Wright loses big to Kleiman — judge rules Kleiman estate owns half the Satoshi stash

Craig Wright claims to be Satoshi Nakamoto, the inventor of Bitcoin. He says he invented it with the help of Dave Kleiman, a computer security expert who died in 2013.

(Approximately nobody believes Wright’s claim, after he famously failed to come through on it repeatedly in 2016. See chapter 6 of Attack of the 50 Foot Blockhain.)

Satoshi Nakamoto mined about a million bitcoins. These coins have not moved since Satoshi disappeared in 2011.

Ira Kleiman is the executor of his brother Dave’s estate. Ira says that, if “Satoshi” mined a million bitcoins … then half of them are Dave’s, and Wright needs to hand them over. Wright denies he was in partnership with Kleiman, and denies that Kleiman has any ownership over the coins. The estate sued Wright over this in early 2018.

Wright has variously claimed that the coins are locked in a trust, that he doesn’t know who the trustees are, and that Dave signed over all rights to the coins anyway. He’s been obstructive in document discovery and in depositions. He’s made contradictory claims. He’s submitted documents in discovery that experts have identified as trivially forged.

After a hearing on Monday 26 August, Magistrate Judge Bruce Reinhart has given his order concerning the coins — he’s struck out Wright’s defenses, and ordered that the Kleiman estate owns half the bitcoins. Wright also has to pay some of Kleiman’s legal costs.

The remedy as written is not as drastic as early Twitter reports from the hearing had it, and Wright’s interview with Modern Consensus after the hearing. (That interview is the most gullible document I’ve read this week.) Though the remedy’s still pretty drastic, and it implies the drastic take on events.

The Court is not ruling on whether Craig Wright is Satoshi Nakamoto — both Kleiman and Wright have accepted Wright’s claim for the purposes of this case.

 

 

Wright’s Bitcoin holdings as of 2013

This order is about just one wrinkle in this case — Kleiman’s 11 June motion to compel Wright to produce a list of the bitcoins he held as of 31 December 2013, and never mind the excuses.

The Court suggested Kleiman ask for Wright’s holdings as of a particular date. Kleiman asked for “a listing of all the bitcoin that was owned [by Wright] on December 31, 2013″ — because Dave died on 26 April 2013 — and the Court concurred.

In Wright’s deposition of 4 April, he declined to answer questions about how much Bitcoin he mined from 2009 to 2010. He testified that a trust, the Tulip Trust, was formed in 2011, and held the mined bitcoins.

Kleiman asked the Court to make Wright detail his bitcoin holdings, and give full details on the trust and the bitcoins it held. The Court concurred. Wright provided a list of trustees and beneficiaries and documentation on two trusts called the “Tulip Trust.”

On 3 June, Kleiman filed the “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.”

Kleiman also asked that if Wright continued not to comply, “that the Court deem all of Dr. Wright’s holdings in the Tulip Trust to be joint property belonging to both Dr. Wright and David Kleiman.”

The Court gave Wright a deadline of 17 June to “produce a complete list of all bitcoin that he mined prior to December 31, 2013,” and entered an Order to Show Cause why Wright should not be found in contempt of court.

Wright responded with literally meaningless technobabble:

What I actually did was, I transferred the algorithms and software that I had used, the nonpublic version of Bitcoin that I was working on, into an encrypted file. The encrypted file was then — basically the key was split so that other people could have it.

Over two days of hearings on the motion, Wright testified that “after drug dealers and human traffickers began using Bitcoin, he wanted to disassociate himself completely from it” — so he put his bitcoins from 2009–2010 into an encrypted file, held by a blind trust, the Tulip Trust. He divided the key into slices, and gave Dave Kleiman a “controlling number” of slices.

Two experts also testified — Steve Shadders, the Chief Technology Officer from Wright’s company nChain, on his efforts to identify Wright’s bitcoins from the public Bitcoin blockchain, and plaintiff’s witness Matthew Edman on documents submitted by Wright in discovery that he thought were forgeries.

Rule 37

Federal Rule of Civil Procedure 37 is how a judge deals with obnoxious and bad-faith parties to a case. Rule 37 allows the Court to, amongst other actions:

• award attorney fees against a party, or their counsel, as a sanction for non-compliance with discovery;
• rule that particular facts hold for purposes of the action;
• strike out claims or defenses from the disobedient party, or stop them from introducing designated matters in evidence;
• strike pleadings;
• stay proceedings until an order is obeyed;
• dismiss the action or proceeding in whole or in part;
• render a default judgment against the disobedient party; or
• treat as contempt of court the failure to obey any order, except an order to submit to a physical or mental examination.

If you behave badly enough in discovery, the judge can pretty much throw out your entire side of the case.

The Court’s findings

The Court found that “Dr. Wright has not met his burden of proving by a preponderance of the evidence that he is unable to comply with the Court’s Orders.”

The judge did not think the evidence in the record was sufficient to find criminal contempt. He found “clear and convincing evidence that would support a civil contempt” — but felt sanctions under Rule 37 would be sufficient:

There is clear and convincing evidence that Dr. Wright’s non-compliance with the Court’s Orders is willful and in bad faith, that Plaintiffs have been prejudiced, and (particularly given the extended pattern of non-compliance and its egregiousness) a lesser sanction is not adequate to punish or to ensure future compliance with the Court’s Orders. Therefore, sanctions under Rule 37(b) are warranted.

Kleiman’s attorney fees related to this motion were awarded — against Wright personally, and not against his counsel. “I find without hesitation that sanctions are not warranted against Dr. Wright’s counsel.” He was very impressed with Wright’s lawyers and their professionalism — and he blames all the problems on Wright alone.

What happens when you annoy the judge

The next eight pages of the order are Judge Reinhart detailing at length just how much Wright pissed him off during this case with his obstruction, dissembling, and provable lies.

Reinhart discusses witness credibility. He found Shadders was credible in his testimony about his blockchain research — even as he’s Wright’s subordinate at nChain.

He was not so impressed with Wright’s testimony. You should read the original document, but here are my favourite bits:

I completely reject Dr. Wright’s testimony about the alleged Tulip Trust, the alleged encrypted file, and his alleged inability to identify his bitcoin holdings. Dr. Wright’s story not only was not supported by other evidence in the record, it defies common sense and real-life experience. Consider his claims. He designed Bitcoin to be an anonymous digital cash system with an evidentiary trail. He mined approximately 1,000,000 bitcoin, but there is no accessible evidentiary trail for the vast majority of them. He is a latter-day Dr. Frankenstein whose creation turned to evil when hijacked by drug dealers, human traffickers, and other criminals. To save himself, he engaged David Kleiman to remove all traces of his involvement with Bitcoin from the public record. As part of his efforts to disassociate from Bitcoin and “so that I wouldn’t be in trouble,” he put all his bitcoin (and/or the keys to it – his story changed) into a computer file that is encrypted with a hierarchical Shamir encryption protocol. He then put the encrypted file into a “blind” trust (of which he is one of the trustees), gave away a controlling number of the key slices to now-deceased David Kleiman, and therefore cannot now decrypt the file that controls access to the bitcoin. His only hope is that a bonded courier arrives on an unknown date in January 2020 with the decryption keys. If the courier does not appear, Dr. Wright has lost his ability to access billions of dollars worth of bitcoin, and he does not care. Inconceivable.

During his testimony, Dr. Wright’s demeanor did not impress me as someone who was telling the truth. When it was favorable to him, Dr. Wright appeared to have an excellent memory and a scrupulous attention to detail. Otherwise, Dr. Wright was belligerent and evasive. He did not directly and clearly respond to questions. He quibbled about irrelevant technicalities. When confronted with evidence indicating that certain documents had been fabricated or altered, he became extremely defensive, tried to sidestep questioning, and ultimately made vague comments about his systems being hacked and others having access to his computers. None of these excuses were corroborated by other evidence.

… There was substantial credible evidence that documents produced by Dr. Wright to support his position in this litigation are fraudulent. There was credible and compelling evidence that documents had been altered. Other documents are contradicted by Dr. Wright’s testimony or declaration. While it is true that there was no direct evidence that Dr. Wright was responsible for alterations or falsification of documents, there is no evidence before the Court that anyone else had a motive to falsify them. As such, there is a strong, and unrebutted, circumstantial inference that Dr. Wright willfully created the fraudulent documents.

… computer forensic analysis indicated that the Deed of Trust presented to the Court was backdated. The totality of the evidence in the record does not substantiate that the Tulip Trust exists. Combining these facts with my observations of Dr. Wright’s demeanor during his testimony, I find that Dr. Wright’s testimony that this Trust exists was intentionally false.

… Ultimately, Dr. Wright’s claim of inability to comply with the Court’s Orders relies on the existence of an encrypted file in the Tulip Trust containing the information necessary to reconstruct Dr. Wright’s bitcoin holdings. I find that this file does not exist.

… In sum, after days of testimony, multiple discovery hearings, and lengthy pleadings, the sole evidence supporting Dr. Wright’s claim that he cannot comply with the Court’s Orders is the uncorroborated word of Dr. Wright. That word is insufficient to meet his evidentiary burden. Moreover, the totality of the evidence, including a negative inference drawn from Dr. Wright’s incredible testimony and use of fraudulent documents, is more than sufficient to meet Plaintiffs’ burden.

Remedy

In deciding the remedy, the Court says of Wright:

His conduct has wasted substantial amounts of the Court’s and the Plaintiffs’ time and resources. It has unnecessarily protracted this litigation.

Judge Reinhart did not order Wright to pay Kleiman $5 billion in bitcoins. The precise wording of this part of the remedy is:

4. Pursuant to Fed. R. Civ. P. 37(b)(2)(A)(i), the Court deems the following facts to be established for purposes of this action: (1) Dr. Wright and David Kleiman entered into a 50/50 partnership to develop Bitcoin intellectual property and to mine bitcoin; (2) any Bitcoin-related intellectual property developed by Dr. Wright prior to David Kleiman’s death was property of the partnership, (3) all bitcoin mined by Dr. Wright prior to David Kleiman’s death (“the partnership’s bitcoin”) was property of the partnership when mined; and (4) Plaintiffs presently retain an ownership interest in the partnership’s bitcoin, and any assets traceable to them.

This clearly implies that Wright has to pay the Kleiman estate a large pile of bitcoins. However, the Court states at the beginning of this order that it makes no findings as to how large the pile is.

The Court also struck almost all of Wright’s defenses, under Rule 37.

What happens now?

This is not technically the end of the case — this is just an order along the way, establishing facts for the purposes of this action.

But functionally, Wright has lost big — and is liable to half the bitcoins that Satoshi mined from 2009 to 2010. He’s lost on the biggest factual issue, and his defenses have been struck.

There’s a huge and obvious problem here — there is no way that Craig Wright was Satoshi Nakamoto, there’s no way he mined a million bitcoins, Dave Kleiman had nothing to do with the origins of Bitcoin, and all the information that Ira Kleiman has relating Dave to Bitcoin comes from Craig Wright.

But at that point, Wright owes $5 billion in bitcoins, that he never controlled, to the estate of the guy he didn’t develop Bitcoin with — because he wouldn’t back down on his claim to be Satoshi Nakamoto.

And if he tries now to back down on the claim — that’s a slam-dunk for perjury.

Perhaps Wright can arrange a settlement.

I must admit, I find it hard to believe that Ira Kleiman really thinks Wright was ever Satoshi — but I’m seeing no signs of him letting Wright off the hook.

Let me make clear — I fully accept that I could be incorrect in saying that Wright didn’t invent Bitcoin. So I invite Wright to move a Satoshi bitcoin — as he has repeatedly claimed he can — and prove me wrong.

See also: Stephen Palley at The Block — “He lost this case because he lied. That’s the bottom line.” And Kim Nilsson of WizSec on the hearing itself, and the full transcript.

 

Anyone who thinks that a case isn't over after a judge says that the defendant is a liar who fabricated evidence and orders them to pay the other side's fees has a curious understanding of what it means to win.

— Palley (@stephendpalley) August 28, 2019