Ah, September! Litigation is in the air

Thom Thompson

Thom Thompson

Contributing Editor

This year, early September is back-to-federal-court time in Chicago. Three of our favorite cases have seen some recent action in the Dirksen Building.

CFTC v Kraft and Mondelez.  Last week, the CFTC asked to move the date of the evidentiary hearing in the parties’ latest spat in U.S. federal court from September 12 to October 2. Its motion was granted. (Btw, it is pronounced “mon-del-ease.”)

The upcoming hearing arises from the now-soured settlement agreement in the CFTC’s wheat futures manipulation case that dates back to 2011. Having agreed to pay $16 million in fines to the CFTC on August 15, Kraft/Mondelez hauled the plaintiff back into court on August 19 after the CFTC published a press release and other statements on its website. It appeared to Kraft/Mondelez that the documents were one part defamatory and two parts indicative of extreme bad faith in settling the case. While brief, the August 19 hearing was tense. The court docket for the date states,  “Assertion of the Fifth Amendment by the Plaintiff CFTC, and provisional assertions of the Fifth Amendment by Commissioners Rostin Behnam and Dan Berkovitz, are noted for the record pending further proceedings. By agreement, all counsel of record, as well as Jamie McDonald, Chairman Heath Tarbert, Commissioners Rostin Behnam and Dan Berkovitz, are ordered to appear in person at the evidentiary hearing and provide live testimony as needed.” 

The reason why the CFTC wanted additional time from the 12th to October 2 was submitted under seal, along with other potentially interesting details. One thing the CFTC might want to do with their extra time is study under what conditions and to what extent the U.S. Constitution allows a government entity to avoid self-incrimination by refusing to provide testimony.  Whatever the legal bases for the CFTC “taking the Fifth” may be, the optics would be horrible. 

CFTC v Jitesh Thakkar.  Jitesh Thakkar was back in federal court Wednesday morning for a status hearing in the civil case brought against him by the CFTC in January 2018. The case is just about identical to the one the Department of Justice brought against him and dismissed earlier this summer after a lengthy trial that ended in a hung jury (10 – 2 for acquittal). 

Renato Mariotti, Thakkar’s successful, superstar attorney, filed a motion for summary judgment shortly before the hearing. According to Mariotti, the record painstakingly established by the federal government preceding and during Thakkar’s April 2019 trial provides a complete and convincing body of evidence that Thakkar is also innocent of the CFTC’s charges. 

Judge Andrea Wood did not buy Mariotti’s oral argument, although she might still be persuaded by the written motion. Judge Wood noted this is a civil case with a different threshold for determining guilt – a preponderance of the evidence rather than evidence beyond a reasonable doubt. She also was sympathetic to the CFTC attorneys’ demand that they be able to question Thakkar under oath, not just rely on evidence obtained by the FBI. Mariotti’s motion will be considered further at any rate and there may be hearings on it in the near future.

Thakkar certainly should be hoping that Judge Wood grants the motion and dismisses the case against him. Otherwise, Thakkar, who continues to maintain his innocence, is facing another very lengthy proceeding. For example, reviewing the trial schedule, Judge Wood provisionally ok’ed the CFTC’s request for eight months of pre-trial discovery. Eight months! 

Bcause, Chapter 11.  Bcause, the illiquid bitcoin ecosystem currently enjoying Chapter 11 bankruptcy protection, and its slew of creditors were back in court on Wednesday. Addressing Bcause’s recovery plan, the heretofore unflaggingly pleasant Judge Baer impatiently told the crowd of lawyers assembled before her, “So many things have to happen to make this work going forward.” There are unresolved issues with the company’s facilities lease, an unsigned settlement with the largest unsecured creditor, missing evidence of money transmitter licenses, and valuations of the current and planned businesses, among other things. 

In late November the first of the three service contracts that have provided more than 95% of Bcause’s revenues will expire. The other two contracts expire shortly after that. None of them is likely to be renewed. Bcause premises its recovery from bankruptcy instead on profitably mining bitcoin as well as launching a successful spot market for cryptocurrency to replace the revenues from mining services. These potential revenues, of course, are already largely spoken for by the creditors for the next few years. 

Bcause is planning on selling the spot market to a 75% owned subsidiary, Bcause Secure, which in turn needs to raise approximately $350,000 by selling 25% to investors so it can launch. Bcause says that it can better solicit investors to participate in an entity not tainted by bankruptcy. It needs maybe an additional $1 million, raised as debt, over the next nine months to operate. Bankruptcy law seems to require that the sale be subjected to evaluation – so the spot market needs to be marketed around to see what it is worth. Tom Flake, the acting CEO, told the court in earlier testimony that Secure is worth tens of millions of dollars. Another expert said he thought it was worth nothing. According to Bcause’s attorney, a broker told Bcause that it had a potential buyer. There had not been time for discussions because the broker told this to Bcause the previous evening. The spot market cannot launch until after the evaluation, which is due on September 25th.

Bcause told the court on Wednesday that among its assets are $35,000 worth of bitcoin (approximately 3.4 bitcoins) that it had mined for its own account. (Ooops, the court promptly ordered the bitcoins to be sold and $35,000 paid to the secured creditor!) Everyone seemed pleased with this new found asset, although there was no discussion of how much it had cost Bcause to mine the bitcoins. Ignoring costs, one might remember, is one of the most common ways companies go bankrupt. 

The case was continued until October 7 when there will be another status hearing. Judge Baer threatened that, if the parties did not make substantial progress in agreeing to a recovery plan, she would be ready to convert the bankruptcy to a Chapter 7 dissolution of the company.  

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