World's First Bitcoin Lawsuit - Cartmell v. Bitcoinica

[repentance]

I hope the lawsuit will eventually lead to criminal charges against the officers of the corporation.  They did not file a police report, even after the hacker was identified.

Zhou Tong isn't even named as a defendant in the lawsuit despite being the only person who claims to know the hacker's identity, and despite claiming to have promised the hacker that Bitcoinica LP would not start a police investigation into him. Also, who are the actual officers of the corporation in the first place? Zhou's certainly acting a lot like one, but...

I believe the officers of the corporation feel they are untouchable because the corporation is a separate legal entity.  In Canada at least (a commonwealth country), a director of a corporation is REQUIRED to do whatever is necessary to protect the assets of said corporation.  So while they cannot be held financially responsible for Bitcoinica's debts, they can be held criminally (and hence civilly) liable for failing to do anything about the crime that was committed against their public business.  Basically, they did nothing while the money was taken.  I'm sure they paid themselves handsomely, however, out of what was left.

All they had to do was pick up the phone and call the police.  The fact they did not do this leads me to believe they profited from the hack.

In many places - including Australia and New Zealand - someone who is carrying out the duties of a director will have the same legal liability as a director whether they're named as such on the corporate papers or not.  Directors can be held personally liable for the debts of a company under certain circumstances, including - but not limited to - reckless, negligent or insolvent trading.

Bitcoinica LP is a limited partnership.  Quite literally, in the case of LPs NZ law treats the limited partner/s (Wendon) as shareholders and the general partner/s (Bitcoinica Consultancy Ltd) as directors.  The limited partner can only be held legally liable for the actions of the partnership if they've had a role in managing the company which goes beyond "safe harbour" activities which are specified in the Companies Act.

There is no doubt that "the Intersango guys" - either individually or as directors of Bitcoinica Consultancy Ltd - are legally on the hook in respect of Bitcoinica LP.  It seems unlikely, though, given the totality of the circumstances regarding the failure of Bitcoinica that they alone would be found liable if an investigation into the failure of Bitcoinica was undertaken.  A liquidator is required to establish why a company failed, but they rely heavily on information provided by the principals of the business and by creditors.  A liquidator is obliged to establish whether directors (de jure or de facto) have any personal liability and to report any criminal misconduct to the appropriate authorities.

Anyone could make a criminal complaint regarding Bitcoinica right now.  It's not essential to wait until the partnership has been liquidated or the US lawsuit has been heard.  

Regardless of whether or not any criminal investigation arises in respect of Bitcoinica, Zhou's continued role in the business after its sale will come under scrutiny in any insolvency or civil action and that will include scrutiny of his transactions following the MtGox breach as well as his dealings with the alleged hacker.  No court or liquidator is going to accept Zhou's statements regarding the AurumXchange transactions or the mysterious Chinese relic collector at face value, but we have no way of knowing whether Zhou would comply with requests from a US court or an NZ liquidator for information.

[ninjarobot]

FYI - IEEE Spectrum now also posted an article on this topic:

http://spectrum.ieee.org/tech-talk/computing/networks/first-bitcoin-lawsuit-filed-in-san-francisco

A recent theft at Bitcoinica, one of the largest Bitcoin exchanges, resulted last week in a debut for the currency in the California court system. Four prominent members of the Bitcoin community, including Jed McCaleb—the original developer of Mt. Gox, the largest Bitcoin exchange and a competitor to Bitcoinica—filed a lawsuit on 6 August  against the company, seeking reimbursement for US $460 457 in lost funds.

While there have been multiple hacking incidents since the cryptocurrency went online in 2009, this is the first time members of the community, have taken legal action.

The whole affair started in March when hackers skimmed over 46 000 BTC from the exchange with an attack aimed at the Webhost, Linode. Three months later, Bitcoinica Consultancy, which has supposedly been handling the exchange since this April, announced that it lost another 4 ,000 BTC (about $350 at the time) through an unauthorized withdrawal from a Mt. Gox account that the company had set up while disbursing refunds to its customers.  

Amir Taaki, speaking for Bitcoinica Consultancy, explained that after the initial breach, Bitcoinica failed to change some of its passwords. One of those was a duplicate of the password they were using for their Mt. Gox API key. On June 12th, someone tried using this password to gain access to Bitcoinica's Mt Gox wallet, and it worked.

The announcement ignited a backlash of accusations from victims who now suspect that the theft was an inside job. While waiting for satisfaction, their losses have only increased. At the end of the July, Bitcoin was trading below $7. Today, it hit $12 for the first time since 2011.

The situation has been especially complicated by the fact that no one seems to really know who is responsible. Zhou Tong, the 18-year old Chinese developer who originally started Bitcoinic claims to have sold the company right after the March theft to the British Bitcoin exchange, Intersango. He now also claims to know who broke into the Mt. Gox account and to have squeezed a confession from a Chinese Multi-millionaire named Chen Jianhai, a story which many victims quickly interpreted as cover for his own involvement. Meanwhile, the Bitcoinica Consultancy is thought to have control over Bitcoin's legal operations, but in emails, they have declined to confirm this role, and have reportedly stopped responding to disgruntled customers.

And so, it seems that those who want to help have no power. And those who have the power aren't talking.

Under these circumstances, it will be very interesting to see what happens when many of those involved convene next month at the Bitcoin Conference in London.

[jago25_98]

Could this be the quiet beginning of the end of the golden age of bitcoin through the first establishment of legal precedent? Or is it addressing $USD separately?

[repentance]

FYI - IEEE Spectrum now also posted an article on this topic:

http://spectrum.ieee.org/tech-talk/computing/networks/first-bitcoin-lawsuit-filed-in-san-francisco

One day somebody might actually write an accurate report on this...but not today, apparently.  These reports consistently get the number of hacks and the amounts involved wrong.  They also consistently state that Zhou sold Bitcoinica after the Linode hack, which is not the case, and that he sold it to Intersango (also not the case).

It is good, however, to see that the Chen aspect of this story is finally getting some media exposure.

Could this be the quiet beginning of the end of the golden age of bitcoin through the first establishment of legal precedent? Or is it addressing $USD separately?

It's a pretty straight forward breach of contract action.  There's not really anything regarding Bitcoin itself which needs to be determined - the plaintiffs are seeking compensation in USD.  There'll probably be some argument about the value at which the claim should be liquidated - ie, for the purposes of compensation should the value of Bitcoins be established at their average price on the date Bitcoinica ceased trading or at their price when the lawsuit is heard.

[tvbcof]

Heh.  Among the engineering feats (purportedly) of Zhou is the ability to convert Libertarians into Socialists.  It's OK.  I don't mind if some of my tax dollars go toward helping seek recompense for any member of society who was wronged...even given the questionable judgement of entrusting half a million $$$ to a minor in Asia and/or a handful of bozos living under the British crown.

[repentance]

Heh.  Among the engineering feats (purportedly) of Zhou is the ability to convert Libertarians into Socialists.  It's OK.  I don't mind if some of my tax dollars go toward helping seek recompense for any member of society who was wronged...even given the questionable judgement of entrusting half a million $$$ to a minor in Asia and/or a handful of bozos living under the British crown.

Your first mistake is assuming that most of the people who placed money/BTC" with Bitcoinica are libertarians.

[tvbcof]

Heh.  Among the engineering feats (purportedly) of Zhou is the ability to convert Libertarians into Socialists.  It's OK.  I don't mind if some of my tax dollars go toward helping seek recompense for any member of society who was wronged...even given the questionable judgement of entrusting half a million $$$ to a minor in Asia and/or a handful of bozos living under the British crown.

Your first mistake is assuming that most of the people who placed money/BTC" with Bitcoinica are libertarians.

At least 33% of the plaintiffs in this case are fairly vocal in their advocacy of that line of political philosophy.  That caught my attention...and provoked a chuckle.

[Rarity]

Yeah, but the silent majority of Bitcoiners are leftists/socialists. Satoshi, most likely, is one of them. It's not at all shocking we are beginning the process of having government regulate Bitcoin, as a currency it was designed for this to happen.

[dree12]

Heh.  Among the engineering feats (purportedly) of Zhou is the ability to convert Libertarians into Socialists.  It's OK.  I don't mind if some of my tax dollars go toward helping seek recompense for any member of society who was wronged...even given the questionable judgement of entrusting half a million $$$ to a minor in Asia and/or a handful of bozos living under the British crown.

Not believing in the current system doesn't mean not using it.

[tvbcof]

Heh.  Among the engineering feats (purportedly) of Zhou is the ability to convert Libertarians into Socialists.  It's OK.  I don't mind if some of my tax dollars go toward helping seek recompense for any member of society who was wronged...even given the questionable judgement of entrusting half a million $$$ to a minor in Asia and/or a handful of bozos living under the British crown.

Not believing in the current system doesn't mean not using it.

Very true.  I myself am not above exploiting the shit out of things I have no belief in or fondness for.  Like unemployment insurance when I'm lucky enough to arrange a lack of work.  I suspect that Roger has paid plenty of taxes and probably a lot more than me so he's more than entitled to use the system if he can.  Although I'd personally be on the fence about doing so in the case of Bitcoin related issue (in spite of my pinko leanings) since a refreshing thing about Bitcoin is that it's independence from TPTB (which are rotten to the core and in particular Holder's justice department,) I'd probably do it.  Especially for that kind of money.  I prefer and advocate the approach I actually took; don't drop your pants and bend over in front of someone who is likely to fuck you.  I lost the amount of BTC I expected I like would to Bitcoinica...2 or 3 iirc.

[davout]

This will be interesting

[repentance]

This will be interesting

Maybe not.  A majority of lawsuits are either dropped or settled on undisclosed terms.

[repentance]

Posting this link for accuracy. It looks like Amir did respond to contact by the plaintiffs and was willing to consider the idea of them taking over Bitcoinica and the claims process.

That sounds like a good plan. I also would be willing to help you verify and vet claims.

However the problem is that now Patrick and Donald have said they're done. They feel like we had no legal responsibility to take on the claims, and that we took it on so people's payments would simply get done. Now that they've walked away, they aren't dealing with this mess. They are also unlikely to hand over the funds to any third party.

http://privatepaste.com/0c4b934417

[Explodicle]

Is it possible to run an exchange where users must opt out of any/all legal recourse? I'd rather risk losing everything I've invested in a site than have to indirectly pay for liability, just because of the inefficiency of the legal system. It's not like the settlement money comes out of thin air - all similar business will now need to pass this cost onto consumers.

Either way we pay for risk, let me cut out the middleman if I want.

[dree12]

Is it possible to run an exchange where users must opt out of any/all legal recourse? I'd rather risk losing everything I've invested in a site than have to indirectly pay for liability, just because of the inefficiency of the legal system. It's not like the settlement money comes out of thin air - all similar business will now need to pass this cost onto consumers.

Either way we pay for risk, let me cut out the middleman if I want.

IANAL, but a short TOS will probably do in most states:

Code:

By participating in Exchange, you agree to surrender any assets transferred and hold harmless Exchange regardless of any damages.

[Vladimir]

Is it possible to run an exchange where users must opt out of any/all legal recourse? I'd rather risk losing everything I've invested in a site than have to indirectly pay for liability, just because of the inefficiency of the legal system. It's not like the settlement money comes out of thin air - all similar business will now need to pass this cost onto consumers.

Either way we pay for risk, let me cut out the middleman if I want.

IANAL, but a short TOS will probably do in most states:

Code:

By participating in Exchange, you agree to surrender any assets transferred and hold harmless Exchange regardless of any damages.

IANAL, but idiots naive kids put all kinds of BS into their T&C and think that it would hold any water in court.

[repentance]

Is it possible to run an exchange where users must opt out of any/all legal recourse? I'd rather risk losing everything I've invested in a site than have to indirectly pay for liability, just because of the inefficiency of the legal system. It's not like the settlement money comes out of thin air - all similar business will now need to pass this cost onto consumers.

Either way we pay for risk, let me cut out the middleman if I want.

You'd have to establish it in a country which allows people to contract away statutory rights.  Even if you did that, people may still have recourse under the laws of their home country if the exchange is "doing business in" that nation.  There's no way that criminal liability can be contracted away because the state isn't a party to any contracts between a user and an exchange.

While you, personally, might be happy to do business with an exchange you have no recourse against, such a venture wouldn't be profitable for the operators unless a lot of other people were willing to take that same risk.

[btcx]

UPDATE 25/Jan/2013:

Defendant Intersango escapes.  

Other Defendants' motion to dismiss for lack of personal jurisdiction is denied.  Case allowed to proceed against Bitcoinica, Patrick Strateman, Amir Taaki and Donald Norman in California.

"Moving Defendants have failed to show that New Zealand is a suitable forum."

"The language of the Terms and Conditions allegedly on the website, even if it is enforceable, states only that 'you [meaning a customer] agree to submit to settle any dispute,' not that customers could not file actions against Bitcoinica outside New Zealand."

"In addition, the fact of a liquidation proceeding against Bitcoinica in New Zealand is not sufficient grounds to stay this action."

https://docs.google.com/file/d/0B_ECG6JRZs-7SDBhU2ducWM5eEU/edit

[cbeast]

Thank you so much for the updates on this case. So apparently the fact that people gave money to a child have less culpability than the folks that tried to clean up the child's mess. Personally, I would be ashamed to go to court to sue a child, but that's just me. I am only a parent. If I missed any major points to this, please point me to the wiki or FAQ.

Irrespective of the motive or the outcome of this decision, it will be advertising for Bitcoin paid for by the plaintiffs.

[Herodes]

It's flabbergasting that people deposited serious amounts of money on a website, created by a teen in 4 days.