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Kleiman v. Wright

United States District Court, S.D. Florida

January 10, 2020

IRA KLEIMAN, et al., Plaintiffs,
v.
CRAIG WRIGHT, Defendant.

          Reinhart Judge.

          ORDER

          BETH BLOOM UNITED STATES DISTRICT JUDGE

         THIS CAUSE is before the Court upon Defendant Craig Wright's Objection to Magistrate Order “Deeming” Certain Facts Established and “Striking” Certain Affirmative Defenses (the “Objection”). See ECF No. [311]. The Court has reviewed the Objection, the opposing and supporting submissions, the record and applicable law, and is otherwise fully advised. For the reasons that follow, Defendant's Objection is sustained in part and overruled in part. The Magistrate Judge's Order, ECF No. [277], is vacated in part.

         I. BACKGROUND

         The factual background giving rise to this action has been set forth previously in prior opinions issued by this Court and are incorporated by reference. See e.g. ECF No. [68].

         Pursuant to 28 U.S.C. § 636 and this District's Magistrate Judge Rules, all discovery matters in this action were previously referred to the Honorable Bruce E. Reinhart. See ECF No. [21]. The proceedings relevant to the present appeal relate to a discovery dispute, initiated when the Plaintiffs sought to identify the bitcoin owned and controlled by the Defendant (herein referred to as Defendant's “Bitcoin Holdings”), and are as follows:

         a. Plaintiffs' First Set of Interrogatories

         On July 31, 2018, Plaintiffs served their First Set of Interrogatories, requesting Defendant identify the “public keys and public addresses” for any cryptocurrency he currently or previously owned. ECF No. [91-2], at 8. Defendant objected to the discovery request as “irrelevant, grossly overbroad, unduly burdensome, harassing and oppressive, and not proportional to the needs of the case.” ECF No. [91-2], at 14-19. The Defendant, however, did not object in his discovery responses that the information sought was impossible to produce. See generally ECF No. [91-2].

         A discovery hearing to resolve these respective objections was scheduled before Judge Reinhart on February 20, 2019. ECF No. [90]. In the parties' Joint Discovery Memorandum, Defendant argued that the Plaintiffs' requests were disproportionate to the needs of the case because they sought all documents relating to any bitcoin transactions by him between 2009 and 2014. ECF No. [92], at 3-4. The Defendant represented, however, that he “stands ready to produce documents in his possession, custody, or control that relate to David [Kleiman], any trust in which David [Kleiman] was a trustee or beneficiary, and W&K Info Defense Research, LLC.” Id. At the hearing, the Court directed the Plaintiffs to identify the starting date and seek production of Defendant's Bitcoin Holdings on that date, and then use the Bitcoin evidence trail to trace forward from there. ECF No. [123], at 120-123. The Defendant did not object in his discovery responses that the information sought was impossible to produce.

         b. Plaintiffs' Second Set of Requests for Production

         On January 17, 2019, Plaintiffs served a Second Set of Requests for Production on Defendant. ECF No. [92-5], at 13-30. In Request No. 1 of the Second Set of Requests for Production (herein referred to as “Request No. 1”) Plaintiffs sought “[a]ll documents or communications that provide and/or estimate the value of your cryptocurrency holdings. This includes, but is not limited to, loan applications, financial statements, tax returns, life insurance applications, financing agreements, sale papers, assignment contracts, etc.” ECF No. [92-5], at 18. Defendant objected to Request No. 1 on relevance, over-breadth, harassment, and disproportionality grounds. ECF No. [114-1], at 5-7. Defendant again did not object in his discovery responses that the information sought was impossible to produce. See generally id.

         Another discovery hearing was thereafter scheduled. ECF No. [104]. In the parties' pre-hearing Joint Discovery Memorandum, they indicated that Request No. 1 was still in dispute. ECF No. [109], at 7. The discovery hearing was held on March 6, 2019. ECF Nos. [110], [122]. At the hearing, the parties deferred the issues surrounding Request No. 1 to the next discovery hearing after the Plaintiffs represented that they were revising the scope of time referenced in Request No. 1. ECF No. [122], at 56-62. Defendant again did not argue that the information sought was impossible to produce. The Court scheduled another discovery hearing for March 14, 2019.

         c. The March 14, 2019 Discovery Hearing

         In the Joint Discovery Memorandum for the March 14 discovery hearing, Plaintiffs represented that they had limited Request No. 1 to “produce any documents that existed as of 12/31/13 which estimate the value of Defendant's bitcoin holdings, ” arguing that such information was relevant to trace the assets of the alleged partnership between David Kleiman and Defendant. ECF No. [114], at 3. Defendant argued that the request was still “overly broad, unduly burdensome and harassing by seeking such personal financial information such as loan applications, financial statements, tax returns, life insurance applications, etc.” Id. The Defendant did not object, however, that the discovery was impossible to produce. See generally id.

         At the hearing the Plaintiffs argued that the information sought in Request No. 1 was necessary to establish the universe of bitcoin that was mined during the alleged partnership between David Kleiman and Defendant. ECF No. [124], at 18-19. Plaintiffs ultimately agreed that what they were seeking was “a listing of all the bitcoin that was owned [by Dr. Wright directly or indirectly] on December 31, 2013.” Id. at 20:21-25. Plaintiff reiterated that “it's just an attempt to find the partnership's assets.” Id. at 19:7-8. At the hearing, the Defendant conceded that the information sought was relevant, but objected to its production on the basis of proportionality and potential undue burden. Id. at 21:6-10.

         At that time, Defendant admitted that a list of public addresses would “identify Craig Wright as being the owner of those addresses, which sort of like opens the door to, you know, a lot of financial information, and without any evidence that all of those - or what portion of those David Kleiman had an interest in.” Id. at 21:17-22. Based on this representation, the Court ruled that Plaintiffs were entitled to a list of Defendant's bitcoin holdings, but granted Defendant leave to file a motion for protective order based on undue burden. Id. at 22-23. At this hearing, the Defendant did not argue that the information sought was impossible to produce.

         d. Defendant's April 4, 2019 Deposition

         The Defendant was deposed on April 4, 2019. During his deposition, he testified that a trust called the Tulip Trust was formalized in 2011 (“Tulip Trust I”), but that Tulip Trust I never owned or possessed private keys to bitcoin addresses. ECF No. [270-1], at 22. Defendant also refused to answer questions about how much bitcoin he mined in 2009-2010. The parties raised this issue with Judge Reinhart, who deferred ruling on the issue. ECF No. [137], at ¶ 1 (“The request to compel Dr. Wright to disclose the amount of bitcoin he mined during 2009 and 2010 is denied without prejudice. The Court will revisit this issue after the parties brief whether production of a list of Dr. Wright's bitcoin ownership would be unduly burdensome.”).

         e. April 11, 2019 Discovery Hearing

         Another discovery hearing was held on April 11, 2019. ECF No. [142]. During this hearing, Judge Reinhart required the Defendant file a motion for protective order regarding Plaintiffs' request for a list of his Bitcoin Holdings no later than April 19, 2019. ECF No. [146], at 38-39.

         Pursuant to the Magistrate Judge's instructions, the Defendant timely filed a sealed motion. ECF No. [155]. In that Motion, the Defendant represented that he did “not have a complete list of the public addresses that he owned as of any date.” Id. at 1. He also argued that the creation of such a list would be unduly burdensome. Id. Beyond identifying himself as the miner for the first 70 blocks of the bitcoin blockchain, and providing the public addresses for those blocks, the Defendant also claimed that he did not know any other bitcoin public addresses. Id. The Defendant represented that in 2011, he transferred ownership of all of his Bitcoin into a blind trust, of which he was not a trustee or a beneficiary. Id. at 2. Defendant also claimed that he did not “know any of the public addresses which hold any of the bitcoin in the blind trust . . . and cannot provide any other public addresses.” Id. Thus, Defendant maintained that as of December 31, 2013, all of his bitcoin had already been transferred into the blind trust, and therefore are owned by the trusts, not the Defendant himself. Id.

         Judge Reinhart denied the Defendant's Motion, finding Defendant's assertion that the production of a complete list of his public addresses he owned as of December 31, 2013 was unduly burdensome to be unsupported by the facts. ECF No. [166], at 2. The Court further stated that the Defendant “does not argue undue burden, he argues impossibility, ” and noted that “[t]he argument that Dr. Wright is incapable of providing an accurate listing of his current or historical bitcoin holdings was never presented in any of the prior hearings before this Court.” Id. at 2-3.

         Judge Reinhart then ordered the Defendant provide (1) a sworn declaration identifying the name and location of the blind trust, the name and contact information for the current trustee and any past trustees and the names and contact information of any current or past beneficiaries; (2) a copy of any and all documents relating to the formation, administration, and operation of the blind trust, accompanied by a sworn declaration of authenticity; (3) all transactional records of the blind trust, including but not limited to any records reflecting the transfer of bitcoin into the blind trust in or about 2011, accompanied by a sworn declaration of authenticity; and (4) ordered the Defendant execute any and all documents, or other legal process, necessary to effectuate the release of documents in the possession, custody, or control of the trustee. Id. at 4.

         In his attempts to comply with Judge Reinhart's Order, the Defendant provided a sworn declaration, in which he stated that he had met with his counsel and provided them “with additional details and clarity regarding trusts that I settled that hold or held Bitcoin that I mined or acquired on or before December 31, 2013.” ECF No. [222], at ¶ 3. Defendant further affirmed that he had mined bitcoin in 2009 and 2010 directly into a trust in Panama, that there were no transactions related to that bitcoin, and that he later “transferred the encrypted files that control access to these Bitcoin in 2011, as explained below.” Id. ¶ 4. In June 2011, the Defendant represented that he consolidated “the Bitcoin [] mined with Bitcoin that [he] acquired and other assets.” Id. ¶ 5. Defendant claims that “[i]n October 2012, a formal trust document was executed, creating a trust whose corpus included the Bitcoin that [he] mined, acquired and would acquire in the future. The name of that trust is Tulip Trust. It was formed in the Seycelles [sic].” Id. Defendant then identified the trustees of Tulip Trust I as (1) COIN Ltd. UK, [1] (2) Uyen Nguyen, (3) Dr. Wright, (4) David Kleiman, (5) Panopticrypt Pty. Ltd, [2] and (7) Savannah Ltd.[3] Id. ¶ 6. Dr. Wright is the contact person for CO1N Ltd. UK. The contact person for Panoptycript Pty. Ltd. is Defendant's wife. The contact person for Savannah Ltd. is Denis Mayaka. Id. ¶¶ 9-12. Defendant further affirmed that the beneficiaries of Tulip Trust I are Wright International Investments Ltd. and Tulip Trading Ltd. Defendant is the point of contact for both of the beneficiaries. Id. ¶¶ 13-14. Defendant then asserted for the first time that “[a]ccess to the encrypted file that contains the public addresses and their associated private keys to the Bitcoin [] mined, requires myself and a combination of trustees referenced in Tulip Trust I to unlock based on a Shamir scheme.” Id. at ¶ 23.

         The Defendant's affidavit also outlined the structure of the second Tulip Trust (“Tulip Trust II”). Defendant admitted that he and his current wife are the beneficiaries to Tulip Trust II. Id. at ¶¶ 19-20. At that time, Defendant provided a limited number of documents related to the trust. According to the Plaintiffs, Defendant “produced two sworn statements, copies of various trust instruments, and a statement from the purported trustee re-attaching a trust instrument.” ECF No. [210], at 3. The documents, however, apparently did not identify the specific bitcoin that were transferred into the blind trusts, nor did they indicate what the blind trusts have done with the bitcoin since their transfer. Id. Defendant claimed that he “produced trust formation documents along with a sworn declaration of authenticity, ” as well as “documents reflecting the use of bitcoin rights from the trust to support research and development by his Australian entities.” ECF No. [211], at 3. Defendant did not produce any documents related to the administration and operation of the blind trust as ordered by the Court. See ECF No. [166]; ECF No. [197] at 4, fn 1.

         f. Plaintiffs' Motion to Compel

         On June 3, 2019, Plaintiffs filed a Motion to Compel Defendant to Comply with this Court's Orders Directing Him to Produce a List of the Bitcoins He Held as of December 31, 2013. ECF No. [197] (the “Motion to Compel”). In the Motion to Compel, Plaintiffs sought an order from the Court imposing sanctions under Federal Rule of Civil Procedure 37, and to order the Defendant to provide a sworn statement identifying the public addresses of the bitcoin transferred into the Tulip Trusts, to provide transactional records and communications relating to the trusts, and to sit for a renewed deposition. Id. at 6. Plaintiffs specifically requested that should the Defendant continue to refuse to comply with the Court's Orders, that the Court deem all of Dr. Wright's holdings in the Tulip Trust to be joint property belonging to both the Defendant and David Kleiman. ECF No. [210], at 6.

         In his Response in Opposition to the Motion to Compel, Defendant conceded that he did not comply with the Court's Order. ECF No. [204]. However, for the first time, Defendant argued in these discovery proceedings that compliance with the Court's Order was “impossible.” ECF No. [204]. Moreover, in this Response, Defendant claimed that information necessary to comply with the Court's Order was in Tulip Trust I in an encrypted file protected by a “Shamir's Secret Sharing Algorithm.”[4] ECF No. [204], at 5. Defendant then represented that he could not decrypt the “outer level of encryption” because he did not have all of the necessary keys, and represented that the encryption keys needed were “distributed to multiple individuals through the [blind] trusts” and “he alone does not have ability to access the encrypted file and data contained in it.” Id.

         A held was hearing on June 11, 2019 on the Motion to Compel. ECF No. [221]. At the hearing, Plaintiffs' counsel presented the Court with the Defendant's earlier deposition where he denied ever putting bitcoin into a trust and denied putting any private keys into the Tulip Trust, which was contrary to the position the Defendant was now taking in his Opposition to the Motion to Compel. ECF No. [221], at 8-9. The Court once again gave the Defendant an opportunity to “produce a complete list of all bitcoin that he mined prior to December 31, 2013, ” and entered an Order to Show Cause why it should not certify a contempt of court to the District Judge. ECF No. [217]. An evidentiary hearing was scheduled for June 28, 2019.

         g. Evidentiary Hearing

         On June 28, 2019, a two-day evidentiary hearing began before Magistrate Judge Reinhart. The Court heard from three witnesses (1) the Defendant, (2) Steven Coughlan a/k/a Steve Shadders, and (3) Dr. Matthew Edman. ECF Nos. [236], [264]. Plaintiffs also submitted excerpts from the depositions of Jonathan Warren and Dr. Wright. ECF Nos. [261], [270]. The Magistrate Judge also heard oral argument on August 26, 2019.

         During the Defendant's testimony, the Defendant testified that it was impossible to comply with the Court's Orders regarding his Bitcoin Holdings due to the Shamir Scheme implemented related to the encrypted file. Defendant also claimed that he enlisted the now deceased David Kleiman to implement and carry out these safeguards. ECF No. [236], at 125:15-126:23. He testified that to decrypt the outer most layer of the encryption he needed eight “key slices, ” of which he presently only has seven in his possession. Id. at 125. It was the Defendant's position that he simply could not produce a list of his Bitcoin Holdings even if he wanted to. Id. at 14:8-14. Judge Reinhart did not find the Defendant's testimony to be credible, and his testimony and demeanor did not impress Judge Reinhart as someone who was “telling the truth.” ECF No. [277], at 19.

         Steven Coughlan a/k/a Steve Shadders (“Shadders”) testified as to his effort to apply the filter criteria to identify the Defendant's Bitcoin Holdings. Judge Reinhart found Shadders' testimony to be credible and worthy of belief. ECF No. [277], at 18. Judge Reinhart found that employing Shadders to identify the Bitcoin Holdings demonstrated a “good faith attempt” by the Defendant to comply with the Court's Order. However, Judge Reinhart found that this finding warranted little weight in light of the ...


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