Cryptoasset Fraud and Recovery - Disclosure and Constructive Trusteeship Through Knowledge / Assistance: The (Financial) Empire Strikes Back

Published: 31/05/2023 10:57

Since His Honour Judge Pelling KC (sitting as a judge of the High Court) was persuaded to make, amongst other orders, without notice Bankers Trust Orders against two Binance entities in 20211 requiring them to disclose their Know Your Customer details of those alleged to have committed a fraud against the Claimant, there have been many subsequent applications for similar orders against cryptoasset exchanges brought by those who have suffered fraudulent deprivation of their assets. Often those orders are combined with freezing injunctions directed at the fraudsters or persons unknown, and subject the exchanges as parties to those injunctions too. Commentators have noted that crypto-exchanges have to deal with thousands of these types of injunctions and orders for disclosure every year, which is likely to affect their ability to provide smooth-running services for their genuine customers, and also causes them financial loss in having to address the applications and litigation.

On 18 October 2022 another such application for Bankers Trusts Orders and freezing injunctions against persons unknown, various banks and Binance Holdings Limited (‘Binance’) (the second defendant in Fetch.AI) was heard before Sir Anthony Mann on a without notice basis.2 He made orders against persons unknown and a company restraining them from dealing with the Claimant’s fraudulently-obtained USD Tether (‘USDT’), which had been traced into the Binance and Aux Cayes Fintech Co Ltd exchanges. He also ordered Binance to preserve the Claimant’s USDT 479,904 or its traceable proceeds and required Aux Cayes Fintech to preserve the remaining USDT or its traceable proceeds. Orders were made for service of the claim form, the order and other documents on those exchanges out of the jurisdiction and by alternative means, and for disclosure by those exchanges of their client information under the Bankers Trust jurisdiction.

A month later, at the return date on 18 November 2022, Michael Green J continued the injunctions and relisted the matter for a day’s hearing because Binance indicated that it would contest the application and the Claimant wanted to call live expert evidence.

On 2 March 2023 Trower J heard that contested application and ultimately discharged the injunctions against Binance, making an order for costs against the Claimant on an indemnity basis. In his judgment he made important points that any litigant needs to consider when making applications for freezing injunctions and Bankers Trust Orders generally and against cryptoasset exchanges in particular. These apply with force in matrimonial finance and private client work, since we also seek to impose these significantly onerous orders on these exchanges.


In summer / autumn 2021 the claimant, Mr Piroozzadeh, was induced by a stranger via WhatsApp to transfer almost CAD 2m to accounts held by the 4th defendant at the 5th defendant bank and to an account held by the 6th defendant at the 7th defendant bank. The claimant did so to enable him to trade foreign currency on an account with the bogus 3rd defendant company. In November 2021 he was induced to increase his trading capital by transferring eight tranches of USDT to four crypto-wallets used by the 3rd defendant. He sought to withdraw his funds in December 2021, was unable to do so and realised that he was the victim of a fraud.

He eventually instructed solicitors and in late June 2022 investigation agents were instructed, who stated that they were able to trace the USDT to 5 wallets held with Binance and the 9th defendant, Aux Cayes Fintech. The wallet holders identified by Binance and Aux Cayes Fintech as a result of the disclosure orders were not said in the proceedings to be parties to the fraud. The wallets had been emptied prior to the injunction being granted.

Binance asserted in its evidence, which was not contradicted, that when a person deposits cryptocurrency with Binance, that user does not retain any property in it. The user’s account is credited with the amount of the deposit, which they can then draw against, just as in conventional banking arrangements. The cryptocurrency itself is swept into a central, unsegregated pool, called a ‘hot wallet’, where they are treated as part of Binance’s general assets, and hundreds, if not thousands, of transactions pass through each of Binance’s hot wallets every hour. Accordingly, one cannot trace a cryptoasset once swept into that pool – it is described at paragraph 8 of the judgment as, ‘an essentially futile and close to impossible and possibly impossible exercise’.

Binance applied on 30 January 2023 to discharge the interim proprietary injunction on the grounds that it should never have been made without notice and that the claimant’s legal representatives failed in their duty of fair representation as a result of the following:

  1. The claimant did not properly explain defences likely to be available to Binance in respect of its liability as constructive trustee;
  2. The claimant did not explain why there was a sufficient risk of a breach of trust by Binance to justify an injunction;
  3. The claimant did not explain why damages would not be an adequate remedy from Binance to the claimant; and
  4. The claimant did not explain how Binance would, in practice, be able to comply with the order.

The judge dealt with the issue of the without notice application as follows:

  1. Regarding whether the application should have been brought without notice at all, he
    1. considered that ease of communication is such now that some sort of notice is nearly always possible, so urgency is unlikely of itself to be enough to permit the application to be heard without notice. The applicant has to provide evidence which shows a well-founded fear that action to the detriment of the claimant would be taken by the respondent if notice were to be given.
    2. stated that where there are several defendants, the justification for a without notice application must distinguish between them. In the present case, there was no evidence that Binance would have done anything to the claimant’s detriment if it had been forewarned of the application. The argument advanced at the hearing before Trower J was that Binance, had they known of the application prior to the orders being made, might inadvertently have tipped off the alleged fraudsters, and because it is an unregulated entity. Trower J did not agree that this was a good answer, as tipping off was not an issue before Sir Anthony and there was no evidence that it was a material risk.
    3. agreed with Binance’s counsel, who argued that the solution was to proceed against the fraudsters and to serve any order on Binance as a non-respondent. Any specific relief required later could be sought in response to Binance’s reaction to the provision to them of the order.
    4. recorded that the alleged opaque structure of Binance (as described by HHJ Pelling QC in Fetch.AI) and the group being outside the scope of regulatory oversight may support the continuation of an injunction, once granted, but that was not a reason in itself for the relief to be sought without notice. The service on Binance as a non-respondent was the way forward.
  2. Regarding whether the Claimant failed in his duty to make a fair presentation of the case at the without notice hearing, Trower J:
    1. summarised Bingham J in Siporex Trade SA v Comdel Commodities Ltd [1986] 2 Lloyds Rep 428 when he said that an applicant must show the utmost good faith (on a without notice application) and disclose his case fully and fairly, identifying crucial points for and against the application. He must investigate the nature of the cause of action and the facts before applying for relief and must identify and tell the court of any likely defences. The judge also noted that in Pugachev [2014] EWHC 4366 (Ch) at 171 Mann J said that this duty of full and frank disclosure is a fundamental requirement and safeguard of without notice applications.
    2. agreed with Binance’s counsel who argued that it is up to the applicant to bring this information to the attention of the judge, not for the judge who will work under time constraints, to have to identify the competing considerations (considering Popplewell J’s statement in Fundo Soberano de Angola v Jose Filomeno Dos Santos [2018] EWHC 2199 (Comm)).

The judge then went onto deal with the four arguments put forward by Binance:

  1. The claimant argued that Binance was a constructive trustee because it had ‘obtained property as a result of wrongdoing’, and so the status was conferred on the company by operation of law. This was because it had had control of the relevant cryptocurrency assets. The claimant told Sir Anthony at the without notice hearing that Trower J had held as much in D’Aloia v Persons Unknown & Ors [2022] EWHC 1723 (Ch).3 Trower J specifically stated in Piroozzadeh that there was no support in his judgment in D’Aloia for any proposition that he had held that, without more, exchanges are constructive trustees.
  2. The claimant had argued that to be subject to that status, it was not necessary for Binance to have known of the wrongdoing.4 Sir Anthony had disagreed with this assertion.
  3. Trower J said that the main problem was that the claimant had not made any reference during the argument before Sir Anthony that if the recipient of the USDT was a bona fide purchaser, the proprietary rights of the claimant would not have survived. In the present case, Trower J found that once the USDT had been swept into the pool and the users granted credit in that amount, Binance became that purchaser, and so long as they acted in bona fide, then it was not susceptible to any remedy at the suit of the claimant.
  4. The failure by the claimant to make clear to Sir Anthony that Binance were likely to run a bona fide purchaser defence on the basis of the pooling, as was set out by Binance in their defence of the D’Aloia proceedings in which the Claimant’s counsel had been involved, was seriously inappropriate. ‘If as a result of their involvement in other litigation the legal representatives are aware both of the way in which [Binance] asserted that its pooling operations functioned and the nature of the legal consequences which were said by it to flow from that, there can be no basis for them to say that it did not occur to them that such defences were not likely to be run.’ [30]
  5. The claimant should have set out more clearly why damages from Binance to the Claimant if found to have acted wrongly would not have been an adequate remedy. This was not addressed by the Claimant in its skeleton argument at all, and it should have been.
  6. The claimant had failed to explain to Sir Anthony how Binance could freeze the traceable proceeds after they had been pooled – this was said by Trower J to be a very important non-disclosure.
  7. Overall, the claimant’s application was not made fairly to Sir Anthony and that there was no basis to otherwise continue the injunction.

Trower J emphasised that applicants must be very careful to make applications for orders specific to the parties against whom they are relevant. It is important that the nature of claims against crypto-exchanges and whether there is a substantive claim for relief or merely a disclosure order such as a Norwich Pharmacal or Bankers Trust order is properly differentiated.

The judge also found that the claimant and his legal team had made a deliberate decision not to disclose the possible bona fide purchaser / pooling defence, although that was as a result of a misapprehension as to the nature and extent of the duty of full and frank disclosure, rather than any dishonesty on their part.

There was no risk of any significant injustice to the claimant if the order were now discharged and he did so as a result of the failure to make a fair presentation of Binance’s likely case at the without notice hearing, continuing into the return date.

The judge declined to determine whether or not Binance acquired title to the deposited USDT when it was received at the deposit address, but noted that an application to strike out or dismiss by way of reverse summary judgment is possible where the claimant sought to argue that Binance was a constructive trustee.

What does this mean for financial remedy and private client practitioners?

Applicants for without notice orders are again warned in the most stringent terms of their obligations to anticipate and to set out all likely and possible arguments contrary to their case, or otherwise risk discharge of protective orders, excoriation, and hefty costs penalties wrought against them. This applies in the family court as much as in the civil court and the warnings in this case should be ringing in our ears.

Practitioners can still seek disclosure orders against crypto-exchanges, but they should do so separate to any freezing injunction unless they have some supporting evidence that the exchange does, actually, have control over those assets. It is likely that most exchanges will set themselves up with this bank-style pooling structure if they have not already done so, and that investigation might need to be done first before any proprietary injunction is sought.

©2023 Class Legal
Class Legal


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