I think this should become the new MtGox slogan. Nothing else quite sums up the new MtGox age we’ve landed in. In truth we’ve been heading there for some time, but now it’s official and unashamed. An age of paid influencers, snake oil in shiny containers, and finding ways to morally justify trampling on other creditors’ heads.
This article is about the recent contract offered by Russian law firm Zheleznikov and Partners (ZP) for getting a share in a possible Russian MtGox bitcoin stash. If you haven’t done so already, read lawyer Daniel Kelman’s article on it from last month.
Here’s my take on the situation. Please note I don’t have a Russian lawyer and these are my private thoughts. They are not verified against Russian law.
A Russian legal firm claims to have identified an unspecified number of alleged criminals in Russia who may have direct or indirect access to bitcoin wallets which may or may not be holding some of the missing MtGox bitcoins.
They believe that by initiating a new criminal case it may be possible to convince the alleged criminal(s) to pay some of their stash (if they have it) back to MtGox creditors in exchange for leniency by the Russian courts.
The firm’s proposal is to take the total recovered figure for each creditor, deduct an eye-popping 75% commission (for those with under 1000 bitcoins), PLUS their legal fees at $320/hour, and if there’s anything left give that to the creditor. Their legal fees will be unknown until the end of all this but for many people are likely to take up most or all of their share of the recovered money.
Bitcoins recovered would normally be shared amongst all of the MtGox victims. However, if you’re not registered with the Russian authorities as a victim at the time of the payout you may not be eligible for a share.
In effect, they propose to take what would be all the creditors’ share of any recovered bitcoins (if they had registered) and hand it to the small private number of creditors who signed up early with them to keep the money for themselves. (Up to the value of their total MtGox claim, minus the 75% which goes to the lawyers, minus the fees). Their hope is that creditors will have dollar (or Ruble) signs appearing in their eyes when they hear this story and sign over their rights to any recoveries before their imminent application deadline on 22nd September. That’s only 9 days after the proposal and application was made public!
One of the critical flaws in their business model for anyone who wants a share of this money, is that this legal firm are not going to be the only people interested in these bitcoins if they exist. The firm won’t have a monopoly on claims just because they prompted a criminal case to be opened.
The US Department of Justice is likely to be interested, as is the MtGox trustee, as well as the other MtGox creditors.
In the theoretical case that only ZP were involved, and in the case that money did become available, then getting a share of all the money, even after 75% plus all the legal fees and expenses, could leave those claimants with some kind of payout. That’s the carrot being dangled. Not a very tasty one really.
The problem is that if you stop to consider all the issues rationally, it seems that in the event of any significant recovery it would be very likely that those who sign up early with ZP would end up much, much worse off than if they had waited and taken a different path, and likely even if they had waited and did nothing.
ZP are probably banking on people seeing this deadline as a last chance to get in on this and panic-rushing to sign up, however this is only an arbitrary deadline imposed by this specific legal firm. Any generic deadline for claims seems likely to be years off in the future because this is likely to drag out for a very long time. It will probably be at least several months before a new criminal case can even start, and going by information in ZP’s own document any other law firm or claimant can put in a claim at any point even during the case and that’s likely to go on for years.
The deadline is also suspicious because it is shortly before the next creditors’ meeting and before the new CR plan will be unveiled. The creditors’ meeting is the point at which we will have the first chance to ask the trustee about all of this, about how he plans to treat the CR claims of those who sign up to ZP and whether he will reduce or delay them. It also could be covered in the CR plan.
It’s not likely that they created this deadline with the genuine aim to stick to it. After the high-pressure period has landed its catch of flustered creditors, I think we can expect an announcement that they want to allow people more time to apply. They even might make their conditions and fees less draconian. Refusing more customers wouldn’t be in their commercial interests.
In reality there will almost certainly be many other claimants if there is any significant money recovered. If the MtGox trustee gets hold of it, and he will be doing everything he can to achieve this, then we will all share in the recovered money automatically.
And it seems almost inevitable that there will be other lawyers offering the service for far lower fees. A creditor-originated effort would be almost certain to happen in the event of there being significant bitcoins to share and if the MtGox trustee is not involved.
There may even end up being a class action suit covering everyone automatically.
In these cases it seems likely that those signing up now will lose out significantly compared to what they could receive by waiting and taking other paths. It’s not clear that there might be any advantage to signing up early.
The MtGox trustee will receive data about anyone signing up for this. His position on this is unsurprisingly that all assets from MtGox should be shared by all creditors. As I mentioned earlier he will try to get hold of the money for the creditors to share. But he actually has a much easier option should that not work out. He can simply reduce the CR payouts for those receiving payouts from Russia to compensate for their gains.
However as the vast majority of any Russia payout is actually paid over to ZP (for anyone under 1000 bitcoins it would be 75%-100%), this presents a significant risk of a massive net loss for anyone signing up. The salesman of the ZP contract Andy Pag suggests he believes the trustee would choose to go easy on the creditor by offsetting the amount paid to ZP and only deducting the rest of the gains. However that would mean ZP’s fees would be effectively covered by all the creditors and it’s unlikely that could be allowed to happen. The trustee is legally bound to act in creditors’ interests and choosing to pay ZP’s fees unnecessarily would not be compatible with that. The loss would almost certainly stay with the creditor who signed the ZP contract.
The other big problem is that in order to ensure the Russia claimants are not paid out more than the correct amount, it seems a reasonable possibility that the MtGox trustee might hold back the CR payouts of those registered in the Russian case until that claim is resolved. If so, it could add an extra delay of years to their payouts.
There is an even worse possibility, and that is this could end up delaying the whole of the CR for all of us. It certainly could make any CR plan more complicated and if that’s the case it could delay the release of the imminently upcoming plan for another few months.
The contract has some quite worrisome provisions for legal fees, and for locking the person into the contract.
The amount of legal fees each user will be exposed to is limitless and it’s very unclear what kinds of things will be expected to be paid for. It will cost $320 USD per hour for any kind of work, which presumably also includes processing the application form, queries and possibly complaints about their service. Their example suggests the total could be 10-100 hours, but doesn’t make any upper limit. The creditor would presumably have no control over this. There would be nothing to stop the firm charging fees for reasons which have arguable merit and there would be no realistic way to escape from the situation if they did, due to the termination terms.
There are so many ways one can lose out by signing up to this scheme but I can see only one possible situation in which it might make more money for someone than waiting. This is a situation in the signup document which Andy Pag mentions as a sweetener. If ZP manage to somehow find a way to use legal sleight-of-hand to block other lawyers, creditors, the MtGox trustee and the Department of Justice from getting their fair share of any bitcoins then it’s possible they could somehow take all of the payout for their clients. But it’s hard to imagine this could possibly happen, and remember the trustee will probably then reduce your CR payout and you’d likely still be far worse off after you’ve paid all of ZP’s fees.
In this case it would effectively be a business model based around taking other peoples’ share of the MtGox bitcoins using legal trickery. Ethically this is about as low as it gets and it’s sad to see it being pushed as a business strategy. If this situation ever did happen you can bet the other creditors would be up in arms and doing everything they could to dox and sue any benefactors. I honestly can’t see anyone coming out of this happy other than those selling it. I’m not sure whether I should feel bad for anyone who has already signed up or feel angry at them. Certainly Andy Pag should know better than to be using his position of influence and (former) trust to be selling this stuff and offering “opinions” which seem crafted to build an unrealistic perspective. I can see possible lawsuits waiting for him further down the line and I’m not sure his responsibility-waiver document will protect him as much as he thinks.