Case Document 24 Filed 10/26/18 Page 1 of 19 UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK WINKLEVOSS CAPITAL FUND, LLC, Case No. Plaintiff, EX PARTE APPLICATION FOR PREJUDGMENT ATTACHMENT V. CHARLES SHREMDefendant. I. INTRODUCTION Concurrent with the Complaint against Charles Shrem ?led herewith, Plaintiff Winklevoss Capital Fund moves ex parte (and under seal) for prejudgment attachment of up to 5,000 bitcoinl owned or controlled by Defendant Shrem. WCF brings this application pursuant to New York Civil Practice Law and Rules sections 620], 6211 and 6212, and Federal Rule of Civil Procedure 64, which allows this Court to order attachment where authorized by state law. Defendant Shrem is new best known for being Bitcoin?s ?First Felon,? but this dispute arises from unrelated misconduct. In late 2012, Shrem was a budding Bitcoin entrepreneur. Amongst the people he sought to work with were Cameron and Tyler Winklevoss, principals, who were exploring investments in the virtual currency2 space. Along with soliciting By common convention, Bitcoin with a capital typically refers to the Bitcoin Network as a whol?wlfereas bitcoin?with a lowercase ?b??refer5?to thevirtual commodity-of the Bitcoin Network. 3 Though often referred to as a ?virtual currency,? ?digital asset,? ?digital currency,? or bitcoin is a commodity as de?ned in Section la(9) of the Commodity Exchange Act, 7 U.S.C. la(9). See In re Cofn?ip, Inc, No. 15-29 (CFTC Sept. 17, 2015). ?Virtual currency? is used throughout this document to refer to the entire ecosystem of virtual -1- Case Document 24 Filed 10/26/18 Page 2 of 19 investment in his new business, Shrem also offered to assist WCF in purchasing bitcoin. Believing Shrem?s statements that he was acting out of a desire to help, WCF sent Shrem a total of $750,000 to buy bitcoin, which Shrem promised to do ?at the best price.? Instead, Shrem stole money and used it to purchase bitcoin for himself. A forensic accounting reveals that Shrem diverted approximately $61,000 of the $750,000 entrusted to him to purchase bitcoin for his own account. At then prevailing prices, he was able to purchase and pocket approximately 5,000 bitcoin. Expert analyisis of the blockchain (Bitcoin?s distributed ledger that re?ects every bitcoin transaction ever made) performed by Elliptic Inc. (?Elliptic?), a bitcoin forensic investigation firm, shows that Shrem made a transfer of exactly that amount of bitcoin shortly after $61,000 went missing, and that 3,999 of this bitcoin was thereafter transferred to two U.S.-based bitcoin ?rms virtual currency wallet provider, Xapo, lnc., and another firm, Coinbase, lnc., that provices both wallet and exchange services. This application seeks an order attaching up to 5,000 bitcoin, or the equivalent, perfected through a levy on Defendant Shrem and levies on third party garnishees with a presence in New York that are in possession or custody of Shrem?s property. See N.Y. C.P.L.R 6214(b). Pursuant to NY. C.P.L.R.section 6214(a), the levy may reach ?any interest of the defendant in personal property.? WCF seeks to attach the following: any bitcoin, other virtual currency, or flat currency held by Shrem in four ?rms that provide virtual currency wallet and/or exchange services in New York, the?above-referenced Xapo Poloniex lnc.? an commodities and other asset types that are digital representations of value that function as a medium of exchange, a unit of account, and-?or a store of value. -2- Case Document 24 Filed 10/26/18 Page 3 of 19 bitcoin or other virtual currency held by Shrem in any other virtual currency wallets or exchanges, or stored electronically on a data storage device in his possession; andfor any other personal property (including intangible assets) held by Shrem necessary to satisfy the requested attachment, including his two powerboats and his two Maseratis. See N.Y. C.P.L.R. 6214(b); Hotel 7] Mes: Lender LLC Falor, 14 303, 312 (2010) (jurisdiction to attach intangible property in the hands of nondomiciliaries). Prejudgment attachment is necessary and appropriate. Shrem?s previous acts including not only the theft and subsequent cover-up at issue in this suit, but also Shrem?s failure to pay a criminal judgment of $950,000 that he owes to the federal government indicate an intent to secret assets for the purpose of evading creditors. Furthermore, the asset itself bitcoin is easy to move nearly instantaneously and without detection. WCF is likely to prevail on its claims and thus is entitled to an attachment order to ensure that assets are available to satisfy a judgment. II. EVIDENTIARY FACTS A. Shrem?s Theft from WCF As more fully alleged in the Complaint and described in the af?davits ?led herewith, this dispute arises from Defendant Shrem?s offer to help Plaintiff WCF in acquiring bitcoin. Declaration of Cameron Winklevoss (?Winklevoss Decl.?) 1 6. Believing that Shrem was acting in interests, WCF entrusted him with $750,000 to purchase bitcoin on its behalf when and where he deemed appropriate. Id. 111] 9-10. Shrem promised to buy the bitcoin ?at the best priceli-and to provide.a full .accountingJL?iLEstc?LB. Shrem, however, did not give WCF all the bitcoin it was owed, nor a full accounting. 1d. 11' 13-24, Ex. l-I. Shrem eventually sent WCF a total of 39,876.34 bitcoin and a partial report -3- Case Document 24 Filed 10/26/18 Page 4 of 19 purporting to detail some of his purchases. Id. 11, 24-25, Ex. 1-1. After WCF realized that it received thousands of bitcoin less than what it should have received, it engaged Matthew Gruchevsky from Paukner and Associates in late February 2013 to audit Shrem?s accounting. Id. 19. Gruchevsky concluded that Shrem could not account for approximately $61,000 of the $250,000 sent to Shrem in September and October 2012, which, at the time, would have purchased approximately 5,000 bitcoin. Declaration of Matthew Gruchvesky (?Gruchevsky Decl.?) 9. WCF repeatedly demanded a full accounting from Shrem. Winklevoss Decl. 111] 12-18, EX. E, G. Shrem also promised Gruchevsky that he would follow up with him and provide additional details after the two met in February and March of 2013. Gruchevsky Decl. 111] 5, 17- 22. Yet Shrem has never provided the additional details that would complete his accounting. Winklevoss Decl. 1! 27; Gruchevsky Decl. 1? 22. As WCF has only recently learned, Shrem?s evasive behavior and incomplete accounting masked the fact that he actually stole the $61,000 from WCF and converted it into 5,000 bitcoin for himself. In July 2017, WCF hired Elliptic, a London-based bitcoin forensic investigation ?rm that works with ?nancial institutions and law enforcement, to determine if Elliptic could trace any bitcoin held by Shrem. Winklevoss Decl. 11 28; Declaration of Tom Robinson (?Robinson Decl.?) 1] 4. Amongst its ?ndings, Elliptic discovered that Shrem likely received 5,000 bitcoin on December 31, 2012 just weeks after he conveniently could not account for 5,000 bitcoin that he should have purchased for WCF. Id. 1 40?41 Ex. G. Ellipt-ic?s investigation- tr-aeed themovemenLoB,999 of_those a series of blockchain addresses to addresses that are associated with bitcoin exchange Coinbase and bitcoin wallet Xapo. Id. 11 43?44, Exs. l, J, K. Speci?cally, an address associated with Shrem received -4- Case Document 24 Filed 10/26/18 Page 5 of 19 5,000 bitcoin on December 31, 2012, which was then transferred to an unknown address an hour later. Id. 11 41? 42, Exs. G, H. Eleven months later, the 5,000 bitcoin was transferred to a second unknown address. Id. 1 43, Ex. 1. Two minutes later, 2,500 bitcoin was transferred to an address associated with Coinbase. Id. 11 43, Ex. J. Six months later, 1,499 bitcoin was transferred to an address associated with Xapo. Id. 1144, Ex. K. B. Other Facts Indicating :1 Need for a Security Interest Shrem currently resides in Florida, and is therefore a nondomiciliary. Declaration of John Mason (?Mason Decl.?) (interviewer noting Shrem ?lives in Florida?), p. 17 (Shrem states, ?I?m taking a lot of Bitcoin and selling it as the price goes up and putting it into real estate, especially down in Florida where we live?). As part of his plea deal in 2014, he agreed to forfeit $950,000 to the federal government. USA v. Faielia, at S.D.N.Y. Case No. Dkt. No. 61 (Rakoff, .). To date, no Satisfaction of Judgment has been entered on the docket in Shrem?s criminal case, and the debt appears not yet to have been paid, Declaration of Sam Ferguson (?Ferguson Decl.?) '1 2, even though Shrem has acquired substantial assets since leaving prison in mid 2016. Indeed, Shrem has been on a steadily increasing buying spree since July of last year, paying cash for more than $4 million in real estate in and around Sarasota, Florida, (ii) two Maseratis, and two power boats. Most of these assets were acquired in just the last six months, including a $2.25 million property purchased on July 27, 2018; a $370,000 property purchased on June 19, 2018; two properties worth a combined $825,000 in March 2018; and one Maserati in July?2018: In addition, heappears to belendingmoney; alimitedJiability compan he formed recently made a loan of $250,000. Mason Decl. 11 3-8, Exs. 8-0. In addition to Coinbase and Xapo, Elliptic?s research indicates that Shrem may also hold bitcoin on other -5- Case Document 24 Filed 10/26/18 Page 6 of 19 exchanges including Bit?nex, Bitstamp, BITTREX, Changelly, Kraken, LiveCoin, Local Bitcoins, MtGox, Orderbook, and Poloniex, and that he likely holds bitcoin directly at various bitcoin addresses. Robinson Dec]. 1] For years before he went to prison, Shrem claimed to be one of Bitcoin?s ?rst millionaires. Mason Declabout the Bitcoirr, Baby, April 30, 2013, Observer, noting ?Mr. Shrem claims to have made more than a million dollars off of his bitcoin investments?). Shrem recently claimed in a media interview on New York?s WNYC that he spent most of his assets on his legal defense in 2014, and that he went to prison withjust $16,000, including just ?three or four bitcoin.? Id. He also said in that same interview that he did not track bitcoin while he was in prison; that after his release in July 2016 he worked as a dishwasher For six months as part of his parole; and that after his release he did not use a computer for two months, meaning he did not begin to reacquire bitcoin presumably with his earnings as a dishwasher until at least September 2016. Id. Shrem?s self-serving story of insolvency and hard-times lies in stark contrast to his publicly-visible hard assets of well over $4 million, most of which he acquired injust the last few months. 11' Shrem?s public statements that he only holds 33% of his assets in real estate are to be credited,3 Shrem?s net worth is currently over $12 million. Either Shrem has been incredibly lucky and successful since leaving prison, or more likely he ?acquired? his six properties, two Maseratis, two powerboats and other holdings with the appreciated value of the 5,000 bitcoin he stole from WCF back in 2012. 3 See Mason Decl. 1] 2, Ex. A (Shrem tweeted on November 5, 2017 that try to keep my assets balanced like this: 33% 33% cash, medals low risk liquid investments 33% income producing real estate?). -6- Case Document 24 Filed 10/26/18 Page 7 of 19 LEGAL STANDARD Pursuant to Federal Rule of Civil Procedure 64 a federal court has the power to issue a prejudgment attachment order whenever such an order would be authorized under state law. See Fed. R. Civ. P. 64(a) remedy is available that, under the law of the state where the court is located, provides for seizing a person or property to secure satisfaction of the potential judgment?); BSH Hausgemte. v. Kamhi, 282 F. Supp. 3d 668, 671 (S.D.N.Y. 2017). New York law permits a plaintiff to obtain an order for prejudgment attachment under the following four conditions: 1) Plaintiff has stated a claim for a money judgment; 2) Plaintiff has a probability of success on the merits; 3) One or more of the grounds for attachment listed in NY. C.P.L.R. section 6201 exist; and 4) The amount demanded exceeds all counterclaims known to the plaintiff. See N.Y. C.P.L.R. 6201, 6212(a); see (1150 Bank Lezmri Trust Co. of New York v. Inc, 892 F. Supp. 478, 481 (S.D.N.Y. 1995). ?As to the ?rst and second requirements, that a claim for a money judgment exists and that the movant is likely to succeed on the merits, ?the court must give the plaintiff the bene?t of all the legitimate inferences that can be drawn from the facts.? NaI'I/ludubon Soc, Inc. v. Sonopia Corp, 2009 WL 636952, at *3 (S.D.N.Y. Mar. 6, 2009) (quoting Bank Lcmni, 892 F. Supp. at 482). And, ?[110 satisfy the second requirement, [the plaintifl] must simply ?demonstrate that it is more likely than not that it will succeed on its claims.? Id. (quoting ThomappleAssocs, IricvaSahagenFZOOJ WL 747861, at *4 Mar. 12, 2007)). Case Document 24 Filed 10/26/18 Page 8 of 19 With regard to the third requirement, the grounds for attachment listed in N.Y. C.P.L.R. section 620] include two relevant to this suit. Attachment is proper where either ?the defendant is a nondomiciliary residing without the state,? N.Y. C.P.L.R. 6201(1), or where ?the defendant, with intent to defraud his creditors or frustrate the enforcement of ajudgment that might be rendered in plaintiffs favor, has assigned, disposed of, encumbered or secreted property, or removed it from the state or is about to do any of these acts.? N.Y. C.P.L.R. 620l(3). Procedurally, New York law permits a court to attach a defendant?s property without notice and even before service of a summons. See N.Y. C.P.L.R. 621] (?An order of attachment may be granted without notice, before or after service of summons and at any time prior to Any debt or property against which a money judgment may be enforced is subject to attachment. N.Y. C.P.L.R. 6202. So long as the court has jurisdiction over a defendant or garnishee, it also possesses the necessary jurisdiction over the defendant/garnishee?s assets, regardless of their location. See Hate! 7] Mess Lender, 14 at 312 (?Based on the foregoing, a court with personal jurisdiction over a nondomiciliary present in New York has jurisdiction over that individual?s tangible or intangible property, even if the situs of the property is outside New York?). The ex parte procedure is authorized, in part, to allow a Plaintiff to seek attachment where a Defendant may secret assets away if given notice. See N.Y. C.P.L.R. 6210, practice commentaries (?In some attachment situations CPLR 6201(3)), it may be easy enough for the plaintiff to show that the-defendanLis likely to absconchittLassets i?gixen any kind o_f advance notice of a possible restraint. In the absence of such showing, the plaintiff must make a Case Document 24 Filed 10/26/18 Page 9 of 19 good faith effort to notify the defendant of the TRO application and provide him an opportunity to appear in response?). A Plaintiff must move to confirm an order of attachment granted without notice within five days after levy of the order, with notice given to the defendant and the garnishee (if any), unless the defendant is not a citizen of New York, in which case the Plaintiff must move for con?rmation within ten days. N.Y. C.P.L.R. 6211(b). The procedure is intended to ensure that the ex parte attachment procedure comports with due process, giving the defendant a prompt opportunity to contest the ex parte attachment. See id. practice commentaries. To confirm an order of attachment, a plaintiff must show ?that there is a cause of action, that it is probable that the plaintiff will succeed on the merits, that one or more grounds for attachment provided in C.P.L.R. section 6201] exist, and that the amount demanded from the defendant exceeds all counterclaims known to the plaintiff.? N.Y. C.P.L.R. 6212(a); see aIso Capita! Ventures 1m '1 v. Republic of A rgemina, 443 F.3d 214, 219 (2d Cir. 2006). In order to secure an attachment order a plaintiff must post an undertaking of at least $500, in an amount to be determined by the court. See N.Y. C.P.L.R. 6212(b); see also Herzi v. AteIiers De La Hattie-Gamma, 2015 WL 8479676, at *3 (S.D.N.Y. Oct. 13, 2015) (?nding undertaking of $10,000 appropriate to cover potential costs and damages associated with attachment of$1.5 million); Hume v. 1 Prospect LLC, 137 1080, 1081 (NY. App. Div. 2016) (setting undertaking of $2,500 against attachment of $5 million). Where a plaintiff moves to attach assets held by a garnishee, the garnishee must provide a statement within ten days ofserviceo?theJevy ?specifying. all de_b_ts.of the garnishee to the defendant, when the debts are due, all property in the possession or custody of the garnishee in which the defendant has an interest, and the amounts and value of the debts and property -9- Case Document 24 Filed 10/26/18 Page 10 of 19 specified." N.Y. C.P.L.R. 62l9.The Court may order that the Garnishee provide such a statement within a shorter period of time, but may not extend the deadline. Id. if the Garnishee holds assets sufficient to satisfy the entirety of the requested attachment, the Garnishee may limit its statement to that fact. Id. IV. ARGUMENT A. Plaintiff Asserts Claims for Money Damages and Defendant Has No Counterclaims The ?rst and fourth requirements for prejudgment attachment under New York Law are easily satisfied here. Plaintiff has asserted causes of action for breach of ?duciary duty and fraud, both of which seek money damages, and has submitted declarations supporting the allegations in its Complaint. See Comp]. 49-60; Winklevoss Decl.; Gruchevsky Decl.; Robinson Decl.; Mason Decl. As indicated by the Winklevoss Declaration, Plaintiff does not believe that Shrem has any counterclaims to assert. C. Winklevoss Decl. 1] 30. Moreover, even if Shrem were to assert counterclaims, such assertions would still be insufficient to avoid attachment. New York law directs courts to ?examine only the amount of the counterclaims that the pIat'me concedes arejust,? and, as indicated by the Winklevoss Declaration, WCF does not make any such concessions. Bank Lezmn? Trust Co., 892 F. Supp. at 482; see also Na! '1 Audubon Son, Inc. v. Sonopia Corp, 2009 WL 636952, at *3 (S.D.N.Y. Mar. 6. 2009). B. Two of the Statutory Grounds for Attachment Are Present N.Y. C.P.L.R. section 620] enumerates ?ve alternative grounds for attachment, of which two apply ere. First, attachment may bme?stEIWhere the defendant is ?a nondo?miciliary residing without the state.? N.Y. C.P.L.R. 6201(1). This is proper in this case, as Shrem Case Document 24 Filed 10/26/18 Page 11 of 19 currently lives in Florida. Mason Decl. 1 2, Ex. A.4 In practice, courts generally refrain from granting attachment orders based solely on N.Y. C.P.L.R. section 6201(1), instead requiring a further showing that the defendant is either likely to lack suf?cient assets to satisfy an adverse judgment, or is likely to hide or dispose of assets. See Haimi? Funding Holding, Inc. v. Carrera, 2017 WL 7411183, at *3 (E.D.N.Y. Feb. 6, 2017) (citing cases). As a result, in many cases the analysis under N.Y. C.P.L.R. section 6201(1) stands or falls with the analysis under N.Y. C.P.L.R. section 6201(3). Under this latter provision, attachment is proper if the defendant has ?assigned, disposed of, encumbered or secreted property? with ?intent to defraud his creditors.? N.Y. C.P.L.R. 6201(3). The allegations and evidence that WCF offers here closely parallel those in Mineola 0rd Sales Ltd. v. Rapp, 242 371 (N .Y. App. Div. 1997), where the court found that attachment was justi?ed because the defendant had ?falsi?ed business business records and accounting ledgers and diverted the plainti??s funds for her own personal use? and ?offered no explanation as to what had happened to hundreds of thousands of dollars belonging to the plaintiff while the funds were under her control.? 1d. at 371-72; see aiso Arzu v. Area, 190 87,92 (N.Y. App. Div. 1993) (inferring that defendant secreted assets with intent to defraud based on defendant's ?patently incredible and almost entirely undocumented explanation? of the disposition of plaintiff's funds and failure to provide plaintiff with an ongoing accounting or contemporaneous record of his use of funds). 4 Shrem lived in Brooklyn during 2012 and 2013. BitInstant was based in Manhattan. All of the relevant wrongdoing alleged herein was transacted in Brooklyn and Manhattan. Winklevoss Decl. ?ll 31. Pursuant to New York?s long-arm statute, this is a sufficient basis to assert jurisdiction over Defendant Shrem. N.Y. C.P.L.R. 302. It also provides the basis for personal jurisdiction in the Southern District of New York. Fed. R. Civ. P. -11- Case Document 24 Filed 10/26/18 Page 12 of 19 Moreover, Shrem?s intent to evade creditors is apparent not only from his conduct towards WCF, but also towards the federal government. See WsionChina Media Inc. v. SharehoZder Rep. Servs., LLC, 109 49, 60 (NY. App. Div. 2013) (defendant?s intent to be inferred from past and present conduct, including the defendant?s history of paying creditors and any statements or action evincing an intent to dispose of assets). As part of his plea deal Shrem agreed to forfeit $950,000. To date, that debt appears to have gone unpaid. Ferguson Dec]. 1] 2. There is no satisfaction of judgment on the criminal docket in his case. Although WCF is not privy to Shrem?s discussions with the government and therefore does not know what statements he may have made to explain his failure to pay, Shrem has stated publicly that he lost almost all of his assets before he went into prison, stating in one interview that he began his sentence with only ?3-4 bitcoin? and $16,000. See broke-death-sex-monew' at 24:35-25:10. The evidence that WCF submits, in particular the results of Matthew Gruchevsky?s investigation, indicates that his statement was false rather than being nearly broke, Shrem appears to have had access to thousands of bitcoin through this entire timeperiod, and has simply denied the fact of their existence. Furthermore, injust over a year since being released from prison and allegedly working for months as a dishwasher at just $8 per hour, Shrem has now amassed real estate holdings in and around Sarasota worth over $4 million, in addition to two Maseratis and two powerboats. Available records indicate Shrem paid cash for these assets. See generalfy Mason Dec]. Shrem?s sudden increase in his personal fortune is likely owing to the appreciation of assets 5,000 bitcoLthaLhe stoleirom and secreted away. -12- Case Document 24 Filed 10/26/18 Page 13 of 19 C. WCF Is Likely to Prevail on the Merits WCF is likely to prevail on the two causes of action that entitle it to monetary relief, breach of ?duciary duty and fraud. 1. Shrem Breached a Fiduciary Duty by Purchasing Bitcoin for His Own Account Using WCF Funds The existence of a ?duciary duty depends on the nature of the relationship between the parties. ?Broadly stated, a ?duciary relationship is one founded upon trust or con?dence reposed by one person in the integrity and ?delity of another. It is said that the relationship exists in all cases in which influence has been acquired and abused, in which con?dence has been reposed and betrayed.? Penato v. George, 52 939, 942 (N .Y. App. Div. 1976). For instance, a ?duciary relationship ?exists between two persons when one of them is under a duty to act for or to give advice for the bene?t of another upon matters within the scope of the relation.? EBC 1, Inc. v. Goknnan. Sachs 5 11, 19 (2005) (quoting Restatement [Second] of Torts 874, Comment see aiso Board of Managers of Fairi-vays v. Fairway at North Hills, 193 322, 325 (NY. App. Div. 1993) (??Fiduciary? is one who transacts business, or handles money or property, which is not his or for his own bene?t, but for bene?t of another person, as to whom he stands in relation implying good faith and necessitating great con?dence and trust on one part and high degree of good faith on other part?). Shrem was entrusted with using each tranche of money deposited with him to purchase bitcoin at prevailing prices and within a reasonable period of time. Shrem was given and he accepted discretion over all other details, such as the sellers, the exact time and quantities of each transaet'iO?n, a?n?d bWten'sio?n theexact?pri'ces. C. WinklevossDecl. ii?9- This granro discretion over the disposition of funds is a well-recognized basis that creates ?duciary obligations. See Gihnan v. Merril! Pierce, Fenner Smith, Inc, 93 Misc. 2d 941, 944 -13- Case Document 24 Filed 10/26/18 Page 14 of 19 (Sup. Ct. 1978) (?The broker, once he has received his customer?s funds, is a ?duciary with respect to those funds?); Jaksich v. Thomson McKinnon Sec. Inc. 582 F.Supp. 485, 502 (S.D.N.Y. 1984) (?Under New York law, brokers maintain ?duciary duties to their customers?). The situation is akin to a customer granting trading discretion to a stockbroker, which is a recognized basis for imposing ?duciary duties on the stockbroker. See Vas?e v. Dean Witter Reynoids Inc, 20 F. Supp. 2d 465, 48] (E.D.N.Y. 1998), aff?d, 205 F.3d 1327 (2d Cir. 2000). Shrem?s assumption of ?duciary obligations included the duty to disclose all relevant facts to his principal, Comvay v. [calm Co. 16 F.3d 504, 510 (2d Cir. 1994) broker, as agent, has a duty to use reasonable efforts to give its principal information relevant to the affairs that have been entrusted to and the obligation not act for his own benefit. See ustok v. Comicommodiry Saws, Inc, 618 F. Supp. 1082, 1088 (S.D.N.Y. 1985) (?We hold only that if the defendants purchased the 400 silver receipts predominantly for their own economic bene?t they will have breached their fiduciary duty?). It also required Shrem to provide all information to WCF (his principal) regarding information relevant to the affairs entrusted to him. See Schenck v. Bear: Streams 484 F.Supp. 937 (S.D.N.Y. Restatement (Second) of Agency 381 (I958). Shrem breached these ?duciary obligations in myriad ways. Shrem withheld critical information from his principals, such as the price paid per biteoin and the amount he spent on each tranche of bitcoin. Critically, his accounting (such as it was) failed to account for nearly 5,000 bitcoin, that he should have acquired on behalf, and for which he received money. And bitcoin for himself defrauding his principals of 5,000 bitcoin. Just weeks after WCF sent Shrem an initial tranche of $250,000 -14- Case Document 24 Filed 10/26/18 Page 15 of 19 between September and October 2012, Shrem deposited 5,000 bitcoin into his own personal address, clearly prioritizing his own interests over those of his principals. In summary, by virtue of taking money and exercising complete discretion over the use of that money to secure bitcoin, Shrem became ?duciary. See, Bd. of Managers, 193 at 325. Shrem undoubtedly betrayed the confidence that WCF reposed in him. He took $750,000 from WCF and promised to secure it bitcoin at ?the best price? with that money, yet kept approximately $61,000 to purchase 5,000 bitcoin for his own account. 2. Shrem Committed Fraud by Convincing WCF to Entrust Him with Funds that He Used to Buy Bitcoin for Himself Under New York law a fraud cause of action requires ?a misrepresentation or a material omission of fact which was false and known to be false by the defendant, made for the purpose of inducing the other party to rely upon it, justifiable reliance of the other party on the misrepresentation or material omission, and injury.? Pasternock v. Lab. Corp. of Am. Holdings, 27 817, 827 (2016) (citation and quotations omitted). iIere, Shrem committed fraud by falsely representing that he wanted to help WCF (rather than stating honestly that he wanted to acquire bitcoin for himself with money), and that he would secure bitcoin for WCF at the ?best price.? See In re Argo Comm 'ns Corp, I34 BR. 776, 791-92 (Bankr. S.D.N.Y. 199]) (?'aud cause of action stated where defendant ?fraudulently misrepresented that it would act in Argo?s best interests?). Shrem?s misrepresentation induced WCF to entrust him with the money to make the bitcoin purchases and it suffered injury when he instead misappropriated a portion of the funds to buy bitcoin for himself. WCF?S?Claims are Tim elf Both the fraud and breach of ?duciary duty causes of action are subject to a six?year statute of limitations. The limitations period applicable to fraud claims, N.Y. C.P.L.R. 213, is -15- Case Document 24 Filed 10/26/18 Page 16 of 19 also applicable to the breach of ?duciary duty claim here because the gravamen of the complaint sounds in fraud. Sec Netccr v. Continuity Graphic Associates, Inc, 963 F. Supp. 1308, 1322 (S.D.N.Y. 1997) ("Claims for breach of ?duciary duty are subject to either a three year or six year statute of limitations, depending on whether ?the gravamen of the complaint? more closely resembles an action to injury to property (governed by a three year limitations period) or an action for fraud (governed by the six year/two year limitations WCF sent Shrem money to purchase bitcoin beginning on September 12, 2012 and WCF discovered the improper accounting in early 2013. This action is therefore timely ?led. 4. is Entitled to 5,000 Bitcoin Longstanding precedent entitles the victim of a breach of a ?duciary duty to what was unlawfully acquired by the ?duciary. Sec Lundy v. Murtagh, 141 247 (NY. Sup. Ct. 1955) (?It is well established that one who has pro?ted by a breach of a ?duciary duty will be regarded as a constructive trustee of what has been improperly acquired?). A constructive trust is a legal ?ction that makes the wrongdoer a trustee of the plaintiff?s assets until the wrongdoer transfers them back to the plaintiff. In general, it may be imposed when a party claiming entitlement can show: (1) a con?dential or ?duciary relationship; (2) a promise, express or implied; (3) a transfer made in reliance on that promise; and (4) unjust enrichment. In Re Koreag, 961 F.2d 34], 352 (2d Cir. 1992); Brand v. Brand, 811 F.2d 74, 77 (2d Cir.1987) (noting ?exibility in application). All of those requirements are satis?ed here. WCF and Shrem had a con?dential relationship in which WCF entrusted substantial assets to Shrem; Shrem promised to buy bitcoin on behalf at the best possible price; WCF transferred $750,000 to Shrem in reliance on that promise; and Shrem was unjustly enriched to the tune of -15- Case Document 24 Filed 10/26/18 Page 17 of 19 5,000 bitcoin by violating the trust placed in him and purchasing bitcoin for his own account with money. Alternatively, an award of damages denominated in bitcoin is appropriate under New York Judiciary Law section 27, which provides: In any case in which the cause of action is based upon an obligation denominated in a currency other than currency of the United States, a court shall render or enter a judgment or decree in the foreign currency of the underlying obligation. Such judgment or decree shall be converted into currency of the United States at the rate of exchange prevailing on the date of entry of the judgment or decree. Under controlling caselaw in this district, bitcoin is ?money.? United States v. aiella, 39 F. Supp. 3d 544, 545 (S.D.N.Y. 2014) (?Bitcoin clearly quali?es as ?money? or ?funds? under these plain meaning definitions?); United States v. Mm?gio, 209 F. Supp. 3d 698, 707 (S.D.N.Y. 2016) (collecting cases holding that bitcoin is money for purposes of federal money laundering and money transmitter statutes). Shrem?s obligation to WCF was denominated in bitcoin. Thus, a judgment entered as 5,000 bitcoin is proper. See 0730 Mitsui Co. v. Oceantmwi Corp, 906 F. Supp. 202 (S.D.N.Y. 1995) (?Entry of judgment in the currency of the parties? transactions accords with principles of fairness and with the goal of making injured parties whole because it provides them with payment in the currency for which they bargained?); Liberty Media Corp. v. livettcii Universal. 2013 WL 105776, at *2-3 (S.D.N.Y. Jan. 9. 2013) (same); Matter Spili by Amoco Cadiz OffCoast oth'ance on Mat: 16, 19.78, 954 F.2d 1279, 1328 (7th Cir. 1992) (?The court should enter the judgment in the currency the parties themselves selected for their dealings, the currency in which the loss is felt?). B. Any Uncertainty is_Reso.1v.c_d by Records that Xapo, Coinbase BitQ-c}, and Polonicx are Required to Maintain by Federal Law While the 3,999 bitcoin passed through two as-of-yet unidenti?ed addresses before landing at Xapo and Coinbase, any resulting uncertainty will be resolved by records that Xapo -17- Case Document 24 Filed 10/26/18 Page 18 of 19 and Coinbase are required to maintain under federal law, 31 U.S.C. 5311 et seq.; 31 CPR. 1010.220 et seq.. as well as records they are required to maintain under New York State Virtual Currency Regulations as New York State Bitlicense companies. See 23 N.Y.C.R.R. 200.1 et seq. The same is true with Bittrex and Poloniex (and other garnishees on which a levy might be served); while there is some uncertainty whether any of these institutions currently hold assets on Shrem?s behalf, that uncertainty will be resolved once an attachment order is served on their representatives in New York and they return a Gamishee?s statement pursuant to NY. C.P.L.R. section 6219. Cf People v. Sousa, 18 Cal.App.4th 549, 557, 22 Cal.Rptr.2d 264, 269 (1993). If this Court decides to issue an attachment order but the records of these Garnishees show they hold no assets in Shrem?s name (or in which he has an interest), then the attachment order becomes a nullity as to them. If in the unlikely event that Shrem?s garnishees collectively hold more than 5,000 bitcoin worth of Shrem?s personal property, the Court may issue an order after receipt of garnishee?s statements reducing the pro rata share of attached assets accordingly. E. The Mechanism of Attachment Pursuant to New York law, prejudgment attachment of personal property may be accomplished through one of two mechanisms. Under N.Y. C.P.L.R. section 6214(a), attachment may be accomplished through service by the Sheriff of an order of attachment upon the defendant, or any garnishee with possession or custody of defendant?s property. The service of the order of attachment thereafter prohibits the defendant (or any garnishee) from transferring the attached property. Under N.Y. C.P.L.R. section 6215, attachment may also be accomplished by property upon a plaintiff ?s direction+and pro ision of indemnity. -13- Case Document 24 Filed 10/26/18 Page 19 of 19 The most logical mechanism here is probably the former an order requiring Xapo, Coinbase, Bittrex, and Poloniex to freeze any biteoin in Shrem?s name, together with an attachment order served on Shrem himself. However, it may be appropriate to order the exchanges and Shrem to transfer biteoin held in Shrem?s name to the U.S. Marshall?s Service given that there is a competing unsatis?ed liability in the amount of $950,000 to the United States Government. Cf 28 U.S.C. 3102. V. CONCLUSION For all the foregoing reasons, WCF respectfully submits that the requested prejudgment attachment order issue. DATED: September 11, 2018 Respectfully submitted, . By: 1" Tyler Meade THE MEADE FIRM p.c. California Of?ce: 12 unston Ave, Suite A San Francisco, CA 94129 New York Of?ce: 1 1 1 Broadway, Suite 2002 New York, NY 10006 Telephone: (415) 724-9600 Attorneys for Plaintiff 49-