$3.3m EUR gone? When escrow services go wrong

Quick Take

  • Symphony FS, LTD v. Thompson
  • Defendant claims that seller’s escrow agent stole the money
  • The Court wasn’t convinced that Plaintiff satisfied the standard for getting injunctive relief
  • Asset freeze request denied

The Block is delighted to bring you expert cryptocurrency legal analysis courtesy of Stephen Palley (@stephendpalley) and Nelson M. Rosario (@nelsonmrosario). They summarize three cryptocurrency-related cases on a weekly basis and have given The Block permission to republish their commentary and analysis in full. Part I of their analysis, Crypto Caselaw Minute, is below.

This week’s CCM looks at just what passes for an asset these days, takes a look at when escrow services go wrong, and we are lucky to have a guest post from attorney Andrés Chomczyk who breaks down a recent criminal case in Argentina concerning the theft of ether from an exchange. (As always, Rosario summaries are “NMR” and Palley summaries are “SDP”, and for this week our guest summary is labeled “ACH.”)

Disclaimer: These summaries are provided for educational purposes only by Nelson Rosario [twitter: @nelsonmrosario] and Stephen Palley [twitter: @stephendpalley]. They are not legal advice. These are our opinions only, aren’t authorized by any past, present or future client or employer. Also we might change our minds. We contain multitudes.

[related id=1]Symphony FS, LTD v. Thompson, 2018 U.S. Dist. LEXIS 21464 (E.D. Pa. 5:18-cv-3904, 12/20/2018) [SDP]

Link to opinion

This case involves a dispute over the use of escrowed funds to purchase bitcoin. It also shows the peril of sending money for bitcoin to an escrow agent who doesn’t actually hold the crypto.

Here’s the gist: Plaintiff (“Symphony”) says that it wired $4 million to defendant to buy bitcoin and instead bought bitcoin for itself. Defendant (“Thompson”) says the money was stolen by the seller’s escrow agent. Plaintiff filed a lawsuit and sought a temporary restraining order and a preliminary injunction seeking an asset freeze. The Court said no.

The Plaintiff is an Irish company that, among other things, engages in cryptocurrency trading. Thompson owns a company called Volantis Escrow (“Volantis”) that allegedly “focuses on bitcoin escrow services.”

In July 2018, Symphony and Volantis signed an Escrow Services Agreement (“ESA”) by which “Volantis would hold and exchange assets for Symphony, including converting fiat currency into cryptocurrency.” The idea was that Volantis would purchase north of 5,000 bitcoin for Symphony, in tranches. The ESA also says that transactions would be on a “bilateral basis”, which Symphony’s CEO understood this to mean that Symphony would only purchase bitcoin directly from Volantis, not an original seller.

For an initial transaction, Symphony sent 3,303,500 Euros to Volantis Escrow for the purchase of 500 “miner bitcoins.” Instead of acting as an escrow agent for both buyer and seller, Thompson used a double-escrow structure, involving two escrow agents: “one accepts the purchase money from the buyer and the other accepts the bitcoin from the seller. Once the parties establish control over the assets and verify that they have been transferred, the escrow agents distribute the assets.”

Thompson claims that after converting the Euros to dollars he sent them to the seller’s “escrow agent”, which then “absconded with the funds, with the assistance of others.” Symphony says it assumed that Thompson had “operational control” over the 500 bitcoin before it sent the money and would never have entered the ESA or sent the money if it had thought otherwise.

Plaintiff filed an arbitration claim against Volantis but when it could not find LLC registration for Volantis on file with the Delaware Secretary of State, it sued Thompson. Thompson explained that the lack of a separate LLC filing is a result of Volantis being something called a series LLC, which doesn’t require separate filings for each LLC. The Court said that this is a fact question precluding relief on plaintiff’s claim for injunctive relief.

This is a really LONG opinion that goes pretty deep into the weeds on the legal theories Plaintiff pleaded and the bottom line is that the Court wasn’t convinced that Plaintiff satisfied the standard for getting injunctive relief. Also, the request for an asset freeze was denied. Though it doesn’t seem to stop people from asking, those are really, really hard to get if you’re a private plaintiff.

What’s the takeaway from this case? I’d say that there are two big ones. First, just because you can file a lawsuit that makes things sound bad doesn’t mean that a court after briefing and careful analysis is going to go along with your theory. Second, bitcoin escrow agreements are fraught with peril. I would personally be exceedingly reluctant to send money to anyone I hadn’t fully vetted and who hadn’t proved to me that they controlled the bitcoin that they were promising to send. The more escrow agents you have involved, the more chance there is for someone to run off with your cheddar. And it’s not like you can run to the bitcoin help desk to force ’em to send the crypto.

© 2023 The Block Crypto, Inc. All Rights Reserved. This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice.