HONG KONG--(BUSINESS WIRE)--With Hong Kong-based bitcoin exchange MyCoin now unmasked as a ‘classic Ponzi scheme’, the race is on in terms of trying to recover up to HK$3bn ($387m) of investor assets around the globe.
RANDALL ARTHUR, a partner in the Hong Kong office of Kobre & Kim, addresses a number of key questions about what lies ahead:
What recourse do MyCoin investors have?
“There are no provisions under Hong Kong law or procedure which allow class action lawsuits to be commenced. Individual investors have the right to commence legal proceedings in Hong Kong against MyCoin, or even join together as joint plaintiffs in a claim. However they would only be pursuing the claim on behalf of themselves and not for the benefit of a class of investors. Even if one or more individuals were able to obtain a judgment against MyCoin, it appears that there may not be any assets in Hong Kong against which such a judgment could be enforced.
“Unless assets can be immediately identified in Hong Kong or elsewhere in the world – and steps taken to freeze those assets in aid of the Hong Kong proceedings – MyCoin and the perpetrators of the scheme would almost certainly use the opportunity to continue to try and hide investors' funds in various jurisdictions around the world, making any judgment obtained that much harder to enforce.
“Taking immediate action to identify the whereabouts of investors' assets and to freeze those assets is crucial. It may therefore be in the best interests of the investors to take immediate steps to place MyCoin into provisional liquidation. Once appointed, the provisional liquidators will have wide powers to take immediate possession of all of MyCoin’s assets and records, including banking records. They can thereafter engage in a large scale recovery exercise, involving investigations, both in Hong Kong and overseas, to trace where investors' stolen funds have been hidden. Once identified, the funds – or assets acquired with those funds – can be frozen and then steps can be taken, whether through legal proceedings or otherwise, to recover those assets for the benefit of the investors.”
How should investors go about applying to put MyCoin in provisional liquidation?
“Simply, as creditors of MyCoin, one or more of the investors would need to present a winding-up petition against MyCoin alleging that there are unpaid debts due to the investors and that it is appropriate for MyCoin to be wound up. It is also possible – although uncommon – for the Registrar of Companies to apply to wind up a company if it appears to the Registrar that the company is being used for unlawful purposes, as is likely to be the case with MyCoin. As soon as the petition is presented, an application can immediately be made to appoint provisional liquidators over MyCoin.”
When provisional liquidators are appointed in this matter, they will begin an investigation into the affairs of the company. What are the top things liquidators need to do right away to minimize losses?
“The provisional liquidators (and liquidators once a winding-up order is made) will be primarily concerned with investigating the affairs of MyCoin and identifying, and preserving, whatever assets they can by securing the premises at which MyCoin conducted business, and taking possession of the computers, books and records of MyCoin. The provisional liquidators' team will immediately begin to review the records to ascertain where the investors' assets may be, whether in or outside of Hong Kong.
“They will also inform banks of their appointment to ensure any accounts MyCoin has are immediately frozen – to the extent that such accounts have not already been frozen by the police – and obtain all relevant banking records. Any funds remaining in any account will be transferred to the company's liquidation account.
“In addition, the provisional liquidators will need to interview – and obtain any relevant information and documents from – a number of organisations and individuals. These include investors, any employees who can be located; and other agents and advisors involved with the company,.
“Once the provisional liquidators are able to identify assets outside of Hong Kong, they will likely engage lawyers to take steps to secure those assets, whether through court proceedings or otherwise.”
How will the fact that there are allegedly no (or few) written records in this case impact asset recovery?
“This will make things more difficult, but liquidators are used to dealing with scenarios where there are few written records. In such circumstances they will conduct investigations with the tools they have, analysing computers, banking records, and other books and records of company. They will also seek to obtain what they can from third parties, whether documents, e-mails, or other electronic records.
“It is worth noting that provisional liquidators have wide powers to compel production of documents and information from any party who may have knowledge of the affairs of the company, such as directors, investors, lawyers, accountants, company secretarial service providers, banks, or other agents. If those parties fail to co-operate with the liquidators’ investigations, then the liquidators can apply to the court to compel those parties to provide documents and information.”
MyCoin allegedly operated with a large network of referral sources such as real estate and insurance agents and law firm clerks. Do investors have recourse against these parties?
“The liquidators may have potential claims against such parties if there is evidence they were complicit in the scheme. Even if did not know of the scheme and were innocent pawns, liquidators may be able to claw back any payments or commissions made to them by MyCoin. These parties will be an important source of information, and potentially documents, for the liquidators.”
What might be the long-term implications of this matter in terms of legislation or moves to protect investors in the future?
“Legislation, called the Pyramid Schemes Prohibition Ordinance, already exists in Hong Kong which makes it an offence to promote, or knowingly participate in, pyramid and ponzi schemes. Further, ponzi schemes involving regulated industries, such as products regulated by the Securities & Futures Commission, are often more difficult to run and promote, as investors are better placed to do due diligence on the company.
“Whilst it is almost certain that MyCoin did not actually trade in bitcoins, it may well have promoted itself as doing so given that the bitcoin industry is not currently regulated. In other words, potential investors would have had less opportunity to investigate the bona fides of the company. In light of this ponzi scheme which falsely promoted itself as trading in bitcoins, there have already been increasing calls for the regulation of bitcoin trading.”