Bitcoin Escrow Buying Gone Wrong in $4 Million Exchange Where $2 Million is Still Missing

    Cryptocurrency-related lawsuits are becoming more common and one of the latest is GSR Markets Limited v. Diana McDonald et al., Case 1:19-cv-01005-MLB, N.D. Ga. 3/1/19 [SDP].

    Plaintiffs alleged that, with the expectation that they’d receive bitcoin in return, they wired $4 million to a lawyer’s trust account. However, after writing the funds, they did not receive bitcoin and only half of the money wired was returned to them. According to the lawyer, she was a victim of a scam.

    Both the defendants and plaintiffs have different versions of the facts and the pleadings don’t seem to help much either. Plaintiff alleges that,

    “[Defendant] Valkyrie promised that it would provide Bitcoin to GSR Markets [plaintiff] in exchange for $4 million. In reliance on that promise, GSR Markets wired $4 million into the Wells Fargo IOLTA account (a fiduciary account) of McDonald and McDonald Law [also defendants]. After the bitcoin didn’t arrive, plaintiff says it demanded its money and only received half, while the defendants kept the other $2 million. Plaintiff is a Hong Kong company and all of the defendants are America.”

    Plaintiffs continue to allege that it acted as the broker for Alivia Corporation Pty, Ltd. (“Alivia”). Further,

    “[o]n January 3, 2019, Plaintiff wired $4,000,000 into the Account, expecting that it would immediately receive 1,000 Bitcoins from the Sellers. Based on that expectation, GSR Markets shortened those 1,000 Bitcoins from the Sellers. Based on that expectation, GSR Markets shorted those 1,000 Bitcoins, based on a purchase price of $3,635 per Bitcoin.”

    However, the plaintiff never received the bitcoin and alleges that it lost $380,000 to unwind its short position. Plaintiff also alleges that it received $2 million, but that the other $2 million is missing.

    Plaintiff’s complaint alleges breach of fiduciary duty and fraud against the law firm, and also requests injunctive relief. According to the complaint, the claim concerning breach of fiduciary duty is premised on

    “McDonald and McDonald law were to hold Plaintiff’s funds in the Account in trust for Plaintiff. As such, they owed certain fiduciary duties to Plaintiff, including the duty to act in good faith and in the best interest of Plaintiff.”

    Another defendant is Wells Fargo Bank, which held the IOLTA account. The allegation against the bank is aiding and abetting fraud.

    A temporary restraining order freezing funds held by the lawyer has been frozen by the court.

    The defendant lawyer filed a response and therein, claims she did not owe a fiduciary duty to the buyer, but rather, to the seller. Further, after wiring a portion of the funds to “unlock” the bitcoin wallet, the seller “informed Defendant McDonald that there was a delay in delivery of the Bitcoin to GSR because of hacking issues affecting storage systems.”

    It’ll certainly be interesting to see where this goes. The complaint is only the beginning.

    Disclaimer: this summary is solely for educational purposes, and are not for legal advice. It is an opinion only and is not authored for any past, present, or future client or employer.

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