In the United States, fraud claims can be brought under federal or state law, by federal or state prosecutors when criminal in nature, or by private litigants when civil in nature. Although there are similarities between federal and state law, there is no uniform law governing fraud claims, and no single entity is responsible for enforcement. Generally, both federal and state law allow a private litigant to pursue fraud claims when one party deliberately deceives another party for some financial advantage or benefit, causing harm to the other party in the process.
Elements of Fraud
Generally, a civil fraud claim brought pursuant to US federal or state law must allege:
The specific elements of a fraud claim may vary by jurisdiction and by the specific type of fraud alleged.
In general, fraud claims are subject to a heightened pleading standard, meaning that the specific allegations of fraud – who, what, where and when – must be described “with particularity” in the civil complaint that initiates a private lawsuit.
Who May Bring a Fraud Claim
Federal prosecutors with the US Department of Justice (DOJ) and state and local prosecutors bring criminal charges against defendants who engage in fraud. Federal prosecutors commonly charge defendants in a variety of financial fraud schemes, including bank fraud, government contracting fraud, healthcare fraud, mortgage fraud, tax fraud, embezzlement and misappropriation, bribery, and corrupt payments to foreign officials.
Private litigants cannot directly prosecute criminal charges but may help initiate criminal investigations by reporting fraud to law enforcement. Private litigants who act as whistle-blowers and bring certain information regarding fraud and corruption to the attention of law enforcement may also recover a percentage of any settlement or financial penalty resulting from the investigation or prosecution.
Federal prosecutors in the DOJ are also responsible for investigating and litigating civil fraud claims brought on behalf of the federal government. State and local prosecutors also pursue civil fraud claims on behalf of their local governments and citizens.
Private litigants may also bring civil fraud claims in lawsuits filed in federal or state court, depending on the circumstances, and allege fraud based on federal or state law. Some of the specific types of fraud claims are addressed more fully below.
Fraudulent Misrepresentation/False Statements
Fraudulent misrepresentation – fraud arising from a false statement – is the offense commonly understood to be a claim for fraud. To state a claim for fraudulent misrepresentation, and using New York law as an example, a plaintiff must allege that:
A plaintiff must also have taken reasonable steps to protect itself against reliance on false statements. In other words, a plaintiff must exercise due diligence in discovering the fraud. Only where the plaintiff is justified in relying on the false statement can it succeed in such a claim.
Another form of fraud arises under the False Claims Act (31 USC §§3729–3733 – FCA), which is a federal statute that is often invoked in the context of government contractor fraud. The FCA provides that any person who knowingly submits a false claim for payment to the government is liable for double the government’s damages plus a penalty for each false claim. While the FCA allows the United States government to institute actions alleging such claims, it also allows private whistle-blowers to bring lawsuits on the government’s behalf against those who have defrauded the government. These are called “qui tam” suits. The whistle-blower may receive a percentage of any funds recovered.
The Foreign Corrupt Practices Act of 1977 (15 USC §§78dd-1, et seq – FCPA) makes it unlawful for certain people and entities to make payments to foreign officials in order to obtain or retain business. While the FCPA is widely known for its criminal provisions, it also provides for civil enforcement actions.
Only the DOJ has authority to pursue criminal actions under the FCPA, but both the DOJ and the US Securities and Exchange Commission (SEC) have civil enforcement authority. The DOJ and SEC routinely co-operate in parallel criminal and civil investigations of FCPA violations. The DOJ and SEC also bring civil lawsuits for violations of the FCPA against companies and individuals who aided and abetted or recklessly provided substantial assistance to an FCPA violator.
In most US jurisdictions, there is no express private cause of action for giving or receiving corrupt payments. Nonetheless, allegations that an individual or entity received or provided corrupt payments may help to establish fraudulent intent in a civil lawsuit.
Conspiracy to Commit Fraud
Under both federal and state law, a conspiracy is an agreement between two or more people to commit an illegal act. To prove a conspiracy to commit fraud under federal law, a party must establish the elements of conspiracy and its underlying fraudulent purpose.
The typical elements of a conspiracy to commit fraud are:
A victim of a conspiracy may sue and recover damages from each participant involved in the conspiracy, regardless of the participant’s level of participation. A civil conspiracy claim allows a victim to pursue participants in the conspiracy who may have more funds or higher insurance policy limits, even if those participants played a minor role in the conspiracy.
Misappropriation is the intentional use of another person’s funds for unauthorised purposes. Misappropriation most commonly refers to situations in which the defendant was in a position of trust or a fiduciary, such as a trustee of a trust or an administrator of an estate.
If a party comes to the unfortunate realisation that its agent has accepted a bribe, it may pursue certain civil claims against its agent as the recipient of the bribe, as well as the payor of the bribe.
For example, if a US corporation learns that its CEO has accepted bribes from a vendor in exchange for steering contracts to that vendor, it may file suit against its CEO and the vendor. It could allege claims for fraud or fraudulent misrepresentation, conspiracy to commit fraud, breach of fiduciary duty, or inducement to breach fiduciary duty, among others.
Civil Causes of Action: State
While there is no express private right of action under most federal and state anti-bribery statutes, many states recognise a civil cause of action for fraud based on bribery-related allegations.
Civil Causes of Action: Federal
Federal law does not establish a general private right of action for bribery. Private litigants may file suit under the civil provisions of the Racketeer Influenced and Corrupt Organizations Act (18 USC §1964 – RICO) if the bribe payments were made as part of a pattern of “racketeering activity”. If the bribery was part of a scheme to induce anti-competitive conduct such as price-fixing, a private litigant may sue under the Clayton Act (15 USC §13(c)). RICO and the Clayton Act provide for treble damages and attorney’s fees to successful plaintiffs. Most often, however, businesses injured by bribery sue for damages using common law fraud claims.
Under most state laws, facilitating or assisting the commission of fraud gives rise to an independent cause of action for aiding and abetting fraud. The typical elements of a claim for aiding and abetting fraud are:
Allegations that the defendant should have known about the fraud are not enough. Instead, state law typically requires the plaintiff to show actual knowledge of the fraud.
To succeed with an aiding and abetting claim, the plaintiff must also show that the defendant provided substantial assistance. Substantial assistance exists where the defendant takes an affirmative action that allows the fraud to proceed, and that action proximately causes the harm alleged. Providing routine business services for an alleged fraudster ordinarily does not constitute substantial assistance.
In one case, the plaintiff, a business investor, sued a bank that allowed its customer to deposit USD750,000 he stole from the plaintiff. The customer defrauded the plaintiff in a scheme involving the deposit of funds into an escrow account at the bank, which the customer claimed would be used to secure loans from other banking institutions and underwriters. The bank’s vice president allowed the customer to name the account an escrow account even though the procedures for setting up an escrow account were not followed. The vice president wrote a letter on the bank’s letterhead, falsely inflating the account balance. The customer also paid the vice president USD100,000 for his assistance. Under these facts, the court found that the bank’s inaction was sufficient to show “substantial assistance” to state a claim for aiding and abetting fraud because banks have a duty to safeguard deposited funds when confronted with clear evidence that those funds are being mishandled.
In another instance, a court found that the plaintiff failed to state a claim for aiding and abetting fraud where a bank allowed its customer, the perpetrator of a Ponzi scheme, to transfer funds between various accounts. The court held that allowing a customer to transfer funds was a routine business service and not “substantial assistance”.
Each state in the United States has its own statute of limitations for fraud, ranging anywhere from two to six years. Under New York law, an action for fraud must be commenced either within six years of the date of the alleged fraud, or within two years of the date the plaintiff discovered the fraud or could with reasonable diligence have discovered it.
Federal law also imposes limitation periods that vary by statute. For example, the Securities Exchange Act of 1934 (15 USC §§78a et seq) requires that an action be brought two years after the discovery of the fraud, or five years after the fraud occurred, whichever is earlier.
In general, a plaintiff who obtains a judgment for fraud against a defendant is on par with other unsecured creditors and does not have any special priority over the defendant’s assets. In addition, a plaintiff in a civil action normally cannot recover proceeds of fraud beyond the damages it suffered. Where the government has instituted a civil or criminal action for fraud, a defendant may be required to disgorge the proceeds of the alleged fraud. Those funds may be used as restitution to compensate victims.
Where the entity or individual alleged to have engaged in fraud is insolvent, different rules govern. For example, dozens of states have enacted the Uniform Fraudulent Transfer Act (UFTA), now known as the Uniform Voidable Transactions Act (UVTA), which permits creditors to void a debtor’s transaction when the debtor engaged in a transaction with the intent to defraud a creditor, or when the debtor made a transfer without receiving “reasonably equivalent value” in certain circumstances. The US Bankruptcy Code also provides recourse to creditors seeking to avoid fraudulent transfers.
Under those laws, a victim of fraud may, in some instances, take priority over other creditors seeking to recover from the fraudulent actor. For example, under federal bankruptcy law, a trustee may avoid a transfer of a debtor made with the intention to defraud a creditor so long as the transfer occurred within the two years prior to the debtor’s bankruptcy filing. Either the trustee or an individual creditor may bring an action seeking to avoid the fraudulent transfer. If a fraudulent conveyance is shown, the creditor will be able to claw back the portion of the fraudulent transaction that satisfies its individual claim.
The preference or priority of a fraud victim may depend on whether the property it seeks to claw back is traceable or identifiable. In many instances, the victim of fraud does not take priority over other creditors.
A victim of fraud may also bring other claims arising out of the fraud to recoup lost property or damages. Those claims include unjust enrichment or conversion, for example.
An action for unjust enrichment allows a plaintiff to try to recoup a benefit that was wrongfully retained by a fraudulent party. Although the elements differ slightly from jurisdiction to jurisdiction, in general a plaintiff must prove that:
A claim for unjust enrichment sounds in equity. An essential inquiry is whether it is against equity to allow the defendant to retain what is sought to be recovered.
Where a fraudster has intentionally and without authority taken personal property belonging to someone else, the owner may allege a claim for conversion to have the property returned. The plaintiff must allege that:
Although exceptions exist, generally an action for conversion can only proceed where the property taken is tangible – for example, a bond, promissory note, check, deed or manuscript. In some instances, an action for conversion of money may be brought where it relates to specifically identified funds.
No specific rules of pre-action conduct apply in relation to fraud claims. Certain related claims, such as conversion, require the plaintiff to make a demand on the defendant for the return of the property. In general, however, there are no set requirements of pre-action conduct prior to the filing of a claim for fraud.
A victim of fraud has several options to prevent a defendant from dissipating or secreting assets prior to a judgment. Depending on the underlying cause of action, a fraud victim may be able to obtain a preliminary injunction or restraining order preventing the pre-judgment dissipation of assets. A plaintiff may also be able to obtain a pre-judgment attachment order under state law.
Fees for filing such motions vary from jurisdiction to jurisdiction. In addition, the plaintiff must often post security when seeking to restrain assets prior to judgment. The amount of security is typically within the discretion of the court and may vary with the amount restrained.
Under Rule 65 of the Federal Rules of Civil Procedure, a plaintiff may move for a preliminary injunction or temporary restraining order to restrain a fraudster from dissipating assets. These are in personam remedies that operate against the defendant and, in some circumstances, third parties acting in concert with the defendant.
Where the plaintiff seeks only a general award of money damages, neither a preliminary injunction nor a temporary restraining order is available. The US Supreme Court has held that a federal court may not issue a preliminary injunction preventing defendants from disposing of their assets pending adjudication of a claim for money damages. By contrast, where a plaintiff seeks equitable relief such as the return of specifically identified property, those pre-judgment restraints may be available.
A plaintiff seeking a preliminary injunction or temporary restraining order may make a motion ex parte against the defendant, but faces a high bar in doing so. A party seeking a preliminary injunction or temporary restraining order must show:
Federal courts have found preliminary injunctions appropriate where the defendant intends to frustrate the judgment by transferring assets out of the jurisdiction.
Different states provide different mechanisms to prevent the dissipation of assets. Most states provide procedures for pre-judgment attachment. Under New York law, for example, an order of attachment may be granted in certain circumstances where the plaintiff shows it is entitled to a money judgment and the defendant has taken steps to dispose of or secrete property to frustrate the judgment. Attachment orders may operate either in personam or in rem, depending on the circumstances.
Mere allegations of fraud do not justify pre-judgment attachment. Instead, the plaintiff must present evidence of intent to defraud.
Failure to Abide by Injunction or Attachment
If a defendant fails to abide by a preliminary injunction, temporary restraining order or pre-judgment attachment, the plaintiff may move for an order holding the defendant in contempt. A contempt order may include a requirement for the defendant to pay a fine for failing to abide by the court’s prior order.
Federal Rule of Civil Procedure 26 allows parties to obtain discovery “regarding any matter, not privileged, that is relevant to the claim or defense of any party.” The US Supreme Court has liberally construed this standard to encompass any matter that could reasonably bear on any issue that is or may be in the case. To the extent a party’s financial information relates to specific elements of a claim or defense, a defendant may be required to disclose his or her assets. A plaintiff may seek discovery through both the production of documents and the provision of testimony at a deposition.
Ordinarily, a party seeks asset discovery from the defendant or from third parties once the court has entered judgment on the claim. In those circumstances, the plaintiff has broad rights to seek discovery without any prior approval from the court, and may even seek discovery of assets located in other jurisdictions.
Courts also have discretion to permit asset discovery even before judgment. Typically, a plaintiff seeking pre-judgment asset discovery has filed a motion for preliminary injunction or sought pre-judgment attachment and is seeking asset discovery in aid of that motion. Discovery seeking asset disclosure ordinarily does not require an undertaking by the claimant.
If the defendant fails to respond to discovery demands, the plaintiff must first attempt to resolve the issue by conferring with the defendant. It may then file a motion to compel under Federal Rule of Civil Procedure 37(a). If the court grants the motion to compel but the defendant still refuses to produce the discovery, the plaintiff may then seek sanctions, which may include significant daily fines until the defendant complies.
Under US law, the duty to preserve evidence exists independent of a court order directing such preservation. Federal Rule of Civil Procedure 37(e) imposes a duty on a party to preserve evidence from the time litigation can reasonably be anticipated. Often, once litigation is reasonably anticipated, a party will issue what is known as a “litigation hold” to custodians who may have relevant documents.
If a party fears that evidence may be destroyed or suppressed despite the obligation to preserve it, the party may move for a preservation order. It must demonstrate that the order is necessary and not unduly burdensome. First, the movant must show that without a court order there is a risk that relevant evidence will be lost or destroyed. This is often shown by demonstrating that the opposing party has previously destroyed evidence or has inadequate retention policies. Second, the movant must also show that the proposed preservation steps will be effective but not overly broad.
In general, courts are not inclined to wade into discovery disputes between parties. However, where necessary and upon the requisite showing, courts will order relief.
Courts in the United States are not likely to allow a physical search of an opposing party’s documents by another party. Generally, parties and their attorneys are responsible for collecting and disclosing relevant documents. If there is a dispute as to whether certain documents are relevant and required to be disclosed, a court may order that they be reviewed in camera by the court.
Subject to certain requirements, a party may serve a subpoena upon a non-party commanding the production of documents or the provision of testimony at a deposition. Courts are sensitive to non-party discovery and seek to balance the burden placed on non-parties with the need for the requested documents or testimony. Courts will quash or modify a subpoena to a non-party if it imposes an undue burden or expense.
Whether a subpoena imposes an undue burden is decided on a case-by-case basis and involves a number of factors, including:
Although the court considers all of these factors in determining whether a subpoena is overly burdensome, successful challenges to a subpoena often focus on the breadth of the request. In requesting documents from a third party, it is therefore advisable to narrowly tailor the request so it is not quashed or modified on grounds of overbreadth.
In many cases, a protective order will govern how documents may be used and with whom they may be shared. Typically, those orders limit the use of documents to the litigation at issue, although they may also permit use of the documents in related foreign proceedings.
Under Federal Rule of Civil Procedure 27, before an action is filed, a party may petition the court to “perpetuate testimony about any matter.” The petition must show:
Because the primary purpose of Rule 27 is to preserve evidence that is otherwise likely to be lost, most courts have not permitted Rule 27 to be used as a fact-finding tool.
Many states also have pre-litigation discovery rules, some of which are broader or narrower than the federal rule. In New York, CPLR Rule 3102(c) provides that, before an action is commenced, disclosure to aid in bringing an action or to preserve information may be obtained by court order. Despite the seemingly broad language, courts in New York have interpreted the rule narrowly to allow for discovery only where a putative plaintiff needs to obtain the identity of a necessary party or where pre-litigation discovery is needed to preserve evidence. New York courts have rejected pre-litigation discovery where it was sought to uncover proof of an intended cause of action or to determine if that cause of action might exist.
In general, motions made without notice to an adverse party are disfavoured, and are appropriate only in a narrow set of circumstances. These include instances of urgency, such as where immediate and irreparable loss will result before the adverse party can be heard to oppose a motion, or where there is a danger that notice to an adverse party will result in that party’s flight, the destruction of evidence or the secretion of assets.
Certain types of motions, such as preliminary injunctions or temporary restraining orders, better lend themselves to being filed ex parte, as the relief requested may concern an opposing party’s destruction of evidence or secretion of assets. Nevertheless, in filing a motion ex parte, counsel should be aware of the additional hurdles necessary to justify granting relief without notice to the opposing party.
In the United States, the DOJ and state prosecutors are responsible for prosecuting criminal cases. While victims of fraud may inform the relevant investigating bodies – such as the FBI or state investigators – of possible fraud, there is no formal method for victims to commence a criminal action.
Parallel proceedings may occur if the government has instituted criminal proceedings at the same time as a civil proceeding, or vice versa. Civil and criminal litigation have different discovery rules, leading to questions about what kind of discovery can be used in which matter. A court may also stay one action until the conclusion of the other. Because of the rules governing criminal prosecutions, it is extremely unlikely that a criminal case would be paused to allow for the continuance of a civil case, so stays in parallel proceedings generally concern civil cases.
Whether a stay of civil proceedings is appropriate turns on the particular circumstances of the case. A civil case may be stayed where continuing would result in undue prejudice or a substantial interference with a defendant’s constitutional rights. The mere existence of a criminal case will not automatically stay a civil proceeding; the civil case will only be stayed if there are unreasonable conflicts between the parallel proceedings.
Where a defendant fails to appear within the required time or fails to answer a complaint, a plaintiff may seek a default judgment, which is a binding judgment in favour of the plaintiff and does not require a trial. The default judgment may be set aside by the court in limited circumstances, such as where the defendant was not given proper notice of the proceeding.
A plaintiff may move for summary judgment prior to trial. If the plaintiff can show there is no genuine dispute as to any material fact and the plaintiff is entitled to judgment as a matter of law, the court will grant summary judgment in favour of the plaintiff without a trial. A motion for summary judgment may ordinarily be filed at any time until 30 days after the close of discovery.
As discussed in 1.1 General Characteristics of Fraud Claims, claims sounding in fraud are subject to a heightened pleading standard. Federal Rule of Civil Procedure 9(b) requires allegations of fraud to “state with particularity the circumstances constituting” the fraud. State rules generally impose a similar heightened pleading requirement.
Fraud claims therefore require more detail than other types of claims. Merely alleging that some type of fraud took place is not enough – the allegations must be supported by particular details describing the fraud.
A plaintiff can sue “John Doe” or “Jane Doe” defendants for fraud. These fictitious defendants are persons that cannot be identified by the plaintiff before a lawsuit is filed. Given that the statute of limitations for fraud can be short, a litigant is under a certain amount of pressure to file a claim, even if all the alleged fraudsters are not known at the time of filing.
Generally, filing a claim against a fictitious defendant tolls the statute of limitations. The plaintiff may later substitute the name of the true defendant for the fictitious defendant once that information is known. Once the complaint is filed, however, a plaintiff must work quickly to determine the true identity of the fraudsters. If the plaintiff’s delay in doing so is unreasonable, the court may not allow amendment of the complaint, and any claim may become barred by the statute of limitations.
A party may serve a subpoena on a non-party, compelling him or her to testify or produce documents or other evidence, either before or at trial. If a witness defies the subpoena, including by refusing to give testimony or produce documents, he or she can be held in contempt.
Under US law, corporations that commit fraud may be held liable in the same manner as an individual who committed fraud. The doctrine of respondeat superior is applicable to corporations, so a corporation can be held criminally and civilly liable for actions taken by its employees or agents – including its officers or directors – as long as the action occurs within the scope of the employee’s employment and is for the benefit of the corporation. This rule reflects the basic idea that a corporation can only act through its employees and agents.
A corporation is not liable, however, for fraudulent acts of an officer, agent or employee taken outside the scope of the person’s employment, unless they were ratified by the corporation. Likewise, if a fraudulent action was taken solely to benefit the individual and not the corporation, the corporation ordinarily will not be held liable.
A fundamental tenet of US corporate law is that a company – which includes not only corporations, but also limited liability companies and limited liability partnerships – is separate and distinct from its owners. The corporate form was created to allow shareholders and owners to invest without incurring personal liability for actions taken by the corporate entity.
In certain instances, however, courts may exercise the equitable doctrine known as “piercing the corporate veil” to disregard the separation between entity and individual, and hold the owners liable for the actions of the company. The doctrine of piercing the corporate veil is rarely invoked and applies only in exceptional circumstances, including cases where the corporate form was abused to effect fraud or injustice.
Claims seeking to pierce the corporate veil and hold individuals liable for the actions of the company are governed by the law of the state of incorporation. Most jurisdictions have recognised multi-factor tests that must be met to determine if veil-piercing is appropriate.
Under New York law, a plaintiff seeking to pierce the corporate veil must show that the owners exercised complete domination over the corporation with respect to the complained-of transaction or action, and that such domination was used to commit a fraud or wrong against the plaintiff that resulted in injury. The party seeking to pierce the corporate veil must establish that the owners, through their domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against that party such that a court in equity will intervene.
A shareholder derivative action is a lawsuit brought by a shareholder, or group of shareholders, on behalf of a corporation. Shareholder derivative actions allow individual shareholders to bring a lawsuit to enforce a corporate cause of action against officers, directors or third parties. Generally, a shareholder can only bring a suit on behalf of a corporation when the corporation itself has refused to bring a valid cause of action, unless the shareholder can show adequate grounds for not demanding action from the corporation first. This most frequently occurs when the defendants are corporate directors or officers. If a derivative action is successful, any damages or proceeds go to the corporation and not directly to the shareholder who brought the lawsuit.
The Federal Rules of Civil Procedure allow for flexibility in pursuing fraud claims against multiple parties, including those outside the United States, as long as jurisdictional requirements are met and the party is properly served. Indeed, where an absent party holds a significant interest in the case, joinder of the party may be required.
A US court may exercise jurisdiction over a person or company located outside the relevant state only if it has personal jurisdiction over that person. State statutes known as “long-arm” statutes prescribe the circumstances where a court may exercise jurisdiction over a foreign person or company. For example, New York’s statute permits jurisdiction where:
Federal courts may exercise personal jurisdiction when authorised by the applicable state long-arm statute and in certain other cases.
In addition to satisfying statutory requirements, the plaintiff must show that exercising jurisdiction is consistent with constitutional due process. The Due Process Clause generally requires that the defendant have certain minimum contacts with the state relating to the underlying controversy, and that exercising jurisdiction would not offend the traditional notions of fair play and substantial justice.
Plaintiffs seeking to join overseas parties must comply with the service of process requirements. Federal Rule of Civil Procedure 4(f) provides for service upon an individual outside the United States pursuant to the Hague Service Convention or another internationally agreed means of service. Where there is no such service treaty between the United States and the foreign country, Rule 4(f) requires that service be “reasonably calculated to give notice” of the suit by one of the following means.
If a party maintains a presence in multiple countries, it may make sense to choose the country in which to effect service based on the ease of satisfying the applicable service requirements for that country.
Rule 20 of the Federal Rules of Civil Procedure allows for the joinder of additional parties after the litigation has begun, as long as the claims relating to the party arose from the same transaction or occurrence and involve common questions of law or fact. Under Rule 14, a defendant may implead an absent third party who may be liable to the defendant for the plaintiff’s claim. Finally, other interested parties may intervene in the action under Rule 24.
Federal Rule of Civil Procedure 19 may require the joinder of other parties to the case. That rule serves to protect the interests of absent parties, and also protects the parties from being sued in multiple jurisdictions.
Courts consider a number of factors in determining whether an absent party should be joined in the action, and the effects of not joining the party if doing so is impossible or impractical. For example, a court considers:
If the court is unable to join a foreign required party – for example, because it lacks jurisdiction – it might be required to dismiss the action.
Once the plaintiff obtains a judgment in a fraud action, the plaintiff may seek to execute the judgment against the defendant’s assets in several ways. Execution procedures vary from state to state. Federal courts follow the state law procedures of the state where they are located.
In New York, for example, a party with a judgment may serve restraining notices on the defendant or other parties with custody of the defendant’s assets. Those notices have the effect of freezing assets while the plaintiff pursues further execution procedures. Parties may serve those notices without any prior approval from the court.
A plaintiff then executes against the assets by arranging for the marshal or sheriff to serve a writ of execution on the party with custody of the assets. The same process may be used to collect a debt that a third party owes to the judgment-debtor in satisfaction of the judgment. If the custodian refuses to turn over the property, the plaintiff may file a “turnover” action asking the court to order the custodian to comply.
In New York, a plaintiff may file a turnover action against a third-party custodian of property even if the property itself is located outside the United States. Because a turnover proceeding is an in personam proceeding against the custodian, New York requires only that the custodian itself be subject to the court’s jurisdiction. Other states are divided on whether they permit extraterritorial turnover actions.
As noted in 2.1 Disclosure of Defendants' Assets, after the plaintiff obtains a judgment, United States law permits liberal discovery into the judgment-debtor’s assets, even those located overseas. Asset discovery is therefore a major component of most post-judgment collection efforts.
Enforcement of Foreign Judgments
Where a plaintiff holds a foreign judgment against a defendant, the plaintiff must obtain recognition of the judgment in the United States before seeking to execute it. Unlike with arbitral awards, the United States is not a party to any international treaty governing the recognition of foreign judgments, and there is no general federal law that applies. Recognition of foreign judgments is therefore almost entirely a matter of state law.
Each state has its own statutes or principles governing the recognition of foreign judgments. Most states, however, have adopted some version of the Uniform Foreign-Country Money Judgments Recognition Act, a model law that provides uniform standards and procedures for courts to follow. The Uniform Act generally prohibits courts from re-examining the merits of a foreign judgment. Nonetheless, courts may decline to recognise a foreign judgment, for example, if the foreign court lacked jurisdiction, if the defendant did not have proper notice of the proceedings, or if enforcing the judgment would violate US public policy.
New York state courts are often a good forum for seeking recognition of foreign judgments. New York has relatively narrow grounds for non-enforcement; it has expedited procedures for obtaining summary judgment in a recognition action; it takes a broad view of post-judgment asset discovery and execution; and many financial institutions and commercial counterparties with custody of the defendant’s assets are located there. Once a plaintiff obtains recognition of a foreign judgment in one US state, it is relatively easy to have that judgment recognised in other US states as well.
The Fifth Amendment to the US Constitution provides individuals with a privilege against compelled self-incrimination. Individuals cannot be forced to give testimony, in the form of answering questions or providing information, that could implicate them in a crime. Invoking that right is often referred to as “taking the Fifth”.
Invoking the Fifth Amendment
An individual may invoke the Fifth Amendment if the following three conditions are met:
The self-incrimination requirement means that individuals who have received immunity or a pardon for a crime, or who have already been convicted and sentenced, may not invoke the Fifth Amendment to avoid giving testimony. Such testimony could not be used to prosecute the individual, and thus is not incriminating.
Consequences of Invoking the Fifth Amendment
The consequences of invoking the Fifth Amendment differ in criminal and civil cases.
In a criminal case, a defendant’s silence or refusal to testify on Fifth Amendment grounds cannot be used as evidence. A prosecutor cannot make the argument that the defendant’s silence implies guilt.
In a civil case, however, the judge or jury can draw an adverse inference from a party’s invocation of the Fifth Amendment. The individual’s silence can be interpreted to support liability.
As discussed in 2.5 Criminal Redress, that different treatment is a complicating factor in the case of parallel civil and criminal proceedings. It may lead to a stay in the civil case until the criminal case is resolved.
Complications in the Corporate Context
The Fifth Amendment’s self-incrimination clause does not apply to corporations. As a result, a corporation may not refuse to comply with a discovery obligation or answer questions on Fifth Amendment grounds, and can be compelled to provide testimony against itself. When a subpoena requests corporate records, those records must be produced, even if the corporate representative who is facilitating the response would be personally incriminated by that information.
A corporate representative can invoke the Fifth Amendment personally, and his or her silence cannot be used against him or her in a criminal matter. An employee may invoke the Fifth Amendment in response to a subpoena for oral testimony, even in his or her capacity as an employee of the corporation.
In both cases, however, the silence can lead to an adverse inference to support the liability of the corporation.
Despite the broad discovery procedures available in civil litigation in the United States, a foundational principle of the legal system is that the attorney-client privilege protects from disclosure of confidential communications between attorneys and clients made for the purpose of seeking or providing legal advice. This privilege promotes open and honest communication between attorneys and their clients.
Attorney work product – documents containing an attorney’s thoughts, impressions, opinions and legal conclusions – is also protected from discovery in most situations, although to a lesser extent than an attorney-client communication. The work product doctrine also provides protection for materials prepared by or for a party in anticipation of litigation.
The Crime-Fraud Exception
The attorney-client privilege does not apply to communications between the lawyer or client made for the purpose of committing or continuing a crime or fraud. This is known as the “crime-fraud exception”, and it prevents the abuse of the attorney-client privilege that would otherwise undermine the administration of justice. The same exception applies, in most respects, to the work product doctrine as well.
Courts construe the crime-fraud exception narrowly. The party invoking it must show two elements:
To determine the existence of a future crime or fraud, courts consider factors including:
The second element – whether the communication was made to further or induce the illegal act – often turns on the client’s intent in communicating with his or her attorney. The crime-fraud exception applies even if the attorney had no knowledge of the client’s intent when the communication was made. With respect to work product protection, the exception applies where the work product was created in aid or furtherance of criminal or fraudulent activity.
The crime-fraud exception may apply within the context of the litigation itself. For example, if a party to litigation represented through counsel that it could not find documents that had been requested in discovery, and that statement is revealed to be a misrepresentation, the opposing party may seek discovery into matters that would otherwise be protected from disclosure. In that scenario, a court may find waiver of the attorney-client privilege with respect to the party’s communications with counsel regarding the preservation, destruction or location of the documents.
Punitive or exemplary damages may be available in a civil fraud action in the United States, provided that additional requirements are met.
In New York, for example, courts may allow the recovery of punitive or exemplary damages where the defendant’s conduct was malicious, gross, willful or wanton, or evinced a high degree of moral turpitude. Some decisions also indicate that the fraud must have been aimed at the general public, not just at the plaintiff alone. Federal due process principles generally require the amount of punitive damages to bear a reasonable relationship to the compensatory award.
As described in 1.2 Causes of Action after Receipt of a Bribe, federal civil RICO claims and antitrust claims allow for treble damages and attorney’s fees. While such damages are not explicitly punitive, many courts and legal scholars have noted that they are at least partly punitive in nature.
In the United States, there is no general protection from disclosure for communications between banks and their clients; banks and other financial institutions are subject to the same discovery mechanisms as any other party. As discussed in 2.3 Obtaining Disclosure of Documents and Evidence from Third Parties, third-party financial institutions may be subject to subpoenas.
Nonetheless, certain laws aimed at protecting consumers govern the disclosure of financial information. Under the Gramm-Leach-Bliley Act, parties may be required to redact certain personal, non-public information such as account numbers and Social Security numbers before disclosing documents in discovery. Parties to litigation also often agree to a protective order limiting the use or disclosure of such information.
The federal Bank Secrecy Act protects from disclosure certain documents that banks generate when reporting suspicious or fraudulent activities to the government. Courts have also recognised a “bank examiner privilege” that protects certain communications between banks and their regulators from disclosure. Organisations such as the Federal Trade Commission and the Financial Industry Regulatory Authority also regulate the disclosure of financial information in certain situations.
US regulators treat crypto-assets as property, as well as securities, commodities, and money, depending on context. Crypto-assets, which are also commonly known as virtual currency, digital currency, cryptocurrency, or crypto, are a digital representation of value and, in many instances, convertible, meaning they have an equivalent value in real currency or act as a substitute for real currency. They are subject to taxation, freezing, and regulation, although a comprehensive federal regulatory regime for crypto-assets is still emerging. It is also worth noting that states have their own laws and regulations that may apply to crypto-assets and transactions.
Federal regulators, including the Internal Revenue Service (IRS), the Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Financial Crimes Enforcement Network (FinCEN), have issued overlapping regulations that subject issuers, owners, and traders of crypto-assets to different requirements depending on the transaction or circumstances at issue. For example, the IRS classifies virtual currency as property for the purposes of federal income tax laws, while the SEC has found that offers and sales of digital assets, such as “Initial Coin Offerings” and “Token Sales,” are securities offerings subject to the federal securities laws. The CFTC defines “commodity” to include virtual currencies subject to its regulation, while FinCEN regulates businesses involved in the exchange of crypto-assets as “money” exchangers.
Recently, the Infrastructure Investment and Jobs Act of 2021 created new reporting requirements for certain crypto-transactions. The Act expanded the definition of a “broker” subject to IRS reporting requirements to include those who help effectuate transfers of digital assets. It also expanded the definition of “digital assets” to include virtual currencies that are “recorded on a cryptographically secured distributed ledger or any similar technology.” Additionally, the Act expanded IRS rules requiring businesses to report cash transactions over USD10,000 to cover transactions involving digital assets.
In March 2022, President Biden signed an executive order directing the Consumer Financial Protection Bureau and the Federal Trade Commission to evaluate how they can use their enforcement tools to protect against fraud and abuse of crypto-transactions. The executive order also encouraged the SEC, CFTC, Federal Reserve, Federal Deposit Insurance Corporation, and Comptroller of the Currency to consider additional measures to protect crypto-asset markets and investors.
Federal regulators and law enforcement have issued warnings to the public regarding fraud and scams relating to crypto-assets. Although crypto-assets provide a new means of perpetrating common fraud schemes, the recovery of funds involved in such schemes is more difficult than in other fraud schemes, and many victims may never recover their losses.
For instance, although enforcement officials have obtained court orders to restrain or freeze crypto-assets, successfully freezing crypto-assets can prove difficult in practice. Digital assets are difficult to locate because they are typically held in encrypted digital wallets rather than in a bank or brokerage account. Regulators have thus attempted to freeze virtual assets as they are transferred through digital “exchanges” or online platforms. However, that approach also poses challenges where the currency passes through non-regulated exchanges and then into overseas bank accounts.
Questions will continue to emerge regarding the federal regulation of crypto-assets, including their scope, as there are hundreds of different types of crypto-assets. How federal regulators will expand their purview of crypto-asset regulation and co-ordinate with each other remains to be seen.
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Old Dog, New Tricks: Innovating Traditional Asset Recovery Tools to Recover Crypto-assets
Whether through civil channels or government seizure, it is getting easier for private parties to claw back fraudulently obtained cryptocurrency and make their asset portfolios whole again. For example, just recently, in February 2022, the US Department of Justice (DOJ) announced that they had seized USD3.6 billion in stolen cryptocurrency that was directly linked to the 2016 hack of the British Virgin Islands (BVI)-based crypto-exchange, Bitfinex (the now-infamous “Croc of Wall Street” case); victims of the hack are likely to eventually recover their lost funds through criminal restitution proceedings. The DOJ was able to trace the funds using blockchain analysis tools that pointed them directly to the couple accused of laundering the crypto-assets obtained from the Bitfinex hack. While this type of blockchain analysis uses new technology, it employs classic principles of asset tracing that follows implicated funds from their current location all the way back to the original wrongdoer. As these tools become more readily available to the legal community, the path for private individuals and companies to use them to recover stolen or wrongfully obtained cryptocurrency becomes clearer and easier to follow.
Because of cryptocurrency’s intrinsic nature on a public and historically accurate blockchain, most cryptocurrency transactions that happen on-chain can be efficiently and effectively traced with advanced forensic toolkits. The blockchains for the most popular cryptocurrency networks such as Bitcoin and Ethereum serve as a ledger of every transaction that has occurred using that particular network, including the sending and receiving of addresses, among other information. This data can be used in conjunction with forensics tools to group addresses under common control, graphically display connections among addresses, and, in many cases, identify which entities control those addresses.
Fundamentally, tracing cryptocurrency transactions is not all that different from tracing transactions involving traditional assets. While traditional asset tracing includes “following the money” by pouring over financial records such as bank account statements, payment ledgers, and trading history, tracing cryptocurrency assets uses the same principles but employs sophisticated software that analyses and graphically displays transactions on the blockchain in a fraction of the time. Proper use of such tools can efficiently lead to the identification of entities and/or individuals, and produce compelling evidence for use in civil and criminal litigation, which may ultimately provide the basis for victims to recover their assets.
Undoubtedly, tracing crypto-transactions comes with its own challenges. Certain techniques exist to try to cover one’s tracks on the blockchain. Additionally, not all cryptocurrency exchanges (or other crypto-services) collect quality “Know Your Customer” (KYC) information or comply with legal requests, which can impede the ability to ultimately link transactions to persons of interest.
In addition, because of the industry’s nascency, international governance rules related to cryptocurrency are constantly evolving. In the United States, the Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC), DOJ and Financial Crimes Enforcement Network (FinCEN) – among various other agencies – have jostled over authority and competed with each other for scarce enforcement resources. Even more so, internationally, the lines delineating jurisdictional responsibilities are not neatly drawn.
However, regardless of these challenges, effective recovery and enforcement mechanisms do exist and are being deployed with increasing effectiveness. In 2021 alone, the Internal Revenue Service (IRS) announced that they had seized USD3.5 billion worth of cryptocurrency, with the DOJ instituting a significant number of investigations and successful seizures of stolen cryptocurrency. The US government has already recovered USD3.6 billion from the Bitfinex seizure at the beginning of this year. Both globally and domestically, successful asset recovery campaigns are only increasing in number, demonstrating that traditional jurisprudential frameworks relating to asset recovery are continuing to be repurposed and developed for the recovery of cryptocurrency. As such, while challenges remain present, the various methods outlined below exist for obtaining compelling evidence as a basis for recovery efforts, and identifying practical uses of the law and the government to assist victims in swiftly recovering their assets.
Civil Asset Recovery
While the DOJ has seized increasing amounts of cryptocurrency over the years and generated flashy headlines in the process (ie, the takedown of Silk Road in 2013, the “Croc of Wall Street” case, etc), even the DOJ has limited resources when it comes to crypto-asset recovery campaigns. As such, victims are well advised to consider civil recovery options as part of an overall recovery strategy.
Civil asset recovery procedures
One such strategy involves the use of freeze letters and civil complaints, which – in tandem – can be used to warn fraudsters and custodians against dissipating assets and initiate legal action against those assets for eventual recovery. Even in cases where the identity of the fraudster may remain anonymous, victims may file “John Doe” complaints (ie, a complaint against persons unknown), in order to encourage or compel cryptocurrency exchanges to assist with identifying the wrongdoer. For example, in White v Sharabati, the plaintiff, Elizabeth White, a resident of New York, agreed to sell Ripple to Mr Sharabati (who was anonymous to her at the time) in exchange for bitcoin. While she sent her Ripple, she never received bitcoin in exchange. White realised she had been duped, but she didn’t know the identity of the person who had duped her. With the assistance of Kobre & Kim, White immediately filed a “John Doe” complaint describing the fact pattern and drawing upon statutes permitting the recovery of treble damages and attorneys’ fees to amplify her civil claims. After conducting further forensic analysis and tracing the funds to two crypto-exchanges, Bittrex and Poloniex, White subpoenaed the exchanges to determine Mr Sharabati’s identity and amended the “John Doe” complaint to specify and name Mr Sharabati as a defendant. After obtaining a default judgment in her favor, White sought enforcement of her judgment and ultimately made a sizeable recovery.
Relatedly, temporary restraining orders (TROs) and preliminary injunctions have also shown merit as US court-ordered legal instruments that can prevent the movement of fraudulently siphoned crypto-assets. In contrast to freeze letters and “John Doe” complaints, TROs and preliminary injunctions have proven useful when the identity of the perpetrator is already known and they are directed against a known custodian of the cryptocurrency, such as an exchange or a hosted wallet site. However, obtaining this type of relief requires a substantial showing. Indeed, to succeed in obtaining a preliminary injunction, a plaintiff must “establish that they are likely to succeed on the merits, that they are likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in their favor, and that an injunction is in the public interest.”
Relatedly, in common law jurisdictions – such as the United Kingdom – similar remedies have led to similarly successful results. For example, in ION Science Ltd and Duncan Johns v Persons Unknown, Binance Holdings Limited and Payward Limited, the claimants – alleging fraud of over GBP570,000 through various crypto-investments – filed an ex parte application for a worldwide freezing order against the assets and a disclosure order against Binance and Payward. The court granted the freezing order and disclosure orders compelling the exchanges to disclose the identities of the alleged fraudsters. The judgment was also significant because it considered the lex situs (location) of Bitcoin, holding that because the defrauded crypto-asset owner was domiciled in the UK and therefore the relevant participant in the Bitcoin network controlling the assets was located in the UK, the lex situs of a cryptocurrency is the jurisdiction in which the owner is domiciled. Furthermore, in the BVI, Norwich Pharmacal orders (court orders that force the disclosure of documents or information), which are also obtained ex parte, may be a similarly utilised means of securing key intelligence related to the beneficial ownership of a given entity. Importantly, the information gathered from such orders may be used to pursue a fraudster without notice to the wrongdoer, so long as the applicant applies, and the court agrees, to append a seal and gagging provision to the order.
It is important to think about how these procedural mechanisms can tie in to a globally co-ordinated effort to recover assets. For example, the strategies outlined above were implemented by Kobre & Kim to bring a lawsuit in the US on behalf of a Swiss company while local Swiss counsel pursued criminal charges in Switzerland. In this case, the clients sought the recovery of over USD50 million-worth of Ethereum sitting in their former CEO’s cold wallet. With the help of in-house blockchain forensics tools to identify where the assets were located and who had access to the wallet, Kobre & Kim filed a complaint in the Southern District of New York (SDNY) requesting that the cold wallet (and therefore, the funds) be returned to the exchange immediately. Although the representation was for a Swiss company, the SDNY was the appropriate jurisdiction because (a) the former CEO resided in New York City, and (b) an affiliated entity of the company that was involved in the dispute was also based in New York City. In tandem with the complaint, the legal team filed a preliminary injunction and a temporary restraining order to immediately prohibit the former CEO from intentionally dissipating the assets. At the same time, Swiss counsel aggressively pursued local criminal proceedings to inflict further lawful pressure. Due to the lawful pressure exerted on the former CEO, they were forced to come to the settlement table, turn over the cold wallet, and eventually provide a full recovery of the assets. This example shows that when victims have been defrauded of their cryptocurrency in a foreign jurisdiction, it is important to think strategically about how to leverage multiple pressure points quickly and efficiently.
An application pursuant to 28 US Code 1782 (“1782”) provides an additional method for victims of a given crypto-related fraud to obtain key evidence in support of cross-border enforcement and recovery campaigns. More specifically, a 1782 application may be deployed in connection with a foreign proceeding to obtain discovery in the US and gather evidence from exchanges, individuals, or any related party located in the US. Although the evidence is obtained in the US, the 1782 application grants victims the opportunity to submit key findings as evidence in a non-US proceeding where the fraudster or other players may be located. Alternatively, because 1782 applications may subject targets to subpoenas or force them to give testimony, they may be utilised defensively when entities or individuals have suspicious claims lodged against them. For example, in its representation of a cryptocurrency fund based outside the US, Kobre & Kim filed a 1782 application in the relevant federal district in order to force the other party to face a subpoena to support their factual contentions. As a result, the legal team used its expertise in cross-border discovery proceedings to identify the tight window in which the target would be traveling to the US and served the subpoena on them then.
Finally, where a plaintiff or victim is looking to trace or seize assets from a bankrupt adversary, there are a number of useful tools that US Bankruptcy Code Chapter 15 (“Chapter 15”) may provide in domestic and foreign bankruptcy proceedings. For example, when an exchange has been hacked and cryptocurrency is believed to have been directed to (or through) the US and there is a foreign insolvency proceeding pending, Chapter 15 may allow foreign insolvency representatives to obtain discovery rights in the US via Rule 2004 Discovery, which grants interested parties in bankruptcy proceedings the right to obtain broad discovery from adversarial parties. Moreover, with respect to recovery efforts, Chapter 15 allows foreign insolvency representatives to assert avoidance actions under the insolvency laws of foreign jurisdictions in an effort to recover crypto-assets or other property that were once transferred into the US.
In its representation of a UK-based crypto-exchange, Kobre & Kim – in part – utilised Chapter 15 filings and related discovery measures in order to bolster the exchange’s international recovery efforts. Specifically, the Chapter 15 petition requested recognition of the client’s ongoing UK creditors’ voluntary liquidation proceedings as the “foreign main proceeding” for the purposes of obtaining relief under Chapter 15 of the US Bankruptcy Code. The petition was granted by the judge after receiving no objections to the recognition request, and thus, the liquidators were granted relief in a USD32 million cybertheft.
It should be noted that Chapter 15 proceedings may also be used defensively. For example, a foreign creditor can apply for an automatic stay of the bankruptcy proceeding or other litigation within the US, and block attempts to seize the debtor’s assets in the US. More concretely, in the middle of US proceedings against Mt. Gox – a Japan-based bitcoin exchange that ceased operations in 2014 due to extensive losses and theft – it filed for Chapter 15 bankruptcy protection, which supplemented the primary court proceedings in Japan and stayed the ongoing US litigation against the exchange, including a class action filed on behalf of US customers.
While recovering stolen crypto-assets through traditional civil litigation mechanisms has proven successful in many instances, plaintiffs or victims may also benefit from seeking to have the US government file charges and/or seize assets against a given fraudster or wrongdoer. Importantly, choosing to present the case to law enforcement allows victims to pursue recovery of their stolen assets and take advantage of the government’s jurisdictional reach and discovery resources without the burden of civil litigation expenses.
While the United States remains the global leader in crypto-asset seizures and has shown an even greater commitment to further asset recovery efforts, as evidenced by the launch of the National Cryptocurrency Enforcement Team in February 2022, other foreign jurisdictions, such as the United Kingdom and Hong Kong, are actively – in conjunction with the DOJ – looking to develop jurisprudence and increase resources given the growing prevalence of global crypto-fraud.
In the United States, perpetrators of crypto-fraud may be held criminally liable for stealing assets, laundering stolen funds, misrepresenting the nature of cryptocurrency-related investments, or otherwise violating securities laws. Often, the government will institute an investigation and immediately seize or freeze certain assets at issue. Under general asset forfeiture provisions, “any property, real or personal, which constitutes or is derived from proceeds traceable,” to a violation of Section 1030 (relating to computer fraud) or Section 1343 (relating to wire fraud) is subject to confiscation by the US under either the general civil or criminal forfeiture provisions. Furthermore, if a crypto-asset is deemed to be “involved in” a violation of the US money laundering laws, then it, too, may be subject to criminal asset forfeiture proceedings by the US government (and laundering offenses allow commingled assets to be forfeited alongside the traceable proceeds).
Unlike an individual plaintiff who may not be able to afford to launch a full-scale investigation into a hack that targets hundreds or thousands of people, the government can use the vast investigative resources (including international co-operation treaties) at its disposal to benefit all victims. For example, if the perpetrators – or the assets themselves – are in a foreign jurisdiction, the government may seek assistance of those jurisdictions through traditional mutual legal assistance treaty (MLAT) requests, which allow the government to obtain documentary evidence that may otherwise be unavailable to an individual plaintiff. As just one of many examples, in November 2020, pursuant to an official MLAT request by the Brazilian federal authorities for assistance in a major internet fraud investigation, the US government seized crypto-assets valued at USD24 million that was sitting in the US. In Kobre & Kim’s own experience representing a UK-based insurance company that was targeted by a ransomware attack – which resulted in its company’s clients losing significant sums of cryptocurrency – the DOJ initially seized a de minimis value of assets domestically in the US. However, through MLATs and other foreign co-operation channels with Canada, the DOJ and Canadian authorities were able to freeze upwards of USD15 million in ransom funds.
Once the government identifies and charges an individual or entity who is allegedly engaged in criminal activity, victims may pursue the recovery of their assets through the government’s criminal restitution proceedings. Victims may formally seek “victim status,” which allows for victims to be granted statutorily mandated crime victim rights and permits them to have a more open line of communication with the prosecution team. Additionally, unlike narcotics matters – for example – once a criminal defendant is convicted of a crime involving seized assets, the US government is obliged to return the assets to the victims.
The US government’s obligatory return of seized funds may come in one of three flavors:
In total, since 2000, the DOJ has returned upward of USD11 billion in assets to victims of fraud. Specifically with respect to crypto-related fraud, the DOJ has outwardly highlighted that their 2022 budget requests include USD150.9 million more in resources to expand crypto-enforcement capabilities. Motivated by the proliferation of crypto-hacks and associated extortion activity in 2020, in April 2021 the DOJ formed a targeted task force to curtail ransomware attacks affecting the US. Beyond the expansion of resources dedicated to stopping crypto-related crimes, the DOJ has demonstrated success in recovering assets in high-profile matters. In addition to the Colonial Pipeline matter and the Bitfinex matter, in November 2020 the DOJ seized more than USD1 billion-worth of bitcoin in relation to Silk Road, the dark web marketplace on which users were able to buy and sell illicit goods – like narcotics and ransomware – with bitcoin.
As an advocate for a victim of a crypto-related crime, strategising regarding the right time to approach the government about an ongoing criminal action is crucial to an engagement’s success. Unsurprisingly, earlier is always better. Generally, if a government investigation stalls, the government will have limited resources and reduced interest in re-engaging their recovery efforts. Thus, when it comes to recovering stolen assets, time is of the essence, and engaging counsel to assist in a given asset recovery campaign should come as soon as possible after the fraud occurs, in order to preserve all available recovery options.
As an added challenge with respect to government investigations, individual actors may often have little to no control over the investigation, its timing, or the manner in which the government makes its decisions. Furthermore, although the government’s seizure powers are strong, the pace at which victims will actually receive their stolen crypto-assets may be slow, as it could take years for a criminal case to result in a conviction or for a civil forfeiture to be fully adjudicated. All of this is to say that – to mitigate the risks of recovering crypto-assets solely through government action – victims should consider parallel civil asset-recovery efforts for an added layer of security and efficiency.
Often, the public-private co-operation mentioned above has led to some of the most fruitful results for Kobre & Kim’s clients. For example, in its representation of the liquidators to a New Zealand-based crypto-exchange, Kobre & Kim was able to assist the government in identifying the relevant fraudsters and lead the authorities to the stolen, laundered crypto-assets, by utilising enhanced forensic tracing capabilities and existing co-operation channels with the government.
As detailed above, when it comes to recovering stolen crypto-assets, victims and potential plaintiffs have many options at their disposal. Enhanced blockchain forensic tracing capabilities have made it easier to identify relevant fund flows and pathways for recovery. In addition, from a civil litigation standpoint, many of the traditional instruments in the asset recovery toolkit with which practitioners are already familiar may be applied to crypto-asset recovery as well, so long as the advocate understands blockchain technology and the forensics tools available. The future of asset recovery will necessarily include merging the old with the new and continuing to innovate as the technology rapidly develops. Identifying counsel who has deep experience with asset recovery strategies and emerging blockchain technology is key to assessing the most viable criminal and civil litigation solutions for clients seeking to recover cryptocurrency assets.