Crypto (& other) Bros – Navigating Storms in the Scammers’ Paradise

Introduction

1. The shift towards an increasingly digital world has created a new and fertile environment in which scammers thrive at causing innocent victims to part with their money. The days of the Nigerian prince have passed; the swindlers are now using cutting edge technology (including AI) to convincingly pass themselves off as legitimate operators.
2. More and more, courts are having to grapple such schemes where cryptocurrency has been used. “Crypto” is an attractive medium into which allegedly ill-gotten gains can be funnelled. Readers will be familiar with the ins-and-outs of crypto from Crawford’s article in the last edition of Hearsay and will recall that tracing and identifying the owner of crypto is inherently very difficult.
3. The increasing sophistication of the frauds, and the enormous consumer losses they are causing, have seen a sharp rise in regulatory action. The reaction from the regulators and the courts has been appropriately stern. This response reflects the difficulty in investigating this kind of conduct and the potential for assets to be quickly rendered unrecoverable.
4. Acting for parties in proceedings involving these kinds of allegations present difficult strategic questions that often must be made with limited time, knowledge and access to resources. This note examines some of the more frequently encountered issues and considers how they might be approached.

First contact

5. The first contact will ordinarily come with the target being served with orders made ex parte. Section 1323 of the Corporations Act enables a court to make orders in addition to the classical Mareva procedural orders. Experience shows that generally ASIC will bring the application.
6. To obtain relief the applicant must establish that the orders are ‘necessary or desirable’. The threshold in s 1323(1)(a) is much easier to satisfy than the traditional test for an injunction: ASIC need not demonstrate a prima facie case nor establish a risk of dissipation of assets.[1]   
7. The courts have used s 1323 to its full extent when required.[2] ASIC has previously successfully sought broad orders in cases involving unregistered investment schemes trading in cryptocurrency. The orders can have immediate and profound effects on a respondent’s business, and include:
   • orders appointing receivers to not only the property of a corporation, but also individuals connected with a corporation or the impugned conduct.
   • orders restraining any dealing with property or incurring monetary liabilities, and requiring provision of credentials, passwords and cryptocurrency wallets.
   • disclosure orders.
   • travel restraint orders.
8. Such broad orders can be seen as necessary to secure the cryptocurrency and prevent access to it; cryptocurrencies are highly liquid and difficult to trace to a specific person.[3]
9. The effect of such broad orders well be to denude the person or entity for whom you are briefed of any assets and thus capacity to pay for legal advice and representation, both in respect of the proceeding in which the orders were made but also any allied investigative processes or criminal proceedings. Access to funding is even more important in cases involving crypto because of the (almost certain) need to have access to expert forensic information technology and accounting services.  
10. In addition, if receivers have been appointed to all property, then the client may no longer have access to important and relevant information stored or recorded on phones, computers and other property taken by the receivers.

Adjusting the landscape

11. The hearing of the first return or continuance of the orders is the best opportunity to facilitate access to funding and information for the client.
12. Generally, where all of a defendant’s property is restrained, they are entitled to a carve out in a freezing order permitting them to use their assets to pay for ordinary living expenses and the reasonable legal expenses of defending the claims made against them.[4] Orders that do not provide for that when made ex parte should be modified at the first opportunity.[5] Where only certain property has been restrained, a defendant must establish that they are unable to live or pay for reasonable legal expenses without access to the restrained property.
13. There have been instances where courts prescribe a sum for living expenses (e.g. $800 per week). It is important that this be struck at the right level at the first opportunity your client is heard on the matter; varying the order at a later point will not be given for the asking and if opposed, will require the moving party to establish a material change in circumstances.
14. The exception to the general position directs attention to whether the restrained assets are the client’s assets. If the claims are prima facie claims for proprietary relief or otherwise involve an allegation that the restrained assets are not “their assets” then the general position does not apply. In such cases the starting point is that a defendant is not entitled to access restrained assets to pay their living and legal expenses.
15. Courts are attentive to protecting trust property.[6] To circumvent that different starting point a defendant must demonstrate that the interests of justice weigh in their favour. This is a careful and anxious judgment[7] but will generally require the defendant to establish (at least) an arguable defence.  
16. We all know that these matters unfold quickly with little time for fulsome consideration. Constrained access to funding provides another form of limitation. The key issues to consider during this initial period are establishing with some precision the nature of the claims made and quantifying a justifiable amount for living expenses.
17. It goes without saying that negotiating with ASIC (and any receivers appointed) to agree a solution is desirable in terms of avoiding risk and expense but may obviously involve compromise. It is not only a professional obligation to keep those negotiations courteous, but it is also in both yours and your client’s best interests: in particular, providing timely and sensible estimates of legal fees to the receivers and ASIC will enhance the likelihood of avoiding a contest about whether the fees are reasonable.

Information

18. In addition to orders appointing receivers and otherwise restraining use of property, it is customary for orders to be made requiring defendants to provide specific information; in crypto cases the specific information is about “wallets”[8] or the keys to unlock them. Private keys are not easy to remember. They look like this:

E9873D79C6D87DC0FB6A5778633389F4453213303DA61F20BD67FC233AA33262

19. As identified above, these information provision orders are obtained simultaneously with either ASIC seizing property during search warrants or the appointment of receivers to all your client’s property. This means that your client may not have access to their phones, computers or other information. That makes compliance with any information provision orders difficult if not impossible.  
20. The only practical solution is to negotiate with ASIC (or the receivers as the case may be) for access to the devices so that the client can comply with the orders. Attempting to have those negotiations as soon as possible disarms the opponent from making any sensible claim that the client has failed to comply.
21. In truth, there is now no good reason why there should be any delay in ASIC or the receivers returning phones, laptops and other electronic devices promptly. Such devices are imaged quickly and easily and once imaged, there is no good reason why they should not be returned (assuming ASIC and the receivers have secured the relevant property).
22. Another reason to obtain that information is to properly prepare your client for the inevitable section 19[9] examination. The starting point of that process is to obtain a detailed statement (or statements) from your client, together with reviewing any available documentation. It is difficult to overstate the importance of proper preparation for ASIC examinations; to set the scene for the future conduct of any proceedings. But:
    • often there will be insufficient time to obtain a statement (or a detailed one); and
    • ASIC will not have completely developed its case and nor will it have been exposed in anything other than a summary form in the interlocutory material.
23. It is legitimate to request a delay to an examination so that the client can be properly prepared. But it cannot be expected that the delay will be of any great length. It may also be desirable to have early engagement with an expert to provide technical IT advice.

First in, best dressed?

24. Early on it may be identified that the person for whom you are briefed has significant exposure, or themselves fallen victim to a larger fraud. In that case, their best course of action might be cooperation.  
25. ASIC has an immunity policy which would be the starting point of any consideration. The next best step is to raise the potential for immunity with your client, and then informally with your opponent.
26. It should be noted that as a matter of policy, immunity will not extend to compensation actions but if the exposure is substantial, they may be the least of your client’s concerns.

Summary

27. Navigating the storm of regulatory intervention presents difficult challenges. That is especially so where crypto is involved because of the inclination to remove the target’s access to assets. The essential matters to consider and resolve are:
    • identifying with some precision your client’s requirements for living expenses and quantifying them in a way that will satisfy the regulator and the court.  
    • ensuring your client can fund legal representation for the proceeding and the investigation. This is best done through negotiation.
    • proactive management of compliance with obligations to provide information.
    • engaging with experts to ensure that the client properly complies with their obligations to provide information (either by reason of a court order or through an examination).
    • preparing the client, as best as possible, for any section 19 examinations.

[1] See Re Courtenay House Capital Trading Group Pty Ltd (in liq) [2018] NSWSC 1918 at [11].

[2] Examples include ASIC v NGS Crypto Pty Ltd [2024] FCA 373; ASIC v A One Multi Services Pty Ltd [2021] FCA 1297.

[3] Future regulation may make this easier. 

[4] Goumas v McIntosh [2002] NSWSC 713 at [27].

[5] Frigo v Culhaci [1998] NSWCA 88 at 9.  

[6] Birketu Pty Ltd v Westpac Banking Corporation (No 2) [2018] NSWSC 494 at [60] [64], referred to in Human Group (below).

[7] National Australia Bank Ltd v Human Group Pty Ltd (No 2) [2020] NSWSC 1900 at [109]-[111], [154] referred to in Westpac Banking Corporation v Forum Finance Pty Ltd (in liq) [2022] FCA 1206.

[8] Services or devices that record crypto holdings.

[9] Of the Australian Securities and Investments Commission Act 2001 (Cth).