Pig-Butchering, Crypto, and Preliminary Injunctions

“Bitcoin Cryptocurrency Laws & Regulations” by edwinchuen is licensed under CC BY 2.0.

The US government just announced its largest forfeiture action ever, seeking $15B in Bitcoin from defendants in Cambodia who allegedly swindled victims in the United States and around the world. The indictment alleges a form of fraud known as “pig-butchering,” one of several kinds of crypto-related fraud beginning to generate significant transnational civil litigation in U.S. courts. Cases brought by private parties alleging crypto-fraud show that the unique features of the currency – the same features that make it so useful to criminals – can also help facilitate the civil actions against crypto-defendants. Courts are, for example, issuing preliminary injunctions to freeze crypto because it is specific and traceable in ways that money is not.  Courts are also increasingly ordering service through crypto tokens.

Pig-Butchering and Other Fraud

Victims of fraudulent schemes are often lured in through dating apps or contacts on social media and are then convinced to purchase cryptocurrency and transfer it to specified accounts. The fraudsters make false promises that the funds will be invested, but instead they are stolen and laundered. In “pig-butchering” schemes, the perpetrators build relationships with the victims who often make multiple “investments” over time and have access to fake websites showing that their assets have dramatically increased in value.  When they ask to withdraw their funds, they are usually asked to pay more money, until they finally realize they have been scammed.  There are many other forms of fraud involving crypto, of course – including hacking and the use of malicious code surreptitiously installed on computers – many of which are also the subject of civil litigation.

Preliminary Injunctions

Lawsuits brought by victims face major hurdles — even ones you might not expect, like forum selection clauses. There is also the very real possibility that defendants (if the plaintiffs can identify and find them), upon learning that they have been sued, will immediately dissipate their assets or move them beyond the jurisdiction of domestic courts, so that nothing is available to satisfy a successful judgment at the end of the case. To prevent this, plaintiffs often ask at the very beginning of the litigation for ex parte injunctive relief directing defendants not to dissipate or transfer their assets, a form of relief known globally as Mareva injunctions.

In federal courts in the United States, however, the classic form of a Mareva injunction is not available.  The Supreme Court held in Grupo Mexicano de Desarrollo v. Alliance Bond Fund (1999) that federal courts generally lack the power to freeze a defendant’s assets before judgment is entered. Preliminary injunctions cannot, in other words, be used merely to ensure the satisfaction of future money judgments. Asset freezes in fraud and breach of contract cases involving money and bank accounts are thus often difficult to obtain, even if a plaintiff can show outrageous or brazen conduct by the defendant.

Like money, crypto assets are liquid in ways that other forms of property are not. Tokens can be transferred, swapped or laundered much more quickly than real property or artwork. But tokens are also specifically identifiable and mathematically verifiable in ways that cash is not, making them more like real property or artwork. Courts have accordingly reasoned that crypto assets are “specific” and “traceable” property that allows for equitable claims such as conversion and unjust enrichment, and also for equitable remedies such as a constructive trust.  And as long the plaintiffs can show that they are likely to prevail on a state law claim in equity, as opposed to a damages claim for breach of contract, federal courts in fraud cases are very freely granting ex parte temporary restraining orders and preliminary injunctions ordering defendants to freeze crypto assets.

Service

Serving defendants in crypto fraud cases presents obvious difficulties because the true identity and location of the perpetrators are often unknown.  In Legacy Investment Holdings, LLC v. John Does 1-20, for example, the plaintiff was the victim of a scam that allowed the anonymous Doe defendants to access the plaintiff’s cryptocurrency wallet and then transfer $28 million worth of crypto into their own accounts.  The plaintiff hired a crypto-tracking expert to locate the defendants active crypto accounts, filed suit, and immediately requested a temporary restraining order from the district court. They also requested leave to serve process by through a non-fungible token (“NFT”). NFTs are unique digital certificates of ownership, recorded on the blockchain.

In Legacy, the names, identities, and addresses of the defendants were unknown.  The only information available was the virtual addresses of the defendants’ crypto wallets.  The plaintiff sought to send NFTs to the defendants’ crypto wallets.  The federal court in California applied California state law (pursuant to Federal Rule of Civil Procedure 4(e)(1)), which permits service on defendants located in the United States in way that is “reasonably calculated to give actual notice.”  If the defendants are located outside the United States, service is permissible under Federal Rule of Civil Procedure 4(f)(3) if it is not prohibited by an international agreement and if it is consistent with due process.  Due process requires what California state law requires: service that is reasonably calculated to provide notice to the defendant. The Hague Service Convention might be applicable in theory – depending upon the country in which the defendants are located – but it does not apply if the defendant’s address is unknown, which was true in Legacy. Under these circumstances, the court held that delivery of the NFT to the defendants’ crypto wallets would constitute successful service.

Conclusion

The district court decisions in crypto fraud cases seem generally well-reasoned and careful. Most of them are resolved ex parte, so they add to the many situations in which relief is granted in transnational cases without hearing from the opposing party, including terrorism cases resolved by default judgments, service of process against defendants in “Schedule A” trademark cases, and requests for discovery under 28 U.S.C. 1782.  Cases resolved without hearing from the defendants are often cited again in subsequent ex parte proceedings, so that an impressive body of case law can emerge in support of a particular holding – even if it has never been meaningfully contested.  District court judges should tread carefully as they issue injunctive relief and authorize service of process in cases alleging crypto-related fraud.