Crypto has disrupted the fintech world and is now a mainstream investment option. But a goldrush into all thing crypto has also given birth to a lot of fly-by-night operators. Many companies have vanished by siphoning off investor money through Ponzi schemes or sometimes direct outright fraud. Due to lax regulation, Crypto is currently the finance world’s wild west.
A very interesting case, (please find supporting court documents attached) is that of Hugh and Brandon Austin. They are the principals of Florida based Valkyrie Group, which along with Wells Fargo entered into a private deed of agreement with GSR Markets for Bitcoin Asset Exchange/Transaction. Wherein Valkyrie Group were to provide Bitcoin to GSR Markets in exchange for $4 million. On account of which GSR Markets wired $4million to Wells Fargo IOLTA account (a fiduciary account) of Diana McDonald (Georgia Attorney) and her law firm. But when Valkyrie failed to provide Bitcoin, the Hong Kong based company GSR, repeatedly reached out to all the concerned involved, demanding for the return of its escrowed funds. In spite of receiving assurance from all concerned regarding the return of Bitcoin or money, GSR didn’t receive anything.
As a result of which GSR Markets Limited, the international trader of digital assets, had to sue attorney Diana McDonald for the sale of it’s Bitcoin. As per court orders dated March 8, given by Judge Mike Brown of the U.S. District Court of Georgia, defendant McDonald had shifted the escrowed funds of GSR into other accounts, including her own operating accounts. GSR was able to recoup only $2 million from McDonald after repeated emails and calls to the lawyer and the complaint filed by the company. As per the court’s order, McDonald’s multiple firm fiduciary trust or IOLTA and operating accounts were frozen. The complaint also alleges that McDonald disbursed the remainder of GSR’s escrowed funds, since McDonald acted as the escrow agent and was only permitted to release funds under specified terms.
Also, the company did sue Wells Fargo as GSR’s money was sitting in a Wells Fargo fiduciary account. Wells Fargo has been accused of doing nothing despite having the knowledge that McDonald had been running a Bitcoin scam through her trust account. However, being accused of defrauding the crypto currency trading firm, lawyer McDonald in response told the State Bar of Georgia that money was always safe in her firm’s trust accounts. Also, that there is no supporting evidence supporting the claim of misuse of funds of GSR Markets.
As per court documents, McDonald was only the closing attorney designated by the Bitcoin broker, Valkyrie Group, for the $4million purchase, where GSR was the buyer. McDonald assured the bar that there was a bitcoin business dispute between GSR and Valkyrie Group and accused GSR of making disparaging claims about her. She also testified that the bitcoins GSR intended to buy was to be supplied by her Australian client Alivic. But the agreement or the purchase deed signed by GSR didn’t include the name of Alivic. Rather the purchase deed was signed with Valkyrie Group, owned by Hugh and Brandon Austin. McDonald has also claimed in court proceedings that once GSR wired the money, she had immediately transferred $2 million to her client Alivic. However, multiple bank statements included in the court papers, including the ones for the trust account, don’t show any such transfer of $2 million.
According to the recently filed court papers, GSR seeks $18 million in compensation and punitive damages from the Valkyrie Group, McDonald and Wells Fargo. The company also claims that the Wells Fargo bank aided and abetted in the alleged fraud. Though McDonald had testified that she had not spent or disbursed any of the GSR’s escrowed funds, neither Valkyrie Group nor its principals Hugh and Brandon Austin, have responded to the civil suit of GSR. No attorney has appeared in court on Austin’s behalf. Even Wells Fargo has denied all the allegations filled by GSR Markets.
The Valkyrie Group is not only accused of the allegations by GSR Markets, but also by Benthos Master Fund, which is a crypto investment firm based out of California. Benthos also signed an agreement with Valkyrie Group for the purchase of Bitcoin, wherein Aaron Etra (New York based attorney) acted as the escrow agent. The trust accounts of Etra were used to facilitate the transactions and moving necessary funds.
The business relationship began with an initial purchase of $5 million worth of Bitcoin. The father-son duo claimed to locate third parties that sell large quantities of Bitcoin. On Aug 6, 2018, Benthos wires $5 million to Etra’s trust account and as per the agreement Bitcoin had to be transferred within fifteen days. Etra wired $3 million to an unknown account the very next day for obtaining Bitcoin. But the respondent demanded additional $850k for the release of Bitcoin which was declined by Benthos. Finally, on 28th Aug it demanded its $5 million back from Valkyrie, which it didn’t receive.
Though the agreement was subject to arbitration, Benthos filed a motion in a federal court, asking the court to stop Etra from conducting any transactions from his trust accounts. By the end of 2018, the court ordered Etra to produce all the relevant documents. Since Benthos felt that Etra was not complying with the court orders, it filed a motion against Etra for the contempt of court. Thereinafter Etra submitted the communications he had in possession and even returned $400k he had in his trust account.
But Benthos claims that it didn’t receive its expected Bitcoin, due to which the company began arbitration proceedings on June 28, 2019 on the basis of a clause in the escrow agreement. Attorney Etra failed to respond to the court proceedings despite receiving formal notices. Thus the United States District Court for Southern District of New York awarded Benthos an amount of $5,254,561 including the damages and the arbitration cost along with the pre-award interest.
On reading the evidence in these cases, there seems to be some common actors linking both the frauds. The question is that whether the OTC market for Bitcoin is being scammed by one sophisticated middlemen leveraging unscrupulous attorneys or is there another plausible reason behind these frauds?
(Supporting court documents can be downloaded here)