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Another crypto-sham or simply a failed start-up?

On 28 July 2020, the High Court upheld a worldwide freezing injunction in a case of alleged investment fraud involving a Blockchain company and large volumes of crypto-assets. Imogen Jones comments.

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Published 21 August 2020

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On 28 July 2020, the High Court upheld a worldwide freezing injunction in a case of alleged investment fraud involving a Blockchain company and large volumes of crypto-assets.

In 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 [2020] EWHC 2027 (Comm),

Blockchain Optimization S.A. and Petrochemical Logistics Ltd, (the “Claimants”) successfully obtained a worldwide freezing injunction in January 2020 and 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 (the “Defendants”) applied to discharge it.

LFE Project

The case concerns the Defendants’ start-up project to set up a cryptocurrency platform called the “London Football Exchange” (the “LFE”) underpinned by Blockchain technology. The aim was to enable fans, traders and investors to buy and sell tokens giving them the chance to acquire indirectly ownership interests in football clubs via LFE tokens. The token holders would also have access to special membership services and offers, such as priority access to fan events. The proposed intention was to eventually apply for FCA authorisation.

The Loans

The Claimants are connected to Integral Petroleum S.A., of which a Mr Seitnespesov is managing director, who was introduced to the project as a potential investor in late 2017.  Through Mr Seitnespesov’s connection, C entered three loan agreements with the Defendant companies. US$2.2m in total was advanced under these loan agreements and it is the Claimants’ case that this was done on the basis of various fraudulent representations made by the directors of the Defendants.

It is the Claimants’ case that they also provided marketing services and assistance to the LFE project under an oral agreement entered into in January 2018 for an agreed payment of US$3m.

The Claimants’ pleaded that when Mr Seitnespesov tried to exit the project in 2018, there was an agreement with the directors of the LFE companies that they would transfer 4.4 million LFE tokens to the second Claimant to cover the loans. US$3m was also to be paid to the first Claimant for the marketing services.

In November 2019, LFE announced that the LFE tokens were being replaced by a new token called “LFE Cash”. The Claimants were not made aware of this and found out indirectly through an announcement online, at which time they realised that their 4.4 million tokens had not been replaced.

The Claimants claim that the funds have not been repaid and that entry into the loans was induced by fraudulent misrepresentations.

The Court upheld the continuation of the Claimants’ injunction and dismissed the Defendants’ application to discharge it.

Freezing injunctions concerning allegations of crypto shams

Worldwide freezing injunctions are used sparingly by the court and their use in this context reflects the courts’ desire to protect investors and potential investors from sham investments and crypto ventures.

The use of a worldwide freezing injunction following a without notice application reflects the fact that the courts recognise that projects of this kind have the ability to be fast moving and potentially untraceable. It highlights how the courts will respond to a new era in which money and assets can be quickly dissipated.

Crypto shams

Unfortunately, the attention received by alleged and confirmed crypto shams casts a dark shadow over the sector. It is striking the ease with which a crypto company can convert their tokens and devalue an investors’ asset. These scams are in direct contention with the work of the UK jurisdictional taskforce to improve confidence in the market of cryptoassets with their legal statement on Cryptoassets and Smart contracts issued in November 2019. To date the courts appear to be taking the same line as the taskforce and will take investors’ rights and claims of fraud seriously.

An interesting point made in the Judgment, in response to the Defendants’ claim that they honestly intended to proceed with the project and that its failure was not due to dishonesty but to things not going to plan for commercial reasons, was that “though cryptocurrencies and similar offerings have attracted their fair share of fraud, many honest start-ups are small operations with unsophisticated operators who struggle to attract investment – those who put money into these ventures do so as risk capital, with potentially high rewards should the start-up hit the jackpot.” Sir William Blair J noted that “when allegations of fraud are made by disappointed investments in start-ups, considerations like these have to be taken into account.” This approach is reassuring to the cryptoasset space and shows that the English High Court will adjudicate between the interests of investors and start-ups with equal fairness.

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Longer Reads

Another crypto-sham or simply a failed start-up?

On 28 July 2020, the High Court upheld a worldwide freezing injunction in a case of alleged investment fraud involving a Blockchain company and large volumes of crypto-assets. Imogen Jones comments.

Published 21 August 2020

Associated sectors / services

  • Commercial disputes

Authors

On 28 July 2020, the High Court upheld a worldwide freezing injunction in a case of alleged investment fraud involving a Blockchain company and large volumes of crypto-assets.

In 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 [2020] EWHC 2027 (Comm),

Blockchain Optimization S.A. and Petrochemical Logistics Ltd, (the “Claimants”) successfully obtained a worldwide freezing injunction in January 2020 and 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 (the “Defendants”) applied to discharge it.

LFE Project

The case concerns the Defendants’ start-up project to set up a cryptocurrency platform called the “London Football Exchange” (the “LFE”) underpinned by Blockchain technology. The aim was to enable fans, traders and investors to buy and sell tokens giving them the chance to acquire indirectly ownership interests in football clubs via LFE tokens. The token holders would also have access to special membership services and offers, such as priority access to fan events. The proposed intention was to eventually apply for FCA authorisation.

The Loans

The Claimants are connected to Integral Petroleum S.A., of which a Mr Seitnespesov is managing director, who was introduced to the project as a potential investor in late 2017.  Through Mr Seitnespesov’s connection, C entered three loan agreements with the Defendant companies. US$2.2m in total was advanced under these loan agreements and it is the Claimants’ case that this was done on the basis of various fraudulent representations made by the directors of the Defendants.

It is the Claimants’ case that they also provided marketing services and assistance to the LFE project under an oral agreement entered into in January 2018 for an agreed payment of US$3m.

The Claimants’ pleaded that when Mr Seitnespesov tried to exit the project in 2018, there was an agreement with the directors of the LFE companies that they would transfer 4.4 million LFE tokens to the second Claimant to cover the loans. US$3m was also to be paid to the first Claimant for the marketing services.

In November 2019, LFE announced that the LFE tokens were being replaced by a new token called “LFE Cash”. The Claimants were not made aware of this and found out indirectly through an announcement online, at which time they realised that their 4.4 million tokens had not been replaced.

The Claimants claim that the funds have not been repaid and that entry into the loans was induced by fraudulent misrepresentations.

The Court upheld the continuation of the Claimants’ injunction and dismissed the Defendants’ application to discharge it.

Freezing injunctions concerning allegations of crypto shams

Worldwide freezing injunctions are used sparingly by the court and their use in this context reflects the courts’ desire to protect investors and potential investors from sham investments and crypto ventures.

The use of a worldwide freezing injunction following a without notice application reflects the fact that the courts recognise that projects of this kind have the ability to be fast moving and potentially untraceable. It highlights how the courts will respond to a new era in which money and assets can be quickly dissipated.

Crypto shams

Unfortunately, the attention received by alleged and confirmed crypto shams casts a dark shadow over the sector. It is striking the ease with which a crypto company can convert their tokens and devalue an investors’ asset. These scams are in direct contention with the work of the UK jurisdictional taskforce to improve confidence in the market of cryptoassets with their legal statement on Cryptoassets and Smart contracts issued in November 2019. To date the courts appear to be taking the same line as the taskforce and will take investors’ rights and claims of fraud seriously.

An interesting point made in the Judgment, in response to the Defendants’ claim that they honestly intended to proceed with the project and that its failure was not due to dishonesty but to things not going to plan for commercial reasons, was that “though cryptocurrencies and similar offerings have attracted their fair share of fraud, many honest start-ups are small operations with unsophisticated operators who struggle to attract investment – those who put money into these ventures do so as risk capital, with potentially high rewards should the start-up hit the jackpot.” Sir William Blair J noted that “when allegations of fraud are made by disappointed investments in start-ups, considerations like these have to be taken into account.” This approach is reassuring to the cryptoasset space and shows that the English High Court will adjudicate between the interests of investors and start-ups with equal fairness.

Associated sectors / services

  • Commercial disputes

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