Investigation into Bitcoin Exchange Cryptsy Issues Subpoenas, CEO Remains Missing

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The court-appointed receiver for Cryptsy, the defunct, Florida-based cryptocurrency exchange that claims to have lost more than $5 million in investors’ funds to theft, has filed a report that identifies some of the banks and exchanges the defendants used in operating the scheme that left hundreds of investors without access to their accounts.

The receiver, James D. Sallah, an attorney for Miami, Fla.-based Payton & Associates LLC, filed the report in the U.S. District Court Southern District of Florida.

The court appointed Sallah as receiver last month in response to an investor lawsuit and gave him control of Cryptsy’s assets, CCN reported.

Investors Want Answers

The class action suit was filed on behalf of Brandon Leidel, Michael Wilson and “all others similarly situated” against Project Investors, Inc., doing business as Cryptsy, and Paul Vernon and Lorie Ann Nettles. The plaintiffs claim Vernon, Cryptsy’s principal, closed the company’s operations and fled to China with approximately $5 million in cryptocurrencies and investor funds.

Investors claim they have not been able to access their Cryptsy accounts and that Vernon and Nettles (now his ex-wife) purchased a home in Delray Beach for $1,374,881 in cash from Cryptsy-derived funds. Nettles later received the property in a divorce settlement from Vernon.

Sallah, a former Securities & Exchange senior counsel, has sought to secure wallet, account and bank records in Cryptsy’s name. He gained access to business records after subpoenaing various parties.

A First Month Update

The purpose of his first report is to advise the court and investors what he has done since assuming receivership one month ago. He said his investigation is still in the early stage, and he expects to file a second report in 90 days.

“We continue to be concerned that our clients’ investments and portfolios at Cryptsy are still missing,” David Silver, an attorney for the plaintiffs, told CCN.

Sadly, Mr. Vernon, to the best of my knowledge, is still in hiding. He has not provided any cooperation to either myself or the receiver.

Silver, who said he has spoken to hundreds of plaintiffs, said Vernon remains in hiding and apparently is running another exchange in China called BiteBi9.

“While we are trying to do everything we can to protect our clients’ interests, we are limited in what we can do,” Silver said.

No Access To Accounts

Sallah confirmed in his report that investors do not have access to their Cryptsy accounts and that significant amounts of funds are missing and/or possibly locked in Cryptsy servers that he’s trying to access. He also confirmed that Cryptsy is no longer operating.

Sallah said he has not received any cooperation from Vernon. He demanded an accounting of the missing funds from Vernon in a letter, but has received no response. He said he has gained some cooperation from former Cryptsy employees.

He is trying to find all of the investors and determine what they are owed. He is also trying to find out which investors made money, how much, and when, as well as which received money back.

Sallah noted he has spoken with investors daily. He said he will try to determine how investors can be repaid what they are owed. If any investors improperly profited, he will try to see that the profits are returned and take legal action if necessary.

The receiver also said he will contact the landlord of the premises in Delray Beach where Cryptsy operated. He said there are presently no computers, furniture or equipment to secure unless it was relocated, which he will continue to investigate.

Property Ownership At Issue

Sallah demanded information from Nettles on the source of funds used to purchase the property she is living at. He said that the property was derived from Cryptsy and should be in receivership. He has filed a “lis pendens” on the property on behalf of the investors.

Sallah said his legal action is needed to stop Nettles from selling the property, which she has been trying to do since her divorce. The property is on the market for $1.5 million. If Nettles doesn’t cooperate concerning the property, Sallah said he will seek a summary judgment on the matter.

Sallah said Nettles also drives an Infiniti QX80 SUV purchased for $82,353.66 with Cryptsy-derived funds. He said this also should be in receivership.

In April, Nettles produced more than 1,800 pages of documents in response to Sallah’s information request. Sallah said he will subpoena TD Bank for missing bank records. He noted that Nettles indicated she will cooperate in producing the bank records.

More Answers Sought

One alleged Cryptsy shareholder, Kaushal Majmudar, allegedly held 10% in Cryptsy and provided consulting services. Majmudar is a managing partner of a New Jersey investment firm, Ridgewood Investments. Sallah said he demanded Majmudar provide an investor list and information on funds he received from Cryptsy. Majmudar produced the documents.

Sallah also subpoenaed TD Bank, where Vernon and Nettles had at least one personal bank account. He requested the bank freeze any Cryptsy accounts and provide bank records. The bank produced some records.

Sallah made similar demands at SunTrust Bank, where Cryptsy had at least one account.

Cryptsy update: Court freezes Cryptsy’s assets, appoints receiver

Bitcoin Businesses Queried

Sallah has also requested information from bitcoin businesses that conducted business with Cryptsy.

He subpoenaed Coinbase, which Cryptsy used to conduct business, and requested Coinbase freeze Cryptsy accounts, wallets or funds. Coinbase froze some remaining bitcoin(s) in Cryptsy wallets and sent Sallah a check for $24.66.

Coinbase also produced some records concerning three Cryptsy wallets.

Sallah also subpoenaed Bittrex LLC, a digital currency exchange, and asked it to freeze any Cryptsy accounts and provide information about Cryptsy accounts. Bittrex froze a wallet with at least $100,000.

One of Sallah’s associates received an anonymous email in April claiming Cryptsy’s servers were located at Vault Networks Inc. in Miami. Sallah said he demanded Vault Networks confirm whether it has Cryptsy’s servers. In the meantime, he confirmed on his own that Vault Network has Cryptsy’s servers.

Vault Networks, in response to a court order, agreed to provide access to Cryptsy’s severs. Sallah said he will try to determine wallet information and will try to secure funds for investors’ benefit.

Sallah further found that Digital Ocean was the Internet service provider for the Cryptsy website. Sallah requested Digital Ocean add his name and appointment as receiver with contact information on the Cryptsy website.

He said he will contact accounting firms that worked with Cryptsy to determine the status of its tax returns for the years prior to receivership.

The receiver noted he will likely establish a website to keep investors abreast of his progress.

Silver added:

Where are you Paul Vernon, and why aren’t you helping the customers who trusted you and who represent the very community of cryptocurrency users without whom your business – and the fortune you took from them – would never exist?

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