A federal court has appointed a receiver for Cryptsy, the cryptocurrency exchange that claims to have lost $5 million in funds to theft. In response to the lawsuit by Cryptsy clients seeking to recover their funds, the U.S. District Court Southern District of Florida appointed James D. Sallah, Esq. as the receiver and given him control of Cryptsy’s assets.
The court has taken possession of Cryptsy’s assets, “of whatever kind and wherever situated.” All powers of the company’s agents, employees, officers and directors are suspended.
The court assigned the receiver in response to a suit by Brandeon Leidel, Michael Wilson and “all others similarly situated,” a group that has also sued to halt the sale of a property that the defendants bought in Delray Beach, Florida.
Court Freezes Assets
All individuals and entities with any control of Cryptsy assets are prohibited from transferring them. The freeze includes assets on deposit with any financial institutions, crypto exchanges or third parties.
The order grants the receiver the right to use “reasonable” efforts to determine the location and value of Cryptsy’s assets.
The receiver faces a big task considering Cryptsy’s principal, Paul Vernon, has disappeared and his ex-wife, Lori Ann Nettles, also a defendant, has taken ownership of their home in a divorce agreement.
While the home is on the market for $1.5 million, there is no current estimate for the value of Cryptsy’s assets, said David Silver, Esq., of the Silver Law Group in Coral Springs, Florida., who is representing the plaintiffs.
The order calls on the defendants, upon being served, to provide all assets belonging to Cryptsy.
All entities owing any obligation to Cryptsy are ordered to pay all such obligations to the receiver.
House Transfer To Hide Assets
The suit seeking to prevent the sale of the Delray Beach property claims Vernon fraudulently transferred it to Nettles to conceal assets and place them outside of the creditors’ reach.
After purchasing the house, Vernon fled to the People’s Republic of China, the suit claims. Nettles around this time initiated divorce proceedings.
Because the property is the only known asset remaining in the court’s jurisdiction to satisfy the defendant’s obligations to the plaintiffs, the plaintiffs are seeking a preliminary injunction precluding the sale of the property during the proceeding.
Nettles has refused to agree to the temporary injunction and would not provide evidence for the source of the purchase funds. The plaintiffs claim the defendants used funds from Cryptsy to purchase the property for $1.375 million.
“The circumstantial evidence clearly indicates that defendant Vernon converted plaintiffs’ and their fellow class members’ digital currency and purchased the property with those stolen proceeds,” the suit claims.
Users Were Denied Access
Cryptsy account holders claimed in 2015 of being denied access to their accounts and being unable to protect or control their assets, CCN reported.
The suit claims that users were denied any substantive response from the company on reasons for holding funds. The claim estimates that approximately $5 million worth of assets are currently being held by the company. The official claims against Cryptsy are negligence, unjust enrichment, conversion of funds and property, and violations of Florida’s Deceptive and Unfair Trade Practices Act.
What Will Plaintiffs Get?
Asked how the plaintiffs are documenting their claims against Cryptsy, Silver revealed that they have provided images of their Cryptsy accounts. Those who have not made these images already will not be able to do so since the website is not currently active. A notice on the website says it is performing maintenance.
Speaking to CCN, Silver said:
My clients have no access to any of their accounts.
The lawsuit has to be certified as a class action suit before the court can determine who will be entitled to recovered funds, Silver said. The court must first determine that Cryptsy was not a legitimate business. Based on the evidence presented in the suit, he doesn’t think this will be any problem. Collectability of claims, however, is a different matter.
We’ve very confident of liability in this case. Collectability is another issue.
How Will Claims Be Set?
Once the suit is certified, an administrator will be named to conduct an analysis and determine plaintiffs’ claims. “How we’re going to do that would be an interesting exercise,” Silver said.
“I’ve spoken to several hundred users of Cryptsy,” he said. Cryptsy users have found Silver through reports on CCN and other cryptocurrency websites.
Cryptsy has acknowledged it did not report the disappearance of funds despite being required to do so.
The defendants confessed on a blog that they had been insolvent after $5 million disappeared in June 2014 and that they concealed this fact from customers and regulators. They also admitted having operated a fraudulent scheme for nearly 18 months when withdrawals were not funded from safeguarded assets, but from profits in its business operating account.
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