Author: Syedur Rahman
5 August 2020
4 min read
Syedur Rahman of Rahman Ravelli examines a case that underlines the courts’ continuing tough approach when it comes to suspected investment fraud involving cryptoasset schemes.
The case of Blockchain Optimization S.A.and Petrochemical Logistics Ltd v LFE Market Ltd, LFE Group Holdings Limited, James (Aka Jim) Aylward, Benjamin Leigh Hunt, White Tiger Global Opportunities Fund and White Tiger Asset Management Ltd  EWHC 2027 (Comm) is a case involving a number of different claimants and defendants. It concerns assets lost via a cryptoasset project and the pursuit of a claim for investment fraud.
On 28 July 2020, judgment was handed down by the Commercial Court in respect of several applications, specifically:
A fifth issue, namely the claimants’ application to amend the particulars of claim, was agreed to be likely to be settled between the parties in the light of the judgment, and so was not ruled upon.
The case concerns the start-up cryptocurrency platform, London Football Exchange (LFE). The aim of the project was to offer football fans, traders and investors the opportunity to purchase and sell tokens via LFE to acquire indirect ownership interests in football clubs. The LFE Token would be operated by cryptocurrency and blockchain technology.
During 2017 to 2018, approximately US $2.2 million in loans was advanced by investors (the claimants) to the project. The claimants also provided marketing services to the project in return for US $3 million, which was agreed orally. In summer 2018, one investor wished to exit from the project and it was agreed orally that 4.4 million LFE Tokens would be transferred to cover the cost of the US $2.2 million of loans. The value of the tokens was guaranteed to be worth at least US $0.5 per token.
While the tokens were provided, it was the claimants’ case that the US $3 million was not paid. The defendants did not agree so the claimants brought a claim against the defendants, alleging fraud by misrepresentation and unlawful means conspiracy. The claimants also stated that, in 2019, LFE replaced LFE tokens with a new type of token called “LFE Cash” and that the 4.4 million tokens were not replaced, rendering them worthless. The US $2.2 million loan was in effect, therefore, advanced with no repayment.
The claimants applied for and were granted a without notice freezing injunction against the defendants. The defendants, however, claimed that the claimants’ tokens could have easily been exchanged if they had pursued the matter rather than applying for a without notice freezing injunction.
An application for an urgent worldwide freezing injunction was made without notice to Butcher J on 14 January 2020.
The Judge began dealing with the application for immediate discharge of the order. This was due to the claimants’ substantial failure to disclose the involvement of their solicitor, Mr Vitaliy Kozchenko, and his firm, in the LFE project. Mr Kozchenko had provided affidavit evidence in support of the freezing order. Notwithstanding the breach contrary to the claimants’ duty of disclosure, it was decided that the order would not be discharged on this ground as it could be dealt with in other ways; for example, by an order as to costs (as in National Bank Trust v Yurov  EWHC 1913 (Comm)).
With reference to the defendants’ additional argument that the injunction be set aside on the basis that there is not a good arguable case of fraud put forward by the claimants on the facts, the Judge found that the case satisfied the threshold requirement of “more than barely capable of serious argument, and yet not necessarily one which the Judge considers would have a better than 50 per cent chance of success” (as set out in Ninemia Maritime Corp v Trave Schiffahrtsgesellschaft GmbH (The Niedersachsen)  2 Lloyd’s Rep 600, 605). The Judge granted an order to continue the worldwide freezing injunction. The defendants’ application to discharge the injunction failed.
The defendants’ application to strike out parts of the claim / summary judgment
The defendants claimed that the LFE was not a sham. They said it was a good idea for a project which did not become successful due to commercial reasons rather than because of any dishonesty. They, therefore, brought an application to strike out parts of the claim or for summary judgment.
In assessing whether there was a case to answer, the Judge reviewed each paragraph in the claimants’ particulars of claim with regard to the allegations of false misrepresentations. In doing so, the defendants’ application to strike out part of the claim or for summary judgment was dismissed.
Evidence in support of the freezing injunction described the LFE project as “one of the latest cryptocurrency shams worth millions of pounds” with the potential to have affected many other investors. The risk potential of cryptocurrency or cryptoasset schemes such as this are not to be understated.
The Judge noted that while cryptocurrencies have attracted fraud, he also accepted the reality of allegations of fraud being made by disappointed, often unsophisticated investors in high risk - high reward ventures. However, in continuing the freezing order and refusing the defendants’ applications to limit or quash the claim, this judgment signalled the continuation of the courts’ tough approach to suspected investment fraud in relation to cryptoasset schemes.
Freezing injunctions, particularly of this far-reaching kind, are deployed sparingly. Their use can be seen as a reflection of the aim of the courts to protect investors and potential investors when it comes to involvement in cryptoassets.
This case is to be continued. It will be interesting to see what the court makes of whether the defendants ever had the genuine intention to perform any of their advertised activities, or whether the scheme was an illusionary fraud from the outset.
This article was also featured on Lexology.com.
Syedur Rahman is known for his in-depth experience of serious fraud, white-collar crime and serious crime cases, as well as his expertise in worldwide asset tracing and recovery, civil recovery, cryptocurrency and high-stakes commercial disputes.