Federal Court In Pennsylvania Orders Trial On Bitcoin Trader’s Claims Against Lawyers Involved In Alleged Crypto-Mining Scam

By:  Carl L. Engel

Last Friday, January 20, 2023, the U.S. District Court for the Eastern District of Pennsylvania, in the case Zaftr Inc. v. Kevin Jameson Lawrence et al., held that a cryptocurrency trading firm must present its claims against two lawyers accused of conspiring to defraud it in a Bitcoin scam to a jury at trial.  According to the trading firm, it lost millions of dollars when it sent funds to the lawyers for the purchase of Bitcoin.  As it turned out, the purported Bitcoin miner who the lawyers said would sell Bitcoin to the trading firm does not appear to exist in real life.  This case illustrates the risks inherent in unregulated financial markets, and serves as warning to those advocating for the abolition of government safeguards.

Zaftr, Inc., is a crypto-currency business based in Calgary, Canada. One of Zaftr’s activities is short-selling Bitcoin.  Specifically, it borrows Bitcoin from a line of credit provided by one of its shareholders, immediately exchanges the Bitcoin for dollars, and later re-purchases Bitcoin to replenish the line of credit.  Zaftr’s profit is the difference between sale price of Bitcoin at the beginning of the trade and the re-purchase price at the end.  If the price of Bitcoin rises over the course of the trade, Zaftr loses money.

In August 2020, the CEO of Zaftr, Nathan Montgomery, was introduced to Kevin Lawrence and John Kirk by a cryptocurrency broker.  During the introductory call, Mr. Lawrence said that he knew a Bitcoin seller, James Smith, who had relationships with Bitcoin miners and access to an inventory.  After the call, Mr. Montgomery believed that he was dealing with two American lawyers – one of whom (Lawrence) was also represented to be a doctor, a former federal prosecutor, and an alumnus of the “Clinton administration” – and an experienced Bitcoin seller.  In fact, Mr. Lawrence is not a medical doctor, his law license was administratively suspended, he was never a federal prosecutor, and he did not ever work in the Clinton administration.  Moreover, it turned out that “James Smith” was not a real person, and the purported seller's identity remains a mystery.

After the call, the parties formed a deal that would reverse Zaftr’s traditional role.  Under the deal, “Mr. Smith” would provide Bitcoin, Zaftr would provide the funds to purchase it, and then Zaftr could lend it out to short-sellers.  Mr. Lawrence and his company would act as the broker between Zaftr and “Mr. Smith,” and Mr. Kirk and his law firm would hold the funds in escrow and act as counsel to Mr. Lawrence’s company.  The deal was arranged so that Zaftr did not communicate directly with “Mr. Smith” during the transactions.  During Zaftr’s due diligence review of “Mr. Smith,” Mr. Lawrence and Mr. Kirk provided him with a fake passport that showed him to be a resident of the United Kingdom.

On August 25, 2020, Zaftr sent $2,254,514 to Mr. Kirk for the purchase of 200 Bitcoin from “Mr. Smith,” but did not receive any Bitcoin in return.  When Mr. Montgomery inquired as to why Zaftr had not received the Bitcoin, he was shown WhatsApp communications in which “Mr. Smith” stated that there was a “timing” issue.  On August 28, Zaftr requested the return of its funds.  On September 4, 2020, Mr. Kirk returned $1,886,977.60.  Mr. Lawrence and Mr. Kirk kept $367,536.40 as a “Seller Mandate Fee” owed under the parties’ agreement.

Apparently learning nothing from the first transaction, Zaftr entered into a second agreement with Mr. Lawrence and Mr. Kirk, whereby Bitcoin would be purchased through a “Mr. Gomes,” whom Mr. Lawrence said was the managing partner of a Malaysian law firm.  The law firm would then send the money to “Mr. Smith” for Bitcoin.  Like “Mr. Smith,” it appears that “Mr. Gomes” may not actually exist.  In September 2020, Zaftr sent $1,683,942.68 to the Malaysian law firm.  Like the first time, Zaftr did not receive any Bitcoin.

To recover the funds it had lost, Zaftr entered into a third agreement with Mr. Lawrence, Mr. Kirk, and “Mr. Gomes.”  Under the new arrangement, funds would first be wired to Mr. Kirk, who would then wire the funds to the Malaysian law firm’s bank account in Singapore.  In return, Zaftr would receive the 200 Bitcoin owed to it, would purchase an additional 300 Bitcoin, and would receive 10 Bitcoin as a fee for the two failed transactions.  In October 2020, Zaftr sent $3,095,120.70 to Mr. Kirk.  Again, Zaftr did not receive any Bitcoin.

On November 14, 2020, Zaftr requested the return of all funds sent by it for the purchase of Bitcoin.  No funds were returned.  “Mr. Gomes” kept $4,779,063.38 of the funds, Mr. Lawrence kept $733,160.90, and Mr. Kirk kept $111,312.35.  Zaftr filed a lawsuit in Singapore to recover the funds kept by “Mr. Gomes,” and has recovered $2,145,120.70 so far.  Zaftr also sued Mr. Lawrence, Mr. Kirk, and their companies in U.S. federal court, based on their breaches of several contracts that they signed in connection with the failed transactions, as well as for fraud and conspiracy.  Zaftr asked the court to enter summary judgment in its favor, arguing that there was no question as to the validity of the contracts, or that the defendants failed to perform their obligations thereunder.

On January 20, 2023, the court entered judgment for Zaftr on a couple of the contract claims, but held most of them for trial.  As to an ID Verification Agreement, which stated that Mr. Lawrence had authenticated “Mr. Smith’s” passport, the court found in Zaftr’s favor, because the passport had been fake.  The court also found in favor of Zaftr as against Mr. Kirk, who had acted as escrow agent, because it found that he had wired some of the funds to third parties before the transaction finalized, and those moneys now could not be recovered.  Because of the conflicting testimony regarding the financial transfers and negotiations, however, the bulk of the contract claims, as well as Zaftr’s fraud and conspiracy claims, will need to be decided by a jury at trial.

As a result of this Botched transaction, Zaftr has lost $3,538,415.93.  This case illustrates the risks of participating in murky unregulated markets, where participants need not register with government authorities, nor is there a licensing body to ensure their professionalism.  As a result of the absence of these safeguards, Zaftr found itself in a situation where it was allowed to sell millions of dollars to two people who may not even exist.  While proponents of deregulated market champion a system without government “interference,” a system without accountability certainly poses its own risks, as Mr. Montgomery can assure you.