To be a victim or creditor, that is the question. Whether ‘tis better to remain silent and suffer the outrageous fortune of a hacked exchange receiving $6 billion in restitution as the alleged sole victim of the hack, or take arms against that sea of trouble and by opposing end the exchange’s bid for a windfall?
Just as Marcellus of Hamlet knew there was something rotten in the state of Denmark, Bitfinex account holders knew something just wasn’t right about letting the hackers and the government reach a deal that left account holders out in the cold. Now a federal court in Washington D.C. has agreed account holders deserve to be heard.
First, a Steal and then, a Deal
The 2016 hack of Bitfinex has been well-reported. Defendants, Ilya Lichtenstein and Heather Morgan, stole approximately 120,000 Bitcoin, representing 36.06% of the value of user accounts on the exchange, and engaged in a sophisticated and complex scheme to launder the stolen property.
To compensate users, Bitfinex implemented a 36.06% haircut to accounts and substituted BFX tokens which could be sold on the secondary market, redeemed for a cash payment from Bitfinex or converted into stock in parent iFinex. Converting shareholders were awarded RRT (Recovery Right Token) tokens, entitling the holder to a share of the recovery only after all issued and outstanding BFX tokens were redeemed. In issuing the BFX, it did so “without release or waiver.”
The Recovery and the Rub
In 2022, and with the help of the defendants, the government recovered approximately 94,000 of the stolen Bitcoin and other property which today is worth $7.6 billion.
The defendants entered a plea agreement with the Department of Justice in federal court which calls for restitution to be made to Bitfinex. In its filings with the court, the DOJ stated that Bitfinex is “perhaps” a victim, but nevertheless sought approval of the plea and restitution because the DOJ and the defendants agreed to it, and further, the DOJ’s position is that the account holders are not victims of the defendants’ crimes at issue.
Ay, there’s the rub. The DOJ’s position is that because the crimes subject to the plea are money laundering conspiracy and conspiracy to defraud the United States which occurred after the hack, and not the intrusion into accounts and transferring out of the assets, account holders cannot be considered victims; account holders may be victims of theft (or creditors of Bitfinex), but the statute of limitations had run by the time the government recovered the assets.
The Opposition
Although the DOJ does not believe account holders can be victims of the defendants’ crimes, it nevertheless, “out of an abundance of caution,” provided a website for those affected by the hack to submit victim statements for the court to consider in determining sentencing.
The victim statements submitted by account holders (along with a hack of the recovered assets) were effective in persuading the DOJ to move for a delay in restitution to Bitfinex, and the court has ordered a hearing date to be held no more than 90 days from the date of sentencing, with a briefing schedule relating to the validity of pending claims by alleged victims.
Bitfinex argues reputational damage suffered and that account holders were made whole through the redemption of BFX tokens.
However, account holders argue that, by Bitfinex’s own terms, they owned the assets in their accounts and as a result of the hack and/or Bitfinex’s haircut, they lost the actual assets in their accounts along with the benefit of the assets appreciation in value. At the time of the hack, Bitcoin was worth approximately $607 at the day’s open and it is now hovering around the $90,000 mark. Accordingly, restitution of Bitcoin to Bitfinex would create a windfall in its favor. They’ll now have a chance to argue why they are victims of the crimes at issue and entitled to a share of the approximately 94,000 BTC recovered, and not be relegated to claims to other forfeited properties.
Fairness and Forfeiture
The issues presented here relate not only to the tensions between criminal statutes and creditors’ rights that we’ve seen in other cases (e.g., preferred shareholders in FTX sharing in forfeited properties), but also the proper measurement date of crypto, which impacts whether a party will benefit from appreciation.
We will be closely monitoring the developments, including the upcoming briefing and the contemplated procedures for sharing in the forfeited properties, the scope of which we expect to soon be determined. Please contact us if you would like to learn more about the issues.
