MTGox, such as the "longtime Madoff investor and acquaintance"

[keithers]

These same clawbacks hit people who were participating in Zeeks Rewards. You guys remember that penny auction ponzi?

[User705]

I read the article. The clawbacks against JP Morgan and the litigation against the other banks is based upon the banks allegedly being complicit in the scheme. The clawbacks against early ponzi investors are based upon their profit from the scheme. As for those who recently sold BTC at MTGox for fiat (and could profit from the artificial spread), unless they got some special treatment, for the most part did not get their fiat out. This is more like trying to go after those depositors of a failed bank who withdrew their funds before the bank failed, and had no inside information. Good luck with that.

Edit: There may well be a case against those who had any kind of "special treatment" from MTGox or were in any way related to the principals of MTGox, such as the "longtime Madoff investor and acquaintance"

Anyone who withdrew more then they deposited as in "profit" would possibly face clawback risk since it isn't currenty known when exactly Gox became an outright Ponzi scam.

[Soros Shorts]

How would you even begin to compute the concept of a clawback on an exchange?

There would be:
1) Winning traders who grew their account over time.
2) Losing traders who dwindled away their account balance.
3) People who are in and out quickly, e.g. wiring in USD and immediately withdrawing BTC, but who never maintain amy significant balance over time.
    3a) net sellers of BTC (I heard that this was still possible for non-US non-EU customers)
    3b) net buyers of BTC
4) People who treat it like a bank or online wallet.
5) Any combination of the above.

[eldentyrell]

The clawbacks against JP Morgan and the litigation against the other banks is based upon the banks allegedly being complicit in the scheme.

As I said, that's not a clawback.  But it's also irrelevant to this thread.  Neither of us is talking about what might happen to MtGox's bank.

The clawbacks against early ponzi investors are based upon their profit from the scheme.

No. They're based on fraudulent conveyance.  See sections 547(b) and 548 of the Bankruptcy Code.  All conveyances from a ponzi scheme are presumed fraudulent.

This is more like trying to go after those depositors of a failed bank who withdrew their funds before the bank failed

And, guess what, that happened all the time before governments backstopped the banks.  But MtGox is not backstopped by any government, so bank resolution is totally irrelevant.

[eldentyrell]

These same clawbacks hit people who were participating in Zeeks Rewards. You guys remember that penny auction ponzi?

Indeed.  There seem to be a lot of people in serious denial about what's about to go down.

How would you even begin to compute the concept of a clawback on an exchange?

That's pretty much what bankruptcy judges get paid to do.

Here's one possibility (there are many): if they can reconstruct the books they can allocate the exchange's losses on a day-by-day basis and share it uniformly across all balances held that day.  Any withdrawals in excess of the post-loss balances are treated as fraudulent conveyances.

In practice I fear they'll do something much more clumsy: just grab whatever they can by following the SWIFT+ACH trails and tell you to sue for whatever you think you should get back.  These things are ugly, messy processes.

[User705]

How would you even begin to compute the concept of a clawback on an exchange?

There would be:
1) Winning traders who grew their account over time.
2) Losing traders who dwindled away their account balance.
3) People who are in and out quickly, e.g. wiring in USD and immediately withdrawing BTC, but who never maintain amy significant balance over time.
    3a) net sellers of BTC (I heard that this was still possible for non-US non-EU customers)
    3b) net buyers of BTC
4) People who treat it like a bank or online wallet.
5) Any combination of the above.

Plenty of Ponzis/Scams pretended to invest or even partially invested in real stocks/securities/commodities.  All of that is irrelevant if its determined it wasn't real.  See MF Global and PFGBest as examples.

[Soros Shorts]

How would you even begin to compute the concept of a clawback on an exchange?

There would be:
1) Winning traders who grew their account over time.
2) Losing traders who dwindled away their account balance.
3) People who are in and out quickly, e.g. wiring in USD and immediately withdrawing BTC, but who never maintain amy significant balance over time.
    3a) net sellers of BTC (I heard that this was still possible for non-US non-EU customers)
    3b) net buyers of BTC
4) People who treat it like a bank or online wallet.
5) Any combination of the above.

Plenty of Ponzis/Scams pretended to invest or even partially invested in real stocks/securities/commodities.  All of that is irrelevant if its determined it wasn't real.  See MF Global and PFGBest as examples.

Yes, but these for the most part were not self-directed customer accounts as Mt.Gox accounts were.

[eldentyrell]

These same clawbacks hit people who were participating in Zeeks Rewards. You guys remember that penny auction ponzi?

Indeed.  There seem to be a lot of people in serious denial about what's about to go down.

Wow, the Zeek clawbacks seem even uglier than the Madoff clawbacks (much smaller amounts, but from much poorer people).

For example, anybody who successfully performed a stop-payment order on a check to the Zeek outfit to recover their funds got hit with a bank-level reversal to "un-recover" them!  Over 7,500 checks.  Yow.

  http://www.ponzitracker.com/main/2013/10/31/zeek-rewards-update-clawbacks-imminent-interim-distribution.html

I'm pretty sure this is what the gox clawback will look like.  Wires from gox to banks in the US and cooperating jurisdictions will simply be reversed en masse.  I bet Dwolla is keen to kiss up to FINCEN by volunteering data.

[eldentyrell]

Plenty of Ponzis/Scams pretended to invest or even partially invested in real stocks/securities/commodities.  All of that is irrelevant if its determined it wasn't real.  See MF Global and PFGBest as examples.

Yes, but these for the most part were not self-directed customer accounts as Mt.Gox accounts were.

Actually a lot of the MF global accounts were small+medium size farmers hedging their crops.

[Roccker]

So, how did this turn out?

There were no clawbacks made in the MtGox case i guess