$10 Billion lawsuit over bitcoin mining business

Dave, an American computer security expert, and Dave, an Australian computer scientist, met in or about 2003. Their relationship centered around their mutual interest in cyber security, digital forensics, and the future of money. Dave and Craig began to speak about ways to use peer-to-peer file sharing to solve issues in cryptography.

On October 31, 2008, a white paper authored under a false name titled bitcoin: A Peer-to-Peer Electronic Cash System was posted to a mailing list of cryptography enthusiasts. This paper detailed novel methods of using a peer-to-peer network to generate what it described as a system for electronic transactions without relying on trust.

Bitcoin is a decentralized digital currency that uses a ledger to track the ownership and transfer of every bitcoin in existence. This ledger is called the bitcoin blockchain. In order to complete a transaction with bitcoins, you must have a bitcoin wallet. Wallets are computer files dedicated to storing bitcoin information. Each bitcoin wallet has a public key that is used as the address to receive bitcoin from others. Each wallet is also assigned a private key. To send bitcoin out of a wallet, an individual must have the private key associated with that bitcoin wallet.

There are two methods of acquiring bitcoins. The first is simply receiving bitcoins from someone. The second way one can acquire a bitcoin is by mining them. Bitcoin is designed without a centralized authority in charge of the blockchain. Therefore, mining is a process through which anyone with internet access can update the ledger and mine bitcoins by employing computer power to solve a complex computer problem. The first miner who solves the problem gets the right to update the ledger by adding a block of recent transactions to the blockchain. The protocol pays the successful miner in newly minted bitcoins, the number of which is determined by a pre-existing algorithm.

For the next several years, Dave and Craig worked together in developing bitcoin in 2009 and 2010. Through their collaboration they mined over a million bitcoins together, then worth a few hundred thousand dollars and now worth billions. These bitcoins were stored in specifically identifiable bitcoin wallets.

On February 14, 2011, Dave formed Company in Florida as a limited liability company.  The Company’s articles of organization, filed with the state of Florida, listed Dave as the managing member and registered agent. Dave and Craig created Company to mine bitcoin and develop intellectual property.

However, the partners (legally referred to as members) did not complete the organizational paperwork. The partners never agreed upon the terms and conditions of an operating agreement, which is like a partnership agreement. An operating agreement typically specifies who manages Company; what say does each partner have in the management of Company; how are profits and capital divided up among the partners; what happens if a partner dies; and many other matters.

There were also no agreements as to who owned the bitcoins and intellectual property developed before the formation of Company, and what happens to Company’s bitcoins and intellectual property when Company is dissolved.

Dave passed away in April of 2013.

Company and Dave’s estate filed a $10 billion lawsuit in a Florida federal court, alleging that Dave created the bitcoin intellectual property on his own and through Company and that his estate and/or Company owned all this intellectual property.

After Dave died, Craig was accused of unlawfully and without permission taking control of well over a million bitcoins from the estate and Company by taking exclusive possession of the private keys necessary to own, move, or sell the bitcoins; and ultimately transferring the bitcoins to various international trusts. Craig allegedly did this by forging Dave’s signatures and falsifying dates on legal documents to commit the embezzlement.

Craig asked the court to dismiss the lawsuit. The court refused to do so; saying that the allegations were sufficient and if proven as true in trial, could result in judgment against Craig.

This case is referred to Kleiman v. Wright, Case No. 18-CV-80176-BLOOM/Reinhart., United States District Court, S.D. Florida, (December 27, 2018).

Comment. This case is a lesson for startups.  Get the business set up right in the beginning because it could help if the business takes off big; like this one.

20/20 hindsight says that a comprehensive written agreement between Dave and Craig about management of their business, and ownership of the bitcoins and intellectual property (both pre and post formation of the limited liability company) would have been very helpful after Dave died.

Also, perhaps there could have been internal controls that could manage the risk of bitcoin embezzlement.

By John McCauley: I help people start, grow, buy and sell their businesses.

Email: jmccauley@mk-law.com

Profile:            http://www.martindale.com/John-B-McCauley/176725-lawyer.htm

Telephone:      714 273-6291

Legal Disclaimer

The blogs on this website are provided as a resource for general information for the public. The information on these web pages is not intended to serve as legal advice or as a guarantee, warranty or prediction regarding the outcome of any particular legal matter. The information on these web pages is subject to change at any time and may be incomplete and/or may contain errors. You should not rely on these pages without first consulting a qualified attorney.

Posted in bitcoin, blockchain Tagged with: ,

Recent Comments

Categories