Order, order: Fetch.AI case enhances English courts' approach to crypto fraud

The case involving an inventive appropriation of cryptocurrencies by unknown fraudsters sheds further light on how and when courts will apply various strictly tested orders and injunctions in favour of claimants.
 
The first claimant (Fetch.AI, an English entity) maintained cryptocurrencies with Binance for trading purposes.

The unknown fraudsters gained access to and sold certain amounts of these cryptocurrencies at low prices to related entities, so that they could be sold on again profitably. This meant the claimants suffered a loss of in excess of US$2.6 million.

It was noted that the Binance Group had an opaque structure that led to difficulties determining which entity was involved in the transfer of the cryptocurrencies.

The UK Binance entity was given notice by the Financial Conduct Authority (FCA) in June 2021 not to carry out any regulated activity. Binance subsequently indicated that the UK entity did not offer any products or services via the Binance.com website.

Evidence was submitted that Binance Holdings was likely to be the main parent entity within the group.

The court followed Ion Science Limited & Ors v Persons Unknown & Ors in confirming the cryptocurrency was held in England, as that is where the first claimant is based.

The claimants sought:

1. A proprietary injunction, Worldwide Freezing Order and ancillary information disclosure orders against the fraudsters (persons unknown) as well as the recipients of the cryptocurrency sold by the fraudsters. 

2. Bankers Trust Orders and/or Norwich Pharmacal Orders against the Binance entities (the cryptoasset exchanges).

3. Permission to serve out of the jurisdiction and alternative service, including against Binance Holdings; although subject to the Hague Convention, due to the urgent nature of the claim, alternative service was sought.

 The court held that:

In relation to the proprietary injunction: 

• There was a serious issue to be tried: breach of confidence, equitable proprietary claim and unjust enrichment.

• The balance of convenience lay in favour of granting an injunction given there is a prima facie case of wrongdoing and no evidence the unknown persons would satisfy a claim for damages.

• It was just and convenient to grant the order as the claimants were the victims of an elaborate fraud.

In relation to the worldwide freezing order:

• There was a good arguable case on the merits: an equitable proprietary claim.

• The underlying claim, and the conduct and nature of the company and individuals involved, showed there was a real risk of dissipation.

• It was just and convenient to grant an order.

However, the court was anxious to separate the different types of "persons unknown" such that the fraudsters would be subject to freezing orders but not innocent recipients of the cryptocurrencies.

The court also distinguished between recipients of the discounted cryptocurrency (who would have known of the fraud) and innocent recipients who paid full price.

Similarly, the proprietary injunction would only apply to in respect of the third class to assets that the third categories of persons unknown either knew, or ought reasonably to have known, belong to the claimant, or did not belong to the fraudsters.

In relation to the Bankers Trust Order:

• The court again followed Ion Science Limited & Ors and held there was a good arguable case that there is a basis on which the court can permit service out of a claim for a Bankers Trust Order on a party outside the jurisdiction, even where no positive remedy is sought against them other than information. The court did not address whether the authority on the scope of NPOs was correct and, as in Ion Science Limited & Ors, the court distinguished NPOs from Bankers Trust Orders – there was authority that lent weight to the argument that Bankers Trust Orders might properly be served out of the jurisdiction in exceptional circumstances.

• The test for a Bankers Trust Order is whether:

       (i) It has been shown there are good grounds for concluding the property in respect of which disclosure is sought belongs to the claimant;
 
       (ii) That there is a real prospect that the information sought will lead to the location or preservation of those assets;
 
       (iii) That the order should not be wider than necessary;
 
       (iv) That the interests of the applicant in getting an order have to be balanced against any detriment to the respondent; and
 
       (v) The applicant should provide undertakings only to use the documents for the purpose specified and pay the respondent's expenses of compliance and to compensate them for loss if the order was wrongly made.

This test was satisfied in relation to Binance Holdings.

• The test for a NPO is:

       (i) It must be shown that a wrong has been carried out by an ultimate wrongdoer;
 
       (ii) There must be need for an order to enable action to be brought against the ultimate wrongdoer;
 
       (iii) Whether or not the person against whom the order is sought is mixed up so as to have facilitated the wrongdoing; and
 
       (iv) It must be satisfied that it is the necessary and proportionate response in all the circumstances to what has happened.

This was satisfied in relation to Binance Markets Limited.

The claimants were entitled to service out and alternative service, including against Binance Holdings, due to the exceptional circumstances.

Finally the court had to decide whether to only grant the orders against the Binance entities, but decided freezing orders were appropriate as Binance had indicated it may not maintain the freezing arrangement it had already provided over an account that held some of the proceeds of the fraud without such orders.

It will be interesting to see how the courts develop these arguments once respondents choose to defend them.

This article was authored by Helen Mulcahy, dispute resolution partner at Fieldfisher.