LMN v Bitflyer and Ors Case Review

LMN v Bitflyer and Ors saw Rahman Ravelli addressing a number of significant crypto fraud issues. Syed Rahman details the most notable aspects of the case.

Rahman Ravelli acted for the claimant in LMN v Bitflyer and Ors. This case was yet another example of the High Court’s willingness to adapt and apply existing legislative tools to novel issues arising out of the fast-developing cryptoasset landscape.

LMN is one of Europe’s largest exchanges. It was subject to a hack in December 2020 whereby the wrongdoers extracted $10.7million worth of cryptocurrencies in Bitcoin, Ripple, Tether, Ethereum, ZCash and Ethereum Classic. LMN had initially contacted regulatory and law enforcement, including the police and Action Fraud. However, this did not result in the cryptocurrencies being returned or located as the agencies simply did not have the resources to help in this regard. LMN, therefore, sought relief through civil proceedings - and soon after instructed Rahman Ravelli.

Experts were instructed to undertake a tracing exercise with the aim of locating the misappropriated assets. The experts identified 26 'exchange addresses', owned and operated by the six exchanges that subsequently became the defendants when proceedings were issued against them.

The matter initially went before Mr Justice Butcher on 28 October 2022 for an ex parte (without notice) hearing. Butcher J granted the application for permission to serve out and to serve by alternative means. A confidentiality order was also made in order to avoid the possible risk of ‘tipping off’.

But Butcher J declined to proceed with an application for substantive relief without notice being given to the defendants. This was because:

• The alleged fraud was not very recent.
• The application was not made against the putative fraudsters.
• None of the defendants were alleged to have been in any way fraudulent.

The six defendants were then served with the claim form and advised that the return hearing was due to take place on 11 November 2022. Two of the exchanges actively engaged with LMN prior to the return hearing and negotiations took place on a number of issues relating to the requested disclosure under the Bankers Trust and Norwich Pharmacal jurisdiction.

At the return hearing, Butcher J granted an order for permission to serve out of the jurisdiction, service by alternative means and for so-called Banker’s Trust relief.

Service out of the jurisdiction

The court applied the usual three-fold test for permission to serve out of the jurisdiction, as summarised in Altimo Holdings and Investment Ltd v Kyrgyz Mobil Tel Ltd [2011] UKPC 7 (which was cited by LMN), namely:

1. There is a serious issue to be tried on the merits.
2. That there was a good arguable case that the claim fell within one of the “gateways” in CPR PD 6B paragraph 3.1.
3. That England and Wales was the appropriate forum for the claim to be tried.

The court was satisfied that, on the merits, LMN had a good arguable case as to its entitlement to the substantive information orders that it sought against the defendants. Those orders required the defendants to produce information about their respective customer accounts so as to help the claimant’s attempt to trace and recover its misappropriated assets.

For the purposes of the requirements of the Norwich Pharmacal jurisdiction, Butcher J commented “given that there seems no doubt that the defendants were ‘mixed up’ in the fraud (in the relevant sense, which does not involve any fraud or wrongdoing on their part) … there was a good arguable case that relief should be granted under the Norwich Pharmacal jurisdiction.”

In respect of the there being a good and arguable case that the claim fell within one of the “gateways” under CPR PD 6B, the court concluded that “there clearly was” one in respect of the new gateway under PD 6B paragraph 3.1(25). This applies in matters whereby a claimant is seeking an information order regarding (i) the true identity of a defendant or potential defendant and/or (ii) what has become of the claimant’s property.

Lastly, in relation to jurisdiction, Butcher J considered the following factors:

1. LMN was an English-registered company.
2. There were good grounds for considering the cryptocurrencies to be located in England.
3. Relevant documents were in England.
4. That English law “at least arguably governed the proprietary claim”.

As such, the court was satisfied that the requirements for service outside of the jurisdiction were met and an order to that effect was made accordingly.

Service by alternative means

In this case, Butcher J was satisfied that there was a good reason (and to the extent necessary, exceptional circumstances) to depart from Article 10 of the Hague Convention due to the nature of the claim and the need for steps to be taken as soon as possible to seek to identify the relevant defendants and to preserve property. Although it could not be described as a case of “hot pursuit”, given the length of time that had passed since the fraud, that was not the claimant’s fault and did not mean that it was no longer important for there to be expedition. He therefore made orders for service by alternative means: by email at a number of specified email addresses and, in one case, additionally by posting a link to the documents on the online contact form on the relevant defendant’s website.

Information orders

Having assessed the merits of the matter in respect of the Bankers Trust requirements in relation to service out of the jurisdiction, the court was subsequently satisfied that such requirements were also met for the purpose of granting the information order.

Butcher J, therefore, ordered the defendants to provide Know Your Client (KYC) documents regarding the account holders, detailing:

1. The names of the holders of the accounts where the stolen cryptocurrencies had been allocated / received.
2. The KYC/AML information provided in respect of the accounts.
3. Any information held that might identify the holder of the account.
4. An explanation as to what had happened to the relevant cryptocurrency.
5. Details of any accounts to which the relevant cryptocurrency had been transferred.

Issues

Whilst this case reaffirmed many established principles in respect of cryptocurrencies - such as cryptocurrencies being treated as assets for the purpose of asset tracing - it also dealt with numerous novel issues.

Firstly, there was the issue of determining which entity should be listed as the defendant. As many corporations use different entities for different jurisdictions, this leads to the challenge of determining which is the appropriate entity for the purpose of the proceedings. This was something raised by the two defendants who fully engaged. However, rather unhelpfully, they were not willing to confirm which entity was the correct one for these purposes.

A further issue stemming from this was that, as a result of the confidentiality orders, the listed entity was not able to approach its sister company and request the relevant documentation and information. This was resolved by listing the exchanges as persons unknown so as to encompass any entities that were relevant in this matter.

Another novel point is that the court ordered the exchanges to provide information as to the funds in the accounts identified immediately prior to the stolen assets being deposited into them, and also at the time of disclosure. This addressed the issue as to whether there were indeed any funds available in the account that could then be frozen and ultimately returned, subject to a successful application.

This was the first reported case of the successful use of the new disclosure gateway which expanded the English courts' jurisdiction and made it easier to secure information orders against overseas non-parties. It can, therefore, be viewed as an encouraging sign that the new gateway is working to full effect and for the purpose it was designed for. It again reiterates the point that the courts are willing and able to equip themselves with the appropriate tools to deal with the fast-paced changes we are witnessing in the crypto sphere.

The case, therefore, is another one that emphasises that asset tracing through the course of civil proceedings is the best forum for those who find themselves to have been subject to a crypto-related crime. While the National Crime Agency’s recently-announced Crypto Cell seeks to bolster law enforcement’s ability to aid in these scenarios, it remains to be seen whether this goal is fully achieved.