Cryptsy Scented 8.2 MM Lawsuit Against Coinbase Lacks Anything Believable | dinbits


When you can't sue the one who stole your money, sue another and steal their money. Not sound legal advice but it's legal practice as evident with a recent lawsuit filed in the ongoing Cryptsy implosion saga. The Silver Lake Group  (SLG) law firm has filed a class action lawsuit against Coinbase for $8.2 million USD in connection with Cryptsy and on behalf of several of its users. They're also asking anyone and everyone to join inn the fun. The problem is that there is little to nothing in the way of anything actually believable cited in the filing. 

Instead the suit appears to paint Coinbase as a company doing exactly what it should have been doing and bases its entire premise on an opinion of which almost nobody in the virtual currency industry could realistically agree with.

Look, we rarely hold punches and I for one had many an altcoin lost in the Cryptsy failure. There's nothing more I would like to see than my coins returned that were stolen, lost, or otherwise misappropriated by Mr. Vernon. However, holding an innocent company liable and bringing harm to that company and its users is not the way that's going to happen This is exactly what the class action lawsuit SLG has proposed and to be honest, its simply ridiculous at best.

Regardless of your opinion of Coinbase, and they have been the subject of more than one less favorable article on dinbits, they're kind of like a sibling, like a brother and as much you pick on them, call them names, or out them when they make a mistake that's not for anyone else to do and when that happens its the outsider that's the enemy. The same concept is applicable, nobody should be picking on Coinbase because that's the industries job to do and not a bunch of outside attorneys filing a frivolous lawsuit.

If you're a Coinbase fan then its worse because this kind of crap can be damaging and result in loss of services, higher fees, and other unfortunate expenses that can sometimes be funneled down to the consumer for basic survival.

Either way, this class action lawsuit is wrong and nobody can possibly join this effort in good faith.

Claiming Unclaimable Claims

The lawsuit filed yesterday on December 15th and followed by a press released to everyone claims that Coinbase helped Cryptsy CEO Paul Vernon launder over 8.2 million dollars of stolen money. 

Which on the surface sounds like a pretty outrageous claim all by itself much less the remainder of the content which is even less credible and the data that they themselves present makes the claims they are trying to make very doubtful at best..

  1. They claim Coinbase helped launder 8.2 million USD
  2. They claim this activity was suspicious and that Coinbase failed to do anything about it.
  3. They claim Coinbase had a federal responsibility to verify Vernons claims
  4. They claim Coinbase enriched itself through illegal activity
  5. They claim that Coinsbase is in violation of compliance with federal law.

More officially they accuse Coinbase of:

... aiding and abetting breach of fiduciary duty, aiding and abetting conversion, negligence, and unjust enrichment

Here's why this sounds like nothing more than bullshit. 

The following are a list of inconsistencies promoting reasonable doubt of both the claim and the intent of the plaintiff(s) which also highlights the differences from the public press release and the actual petition. The press release itself reads more like an advertisement designed in effort to presumably obtain more members of the class action of which there are currently only 2 and one of those members is the court appointed receiver.

1. Accusations inconsistent with historical fact. 

Press release: The press release states that Coinbase aided and abetted Vernon in liquidating 8.2 million in various crytocurrencies of which the Cryptsy exchange supported over 500. 

Coinbase currently supports 3. They allow bitcoin, ether and litecoin transactions on their platform and the GDAX exchange. However this was not the case until 2016 and long after Paul Vernon skipped town thus only bitcoin was supported and the only form of virtual currency that could have possibly been used in any liquidation.

Court filing: In the complaint itself a different picture is painted that only bitcoin was use and Coinbase was engage to liquidate bitcoin only.

2. Math doesn't paint the same doom 

The current limits on Coinbase bank transactions without further approval from Coinbase is $10,000.00 and even with an approval, there is a long waiting period to get this limit raised.

Press release: According to the press release Coinbase helped Cryptsy liquidate 8.2 million USD worth of cryptocurrencies over the course of three years. So let's assume they did indeed go through all of the validations required and waited 90 days for approval of which is only a guess on waiting period of course. I'm not fully aware of the policy but let's say that happened.

Court filing: It couldn't have happened until mid-2014 according to the petition and had to have ended before March of 2016 when Vernon was long since vanished equating to less than two years of any "agreement" with Coinbase that would have been adequate to lift limits supporting the volumes of liquidation made in the accusations.

Thus it appears as if the majority of the time Cryptsy was indeed under the $10,000/day limitation and if that were the case, this isn't even mathematically possible.

If we extend the full three years of which the complaint claims, that give us 365 * 3 which from we deduct 30 holidays (10/day) in which banks cannot do accept incoming wires and 312 days at 104 days per year for Saturdays and Sundays in which the same in applicable. Roughly of course. That leaves 743 days and that's if $10,000 per day, every single day, was processed. That bring the amount of processing per day to approximately $11,036.34.

The problem with this is that Cryptsy was not doing the volumes in 2013 or in 2016 that they were processing in 2014 and 2015 so the bulk of this money had to have been within that two year period which would put that number at around $16,334.66 which is clearly above the limit as is the $11,036.

Legal complaint: The complaint attempts to explain this away by saying Cryptsy itself transacted $4,900,000 whereas Vernon, through other personal revenue streams and mining, transacted $3,300,000 of the total $8,200,000. That barely puts Cryptsy's account a hair under the limit, although is does easily put Vernon's account under this limit. However, for the Cryptsy account just missing as little as 2 days a month would catapult Cryptsy beyond the limit by nearly $800 at $10,792.

However, this part is plausible but the issue is that when you break this down over the course of three years across two accounts, it's just not a significant amount that is in anyway earth shattering and Coinbase is not a bank. Even a bank isn't going to find this abnormal if its consistent and why no class action lawsuit against Crypty's or Vernons bank? Why just Coinbase? They'd have better luck with the bank since they actually do monitor accounts. We'll get to that in a second.

3. The Math Supports Coinbase

If the data is reviewed, the volumes and amounts used in the complaint do not support their claim, in fact they support Coinbase.

Press release: Coinbase negligently or maliciously aided Vernon to steal 8.2 million from users.

Legal Complaint: Coinbase should have considered this fraudulent activity.

Now this is about where the crack smoking must have started because unless you know absolutely nothing about this industry, you know that in its peak operating period Cryptsy was doing between upwards of 4000 bitcoin in volume per day. If we conservatively average that at 3000/day it comes to 2.3 to 2.4 million USD at today's rate.


Overall from March 20th to March 31st, that average comes to over 1.2 billion USD, and if we count only 2014 through March 31st (when the alleged Coinbase cooperation came into play) we come to a daily average of approximately $1,200,787.81 which is roughly $4002.62 per day at a 0.3% transaction rate but this only takes into consideration those transactions of bitcoin, when you add litecoin or dodge, then its easy to assume that perhaps other revenues equate to the 4.9 million and note the averages comes out to almost exactly what Vernon ran through his account.

That said if we lift the numbers during the peak period to 4000, we get an overall average of over 1.6 million which would put that number around 4 million and already within the realm of what the complaint states before you take into account other revenues. For example, Cryptsy charge a 0.5% withdraw fee.

Since the above #2 math isn't in line with the complaint, we'll use numbers from the complaint which states Cryptsy did this over the course of the 3 full years. Cryptsy liquidated $4,900,000 in bitcoins over the operating period of 1049 days which comes to $4,671.17 in cash per day. If we use the average of 3000 coins per day we get a total of $1,169,128,760.70 divided by the same 1049 days to result in $1,114,517.41 of which 0.3% $3,343.55.

When discussed with Coinbase (again this is according to the complaint) in mid-2014 the volumes and numbers were much higher and on that same average cash liquidations would have been an average of over $5,000 USD.

July 2014 Estimated Volumes

Here's the actual data for the 1st 1/2 of July 2014.

Date
Index
Vol USD
0.30%
6/1/2014
629.0242
      1,887,072.60
               5,661.22
6/2/2014
658.786
      1,976,358.00
               5,929.07
6/3/2014
665.73
      1,997,190.00
               5,991.57
6/4/2014
636.7837
      1,910,351.10
               5,731.05
6/5/2014
656.0598
      1,968,179.40
               5,904.54
6/6/2014
645.5647
      1,936,694.10
               5,810.08
6/7/2014
652.7083
      1,958,124.90
               5,874.37
6/8/2014
653.6402
      1,960,920.60
               5,882.76
6/9/2014
645.341
      1,936,023.00
               5,808.07
6/10/2014
649.8068
      1,949,420.40
               5,848.26
6/11/2014
627.9098
      1,883,729.40
               5,651.19
6/12/2014
581.8033
      1,745,409.90
               5,236.23
6/13/2014
597.4267
      1,792,280.10
               5,376.84
6/14/2014
571.6902
      1,715,070.60
               5,145.21
6/15/2014
591.9718
      1,775,915.40
               5,327.75


Thus, if an employee in the Coinbase risk and compliance department takes a look at this information here's what they see. Crypsy does up to 4000 bitcoin coins in volume not including other revenues. Cryptsy is pushing in around $4600 per day (according to the complaint)  and according to the data available, the amount is spot on the estimated revenue based on the numbers.

4. Not industry unusual 

When you compare the numbers outlined in #3 with what the complaint says. It seems to be exactly in line with the data and a 10 minute search shows the common agreement with the volumes. Furthermore this is not unusual by any means, if you look at the exchange volumes this is exactly what bitcoin exchanges average. Both GDAX and Bitstamp currently share this exact volume and let's not forget that Cryptsy at the time was the largest altcoin exchange.

Additionally GDAX, own by Coinbase and who the attorneys believe should have found these volumes unusual and suspicious are exactly to be expected and precisely the volumes that Coinbase would expect themselves as evident with volume reports available right this very moment (see below).



4. Overall volume reasonably matches complaint

If we use average volumes we get an estimate of about 1.2 to 1.2 billion USD transacted over the course of 1049 days. The complaint tries to make the volumes sound outrageous claiming that according to their numbers, Coinbase could not possibly believe this number. They states specifically that:

Based on the number of assets deposited and liquidated through CRYPTSY’s COINBASE account, with full knowledge that CRYPTSY charged its customers a 0.3% transaction fee on the value of each transaction, COINBASE could not have reasonably believed that CRYPTSY was conducting nearly $1,700,000,000.00 USD in cryptocurrency exchange trading business over the stated time period.

Coinbase could not reasonably believe that Cryptsy conducted nearly 1.7 billion? Really? Why not? The data specifically supports this number almost in trade volume alone.

Now perhaps these attorneys and the receiver can't believe this number but most people in this industry are going to shrug this off as "well duh, this is normal". That's because it is and this is an average day for a large exchange. These attorneys are going to have to search very hard to find any experienced individual that would be shocked at an exchange transacting 3000 bitcoins per day and if they manage to find one, there's going to be about 100 more ready to tell them that whatever idiot they pulled out from under a rock to state otherwise is full of shit because their witness would be either lying or ignorant. Possibly both.

5. Assumptions do not equate to guilt

If the facts and the numbers presented by the firm itself weren't supportive enough of Coinbase actions, the entire premise is presumptuous anyway. You have to manage to get a jury to buy the fact that aside from the data supporting the numbers, Coinbase experience with its own exchange, and volumes reported by others that all seem to match exactly what Cryptsy reported and what Coinbase liquidated, that they somehow should have considered this entire scenario backed by hard-data of  a seemingly legitimate business, was somehow oblivious to a blatantly obvious scam.

What is starting to sound like a scam is this class action. It sounds like this firm and these plaintiffs are just trying to bully money out of an innocent company just because the one they want to sue doesn't have the money and Coinbase does. If this guy had so much invested after the Mt. Gox implosion then quite frankly he was an idiot because that's whats really the hard thing to believe That after Mt Gox anyone would be foolish enough to leave millions of coins in an online wallet.

6. Coinbase are not the police

The complaint makes an assumption (pretty much what the entire complaint is) that Coinbase should have somehow known that this impossible to detect scam, assuming any of these funds had anything to do with anything was obviously fraud and they should have done something about it.

Like what? Put on a Batman costume and go make Vernon laugh himself into submission to the point of filing an affidavit of admission of his guilt subsequently throwing himself in jail? What they hell were they suppose to do even if they did feel like suspicious activity was involved?

Under the law they did exactly what they are required to do, assuming they recorded certain transactions and reported others if required, and even if they did suspect fraudulent activity, its not their job to go police other companies or start a case to solve for the FBI. They are required to file a report. That's it.

Under the federal regulations governing this activity, if there was something suspicious going on and they detected it, they would need to file a suspicious activity report (SAR) with the Financial crimes Enforcement Network (FinCEN) and how could this law firm possibly know of they did or did not do this?

They do not have access to this information. Police don't even have access to this information (they go through a state contact) and I hate to inform these guys of this, but if Coinbase did indeed file this report, then they're wasting their time with this because Coinbase would be protected by the federal government under legal safe harbor and this class action is just going to be flushed down the toilet where it belongs.

Yet, the legal firm would have you believe that they mysteriously have access to this information and have gone through all 3 million SAR reports during this time period and they themselves have been able to determine that Coinbase did not file a report involving activity of which they don't have access to in the first place and state specifically that Coinbase failed to do so.

Well boys and girls, another epic failure on the part of this claim because it doesn't matter how much virtual currency is transferred to and from what account for what reason and with whom it was involved because this activity is not regulated unless it involves cash exceeding thresholds either aggregated into a single transaction within a 24 hour period of time or one single transaction.

7. Inaccurate application of Money Service Business regulation

Press Release: Coinbase failed to fulfill its regulatory requirements and violated federal law and unlawfully transmitted money and Coinbase is not a bank.

Complaint: Coinbase is expected to implement robust monitoring software capable of single handedly identifying 300,000 user deposits from account of which they have no access to or knowledge of followed by the simple task of determining that deposit amount aggregated into transactions sent to Coinbase that don't match the aforementioned deposits by customer derived from these customers and the intent of which nobody anywhere on earth would have agreed with was to steal these funds and assume presumably that Cryptsy doesn't have to pay any bills. Coinbase illegal enriched themselves, risks over 100 million dollars of venture capitol, federal registration, and over 30 current money transmitters license of which likely cost them millions to obtain all for astonishing mountain of money equating to exactly $73,010, which is about $70 per day.

That is not "enriching" themselves. That's beer money and buying some extra inventory.

I'm not sure what the attorneys were thinking here other than maybe hitting the crackpipe again because they underscore the fact that Coinbase is not a bank. This is exceedingly in the favor of Coinbase when it comes to monitoring accounts and the complaint seems to go out of its way to point this out as if to negate everything they try and force into applicability.

The KYC regulations that the lawsuit points out are applicable to banks, not Money Services Businesses, in the manner in which they claim failure of Coinbase staff. What Coinbase is required to do is obtain identification in some cases and monitor for suspicious activity that is geared to look for things like structuring.

The complaint also inaccurately states that Coinbase is required by law to make formal inquiries and lists 800 transactions of which it wasn't done. Yeah ... fat chance of getting anyone to believe that 800 transactions (almost 1 per day of operation) is going to be considered by anyone as earth as abnormal if they occur almost every single day.

Upon information and belief, from May 21, 2013 to December 4, 2015, VERNON initiated over 800 transactions that obligated COINBASE to make some form of inquiry as to the legitimacy and legality of the transaction, and COINBASE routinely failed to make the necessary inquiry...

What the law states is that suspicious activity should be investigated to make a decision of filing or not filing a SAR, and investigation is not going out undercover or hiring Inspector Gadget, it looking at the transaction and asking a question or do of which the complaint states Coinbase did do. Coinbase need only have filed a report if the activity was determined to need a SAR and/or simply have a reasonable explanation of the activity.

According to the complaint, again, this was exactly the case and Coinbase had the correct answer.

8.  Improper explanation of federal law that requires magic and other nonexistent technology.

If you're expecting a unicorn sighting soon, you're not alone, Regardless of #7, FinCEN does not require reporting on virtual currency transaction nor is Coinbase obligated in any way to play detective and use mental telepathy or some other unknown power that currently doesn't exist to magically make inconsistent amounts suddenly apparent on the blockchain of which is unregulated without any given procedure or guidance from any federal agency as to obtaining any such information. That's because it can't be done.

Moreover, the claim alleges Coinbase transmitted money. Coinbase has a licenses to do so for one thing and secondly they didn't even do that in this case. Cryptsy was paid a fee, they own that fee. That fee was paid in bitcoin of which Cryptsy moved to Coinbase and then converted the value to United States dollars and Coinbase made a few pennies.

You can't transmit money to yourself and call it money transmission. Not even FinCEN is going to agree with that one and they'll call a paper-airplane made out of a dollar money transmission,

9. Technologic examples are inconsistent with common practice of everyone on earth

Despite telepathy and magic potions that mysteriously materialize secure data of a competitor, Coinbase had no possible way of knowing who sent what to Cryptsy and of those funds what was sent to Coinbase. Furthermore the examples outline in the complaint are ridiculous and inconsistent with how everyone on earth uses bitcoin.

For example, they point out single addresses that Coinbase "should have known about". Coinbase itself doesn't even use the same wallet address over and over and Cryptsy generated possibly millions on top of the millions upon millions generated by Coinbase. This is a security measure, yet for each and every transaction, the complaint wants you to believe that Coinbase had a obligation to spend copious amounts of time, research, and investigation resources to deliver results that the Cryptsy investigation team currently sifting through data likely had a difficult time finding and they had all of the information. Coinbase had little to none and no right to ask for it,

The fact is nobody uses the same bitcoin address for long and most create a new address each and every single transaction.

Nobody is going to believe this steaming pile of fairy tales.

10. Contradictions

The complaint is contradictory. On one page the amount is 4.9 million Cryptsy account dollars in question but that number magically increases to over 6 million as the dramatic fictitious story continues as if nobody is going to notice this and then really twists all of the numbers stating that it's really 6 million through the Vernon account and 3 million into Vernons bank account but at this point there's no mention of the Cryptsy account as if the load of crap they were writing finally sparked a brain cell into action that slapped them upside the head with the realization that everything they had just said was utterly ridiculous.  

Of course the complaint starts off bitching about 5 million bucks. Then 4,9 million, 3,3 million, morphed into 3 million, then 6 million comes out of nowhere while 4.9 million gets forgotten about and it's all insisted that for $70 per day Coinbase broke every law known to mankind in this area and cheated more people out of money than the lawsuit can possibly list but more likely just can't list since there's nobody that wants to be part of a frivolous lawsuit other than one guy named Brandon Leidel who's total out of pocket and the only actual legitimate number mentioned in the entire document as a proposed damage is a monstrous 4 bitcoins, That's being nice because it was even quite 4, it was 3.9409.

Plaintiff LEIDEL, on August 13, 2014, deposited 3.9409 BTC to initially fund his CRYPTSY account. The value of that deposit was approximately $2,112.32

They don't bother to go after TD Bank, who actually does have strict CDD compliance requirements and should question strange amounts of money as well and there is no mention of Crypty's account where it's very simple. If Coinbase liquidated all of these funds then there's also a bank somewhere the same bullshit story was given to and they should be just as liable under this ridiculousness.

The trashcan-destined filing also states the three year period spanned into 2016 only by later contradicting itself with the actual truth of the fact that Coinbase closed Crypty and Vernon's account in 2015 when rumors surfaced of SEC and other regulatory investigations. 

Coinbase is specifically pointed out as not being a bank, then held up to regulations applicable to bank only without bothering to go over the money services business (MSB) guidance and rules specific to those types of financial institutions (banks and MSB's are both financial institutions).

The suit states that Vernon has complete control over the organizations bitcoins, a fact that any user of Cryptsy knows is simply not factual.

Ignore this Frivolous Lawsuit

The complaint is not without its humorous moments and I'm not just talking about the misinformed nature of the industry. At one point the document describes Vernon as an "evil zombie"

Cryptsy was once the leading alternative digital currency exchange and well respected in the industry. With millions in transaction volume and hundreds of thousand of users, it certainly appeared as if the exchange was heading in the right direction. Then things didn't go that way and Cryptsy imploded so badly that only Mt. Gox could possibly compete with such an epic meltdown. GAW Miners might be a close 2nd runner-up.

Its never a positive thing when this happens and despite the efforts of attorneys, they simply can't find Vernon and can't find the money. Which is tragic and it sucks. However, that doesn't mean they have any reason to take it out on others and this suit is so frivolous it almost crosses over into criminal intent. There is nothing remotely believable from an industry perspective, the regulations are grossly misdirected and not even applicable in some areas.The very evidence provided actually supports Coinbase in that anyone in the industry would consider the numbers and volumes normal.

That is not to say that the available data is accurate by any means, but in a reasonable effort used to investigate this, we uncovered the data above and that was the belief at the time, so any contrary to that is going to be hard, if not impossible, to prove since this is basing an accusation on an opinion of another person or departments opinion. So unless it was grossly negligent to the point of intentionally breaking the law, its just not going to be concluded that way.

They go out of their way to make pointless statements that have absolutely no relevance and all of the counts listed are based on hearsay, assumptions, and circumstantial evidence as well as possibly dreams, voices, ghosts, and fortune cookies.

The latter may sound a bit ridiculous but its nothing compared to the silliness filed with the court.









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  1. I am "Coinbase indifferent" but agree with what is said here. Would just add that only attorneys make money on these class actions.

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