Tulip Trust

The Tulip Trusts were created by the defendant with the fraudulent intent of shielding stolen assets such as W&K software and Bitcoin.

On August 26, 2019 an evidentiary hearing was held in the Kleiman v Wright lawsuit where Judge Reinhart spoke about his findings on the matter.

Let me turn now to Dr. Wright’s testimony.

Apparently, dead men tell no tales, but perhaps they send bonded couriers. 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. Quite simply, Dr. Wright’s story not only was not supported by other evidence in the record, it defies common sense and real life experience. Consider the claims. Dr. Wright says he designed Bitcoin to be an anonymous digital cash system with an evidentiary trail. He mined approximately 1 million Bitcoin. There is no accessible evidentiary trail for the vast majority of them. He portrays himself as a latter day Dr. Frankenstein, whose creature turned evil when hijacked by drug dealers, human traffickers and other criminals. So 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, quote, so that I wouldn’t be in trouble, end quote, he put all his Bitcoin and/or the keys to it, because the 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 the trustee, and gave away a controlling number of the key slices to the now deceased Dave Kleiman, and so therefore he cannot now encrypt the file that controls access to the Bitcoin. His only hope is that a bonded courier arrives in 2020 with the decryption keys. If the courier does not appear, Dr. Wright will lose the ability to access billions of dollars-worth of Bitcoin, and he says he doesn’t care. That’s completely inconceivable.

Turning to the factors that the Eleventh Circuit says I must consider. 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, he 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 defensive, tried to sidestep questioning, and ultimately made vague comments about systems being hacked and others having access to his computers. None of these excuses were corroborated by any other evidence.

Dr. Wright has a substantial stake in the outcome of this case. If the plaintiffs succeed on their claims, he stands to lose billions of dollars in Bitcoin. That gives him a powerful motive not to identify his Bitcoin. As long as the relevant Bitcoin addresses remain secret, he can transfer the Bitcoin without the plaintiffs ever being able to find them. Because after all, Bitcoin is an anonymous cyber currency. In addition, Dr. Wright had very good motives not to tell the truth. Most notably, he might want to prevent the plaintiffs or others from finding his trove of Bitcoin. Alternatively, there was evidence that relevant documents were altered in or about 2014 when the Australian tax office investigation was actively — I’m sorry, when the Australian tax office was actively investigating one of Dr. Wright’s companies. Perhaps Dr. Wright’s testimony here is motivated by certain legal and factual positions he took in the Australian tax office investigation and from which he cannot now recede.

At the end of the day, his motivation doesn’t matter. His testimony is not credible on its face. As Judge Bloom recently noted, Dr. Wright has taken directly conflicting factual positions at different times throughout this litigation, and that behavior continued before me. There was substantial credible evidence that documents produced by Dr. Wright to support his position in this litigation are fraudulent and forged. There was credible and compelling evidence that documents had been altered. Other documents are directly contradicted by Dr. Wright’s testimony or his sworn declaration of May 8th. While it is true that there was no direct evidence that Dr. Wright was responsible for the alterations or fabrications of documents, there is no evidence before the Court that anyone else had a motive to falsify them. And although Dr. Edman was not permitted to testify that he believed they were fraudulent, as the finder of fact, I find them to be fraudulent, and willfully so. There is a strong and unrebutted circumstantial inference that Dr. Wright willfully created fraudulent documents.

One example is the Deed of Trust document for the Tulip Trust. Among the trust assets identified in this purported Deed of Trust, dated October 23rd, 2012, are all Bitcoin and associated ledger assets transferred into Tulip Trading, Limited by David Kleiman on February 10th, 2011. Notably absent from the list of trust assets is any encrypted file, any software or any public or private keys. The Deed of Trust states that the parties forming the Tulip Trust are Wright International Investments, Limited and Tulip Trading, Limited. There was credible and conclusively probative evidence that Dr. Wright did not control Tulip Trading, Limited until 2014, which would have been two years after the trust allegedly was formed. There was other forensic evidence indicating that the Deed of Trust document itself is fraudulent.

So the totality of the evidence in the record does not substantiate — I’m sorry. I find that the totality of the evidence in the record does not substantiate that the Tulip Trust even exists, and I find that Dr. Wright’s testimony that this trust exists was intentionally false. And although I am only required to make this finding by a preponderance of the evidence, if required to do so, I would find clear and convincing evidence to support it. Dr. Wright’s false testimony about the Tulip Trust was part of a sustained and concerted effort to impede discovery in this case. I start with his deceptive and incomplete discovery pleadings. He testified at the evidentiary hearing that at least as early as December 2018, he knew he could not provide a listing of his Bitcoin holdings, yet the Court was not told this quote-unquote fact until April 18th, 2019.

I give Dr. Wright the benefit of the doubt that prior to May 14th, the plaintiffs were seeking information that went beyond merely a list of his Bitcoin holdings on December 31st, 2013. Nevertheless, after the May 14th hearing, it was well and clear that the Court expected Dr. Wright to provide plaintiffs with sufficient information so the Bitcoin holdings could be traced. After May 14th, having lost on legal grounds, Dr. Wright changed course and started making affirmative misleading factual statements to the Court. His April 18th motion argued for the first time that he had transferred all of his Bitcoin into a blind trust, and that he was not a trustee or beneficiary of that trust, nor did he know any of the public addresses which hold any of the Bitcoin in the blind trust. This pleading was intended to communicate the false impression that Dr. Wright had no remaining connection to the Bitcoin, and it was also intended to create the impression that the Bitcoin themselves had been transferred into the trust.

Now, this was a pleading. It was not verified; it was signed by counsel. And by signing the document, counsel certified that the pleading had evidentiary support. The only source of information that could have provided the information was Dr. Wright. So I find that counsel reasonably relied upon Dr. Wright as the source of that information, and that Dr. Wright is personally responsible for the misrepresentations made in the pleading on April 18th.

As I noted earlier in discussing with Ms. McGovern, three weeks later, Dr. Wright submitted a sworn statement that contradicted the April 18th motion in which he admitted he was one of the trustees of the trust. So, clearly, his represent — one of those representations cannot be true. He also gave inconsistent sworn testimony about what is in the alleged trust. His April 18th motion states that Bitcoin had been transferred to the trust. His May 8th declaration swears that Bitcoin had been transferred to the trust. But at his deposition and at the evidentiary hearing, he changed his story and testified that what had been transferred were the keys to Bitcoin, not the Bitcoin itself.

All of this evidence cannot be reconciled; particularly, the April 18th motion and the May 8th declaration. One of them is intentionally false. The Court gave Dr. Wright an extension of time to draft and file the declaration so he could meet in person with counsel. He swore they had met, and that he had provided counsel, quote: With additional details and clarity regarding trusts that I settled that hold or held Bitcoin that I mined or acquired on or before December 31st, 2013. He further — end quote.

He further swore, quote: In June 2011, I took steps to consolidate the Bitcoin I mined with Bitcoin that I acquired and other assets. In October 2012, a formal trust document was executed, creating a trust whose corpus included the Bitcoin that I mined, acquired, and would acquire in the future. The name of that trust is Tulip Trust. It was formed in the Seychelles, end quote.

During his testimony at the evidentiary hearing, Dr. Wright made a point of being precise in his use of terms, including at one point contesting whether a document was an e-mail or a PDF of an e-mail. It is not credible that given his claim to have an intimate understanding of Bitcoin, he would have mistaken the currency for the keys that control the ability to transfer the currency. I find, instead, that he belatedly realized that any transactions transferring Bitcoin into the Tulip Trust would be reflected on the master block chain. That he would then be required to identify those transactions, which would allow plaintiffs to trace. So to avoid that, he changed his story again.

His story also changed at the evidentiary hearing, where he argued for the first time that a list of public addresses was meaningless. As I’ve noted, the Court never ordered him to produce a list of public addresses. I ordered him to produce a list of his Bitcoin holdings. His position that public addresses are meaningless or have no evidentiary value is particularly disturbing, because it was his counsel who first injected the idea of public addresses as a discovery matter. Now, admittedly, counsel answered the Court’s question without consulting Dr. Wright and without time to fully research the situation, so I do not fault counsel. But if, as Dr. Wright now asserts, his counsel was wrong, Dr. Wright, the self-proclaimed creator of Bitcoin, and therefore a person who claims to have intimate knowledge of how Bitcoin works, should have corrected the record long before the evidentiary hearing on June 28th.

Instead, in his April 18th motion, Dr. Wright explained he could not produce a list of public addresses. He never said that public addresses lack evidentiary value. This behavior continued in his May 8th declaration, where he again talked about public addresses, but never argued that they were meaningless. Although Dr. Wright may not have an obligation to correct an opposing party if its discovery request is imprecise, the Court is different, particularly where, as here, the Court’s intent was unmistakable. It was clear that the Court was ordering Dr. Wright to produce evidence to document the existence and extent of his Bitcoin holdings so that plaintiffs could attempt to trace them through the master block chain. If, as Dr. Wright now claims, the public addresses are not the proper data point to identify the Bitcoin he held on December 31st, 2013, he had an obligation to tell the Court. His delay in doing so is deceptive and intentionally misleading.

All this information is more than sufficient to warrant sanctions that I’ve discussed. However, there is also the alleged file that Dr. Wright claims is being held by the Tulip Trust which contains the information necessary to reconstruct his Bitcoin holdings. I find that file does not exist based on the evidence before me. Dr. Wright testified it is an encrypted compressed file containing multiple subfiles. He explained, quote, each of these files has a differently calculated encryption key. It’s a hierarchical system, where, based on a combination of the file hash and the original encryption key, there are a variety of those, there are multiple Shamir schemes. So, in essence, he testified it’s like a Russian nesting doll.

The Shamir scheme divides a single encryption key into multiple key slices, and some subset of those key slices is needed to decrypt a file. Dr. Wright testified that 15 key slices existed for the outermost file, but only eight key slices were needed to decrypt that file, but he only has seven, or can only access seven. After observing his demeanor and considering a lack of any other credible evidence in the record that this file exists, I find that a preponderance of the evidence exists that no — I’m sorry, I find that a preponderance of the evidence establishes that no such file exists, and that Dr. Wright’s testimony to the contrary was perjurous.

I also note as a side note that Dr. Wright testified that the key slices for the encryption of the outermost layer had to be applied in a particular order. That is not what Dr. Shamir’s paper says. According to Dr. Shamir’s paper, a Shamir scheme is decrypted by inserting each key slice into the same polynomial to create a series of linear equations, which are then solved simultaneously, not sequentially. There is no ordering or indexing of the key slices.

Now, that being said, I do not exclude the possibility that Dr. Wright could have employed a modified Shamir scheme, so I do not consider this testimony as to the ordering of the key slices in making my overall findings, but I do note it is inconsistent with Dr. Shamir’s paper.

Now, Dr. Wright argues quite forceful that he would never risk going to jail for contempt or having sanctions imposed against him if he could produce a list of his Bitcoin holdings. He argues that it would not be credible that anyone would make that choice. Equally, if not more incredible, is the idea that someone who controlled almost a million Bitcoin would encrypt it in a way he could not access it and then wouldn’t care if he lost it all.

Additionally, as discussed above, there are many reasons a person in Dr. Wright’s situation would take the risk. 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 my order is his uncorroborated, incredible testimony. That is simply insufficient to meet his evidentiary burden of proving by a preponderance of the evidence that he is unable to comply.

Moreover, the totality of the evidence, including the negative inference that I draw from Dr. Wright’s not credible testimony is more than sufficient to meet the plaintiffs’ burden. Now, Dr. Wright’s counsel has also made a very forceful argument that sanctions in this case ought to be tempered by the idea that we should let the process play out. There shouldn’t be a windfall to the plaintiff for a discovery violation, and I’m mindful of that. But I also must say there is nothing, nothing more prejudicial or inimical to the American judicial system than perjury and false testimony, which I have found occurred in this case.

So I now turn to the question of a proper remedy. I begin with something I hope is obvious here. I do not find any basis, any basis for sanctions against Dr. Wright’s counsel. Although several rules of civil procedure authorize the Court to consider sanctions and attorney’s fees against counsel, there is no basis for that in this record. I have conducted numerous hearings, and I have been able to closely observe counsel’s conduct. Counsel has zealously and ethically advocated for their client. Counsel has unfailingly been candid with this Court, even when Dr. Wright’s conduct and conflicting statements have created incredibly awkward situations for counsel. I find that counsel reasonably relied on Dr. Wright as a source of information. I find that Dr. Wright alone is fully responsible for any evasion, incomplete or false representations to the Court or noncompliance with the Court’s orders. To that end, I commend his counsel for their outstanding work in this matter.

So to this day, Dr. Wright has still not complied with my order compelling discovery. Rather, as described already, a preponderance of the evidence establishes a continuing pattern of obstructive behavior, including incomplete or deceptive pleadings, filing a false declaration, knowingly producing a fraudulent trust document and giving perjurous testimony. His conduct has wasted substantial amounts of the Court’s time and the plaintiffs’ time and resources, which could have been saved. His behavior has unnecessarily protracted this litigation. I find there is clear and convincing evidence that Dr. Wright’s noncompliance is willful and in bad faith, that plaintiffs have been prejudiced in the amount of time and money and diversion that has been occasioned upon them, and particularly given the extended pattern of noncompliance and its egregiousness, a lesser sanction is not adequate to punish or ensure future compliance with the Court’s order.

Therefore, I will impose sanctions under Rule 37(b) in addition to attorney’s fees. I start with the fact that Dr. Wright’s conduct has prevented the plaintiffs from obtaining evidence that I found relevant to their claims to a partnership between Dr. Wright and David Kleiman related to the development of Bitcoin technology and the mining of Bitcoin. Plaintiffs have been prejudiced by not being able to try to pursue this theory by tracing the Bitcoin that was mined. Therefore, as a remedial measure pursuant to Federal Rule of Civil Procedure 37(b)(2)(A)(i), the Court deems the following facts to be established for purposes of this action: And, by the way, I find that no lesser sanction is sufficient than what I’m about to announce.

One, Dr. Wright and David Kleiman entered into a 50 percent 50/50 partnership to develop Bitcoin intellectual property and to mine Bitcoin. Second, it is deemed proven that all Bitcoin mined by Dr. Wright prior to December 31st, 2013, was joint property of Dr. Wright and David Kleiman at the time it was mined. Because Dr. Wright’s 10th affirmative defense relating to the statute of frauds challenges the existence of a partnership, it is inconsistent with these findings and these facts, so it is stricken. As a further punitive sanction, I deem the following facts:

One, any Bitcoin-related intellectual property developed by Dr. Wright prior to David Kleiman’s death is jointly and equally owned by Dr. Wright and by the plaintiffs. And, two, any Bitcoin mined by Dr. Wright prior to David Kleiman’s death and any assets traceable to those Bitcoin is presently jointly and equally owned by the plaintiffs and Dr. Wright. Dr. Wright’s third, fourth, fifth, sixth, seventh, eighth, second seventh affirmative defenses assert that David Kleiman surrendered has legal rights in return for shares in a corporation. These affirmative defenses are inconsistent with the facts as I have deemed them, so they are stricken. I do not strike Dr. Wright’s first, second, I think ninth, or 11th and 12th affirmative defenses. So I do not — I do not strike all of his pleadings. I do not enter a default judgment. I leave in place the affirmative defenses relating to statute of limitations, latches, res judicata and the one I can’t remember. In addition, Dr. Wright’s April 18th motion which was in substance a motion for protective order was denied, the plaintiffs’ June 3rd motion to compel was granted, and the current motion is also granted. Therefore, I will order that the plaintiffs are entitled to receive reasonable attorney’s fees and expenses related to each of those motions. I will enter a written order summarizing these findings more fully.

Tulip Trust III - Judge Reinhart Findings

The record does not establish that an attorney-client relationship exists between Mr. Mayaka and Ms. Watts. First, as finder of fact, I disregard the Mayaka Declaration because it has not been adequately authenticated. Particularly given my prior finding that Dr. Wright has produced forged documents in this litigation, I decline to rely on this kind of document, which could easily have been generated by anyone with word processing software and a pen. Second, I accept counsel’s representation that Dr. Wright intended for his sworn interrogatory answers to affirm that Mr. Mayaka was the counsel to the Trustee of Tulip Trust III. Nevertheless, I give no weight to sworn statements of Dr. Wright that advance his interests but that have not been challenged by cross-examination and for which I cannot make a credibility determination. I have previously found that Dr. Wright gave perjured testimony in my presence. Third, the Trust document does not identify Mr. Mayaka as counsel; he is assigned a different role. See generally DE 404–3. In sum, the record does not establish that Mr. Mayaka is counsel to the Trustee of the Tulip Trust. For similar reasons, the record does not establish that Dr. Wright and Mr. Mayaka have an independent attorney-client relationship.