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Stellar Enters Legal Dispute With Bitstamp, Ripple and Jed McCaleb

(@mpmcsweeney) | Published on June 4, 2015 at 23:31 BST
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The legal battle over roughly $1m in disputed funds continues between Ripple Labs and founder and ex-employee Jed McCaleb, with a flurry of new court filings over the past month setting the stage for conflict between the two sides.

In total, $1,038,172 is currently being held by digital currency exchange Bitstamp, an amount that both Ripple Labs and the Stellar Development Foundation, McCaleb's current employer, are now seeking.

Both sides have weighed in on whether the court should grant Bitstamp’s request to be discharged from the case after it filed a complaint for interpleader on 1st April. As part of that request, dated 13th May, Bitstamp asked the court for permission to transfer the funds to Stellar.

Bitstamp stated at the time:

"In the alternative, in light of Ripple’s cross-complaint indicating that its dispute with McCaleb and [McCaleb's cousin Jacob] Stephenson is a simple contract dispute to which Bitstamp is not a party, Bitstamp requests dismissal of the action."

Bitstamp argued in its original complaint that it was unable to determine whether Ripple Labs or defendant Jacob Stephenson, McCaleb's cousin, was the rightful owner of the disputed funds.

Stephenson sold the XRP– the native currency of the Ripple network – to Ripple in a sale on Bitstamp, an action that Ripple argued was done on McCaleb's behalf in violation of a settlement agreement.

In its request, the exchange suggested that it faced the threat of litigation owing to its continued role in the lawsuit.

Growing court battle

The fight entered a new phase last month when US District Judge William Orrick ordered a temporary freeze on the disputed funds.

That order, according to court documents dated 15th May, also granted Ripple Labs expedited discovery, during which time McCaleb and Stephenson, would sit for deposition.

Ripple Labs first responded to the suit in a cross-complaint filed on 29th April, alleging breach of contract against McCaleb and claiming, among other items, that McCaleb is currently the subject of a US Department of Justice investigation. Ripple also sought to prevent McCaleb from selling any additional XRP for a period of 150 weeks.

McCaleb and his former employer had previously agreed to a timetable that would limit his ability to sell the XRP he was awarded at the outset of the company's creation over seven years.

In filings since Orrick’s 15th May order, the defendants have argued that the dispute should be handled via arbitration, citing stipulations in the agreement that governs McCaleb’s XRP sales. McCaleb and Stephenson have also contested the order to sit for deposition.

Additionally, the Stellar Development Fund has asked to be entered into the suit as an intervenor-defendant.

The defense has also questioned the basis of Bitstamp’s original complaint for interpleader itself. In Stellar’s 22nd May motion to intervene, the organization echoed past defense filings by stating that Ripple never had claim on the funds in the first place, a statement which it says is backed up by Ripple and Bitstamp’s own filings.

The filing states:

“Bitstamp clearly knew from Ripple’s own statements, as alleged in the complaint, that Ripple did not have a claim that the particular funds contained in the r3Q and rPQ accounts (a total of $1,038,172) belonged to Ripple. Rather, Bitstamp knew that Ripple was asserting only that McCaleb had breached a contract with Ripple, and that Ripple might be entitled to damages in the amount of funds paid by Ripple in the transaction.”

Orrick will hear both Ripple’s request for a preliminary injunction and Bitstamp’s request for discharge during a 10th June hearing, according to court documents.

Latest allegations

Recent court filings from both sides suggest that the fight over the disputed funds is far from over, as each was asked to submit a response to Bitstamp’s request to be discharged by 28th May. Bitstamp has until 4th June to submit its own response, according to a recent order by Orrick.

A filing submitted by McCaleb and Stephenson, as well as the Stellar Development Fund, called for the suit to be dismissed by disagreeing with Bitstamp’s request for discharge. The filing alleged a conflict of interest involving Ripple counsel George Frost, who is representing Bitstamp in the case.

Frost acts as counsel for Ripple Labs generally, and is said to be advising Arthur Britto in a different lawsuit against McCaleb over alleged breach of contract.

The defendants also called attention to the relationship between Ripple and Bitstamp.

“Moreover, Ripple and Bitstamp are significantly intertwined. Britto is both a board member of Bitstamp and one of Ripple’s first officers,” the filing reads. “Greg Kidd, an officer of Ripple, is a significant investor in Bitstamp and is financing Britto’s lawsuit. Kidd has also been represented by Frost concerning actions against McCaleb.”

In its own response to Bitstamp’s request for discharge or dismissal, Ripple asserted that the defendants are actively seeking to circumvent the court’s jurisdiction, as well as the order signed by Orrick on 15th May, stating:

“McCaleb, Stephenson, and Stellar (McCaleb’s purported 'foundation') have gone to great lengths to prevent this court from evaluating the merits of this dispute. They want to avoid discovery into their actions at all costs. Their profound aversion to discovery is almost certainly due to the government’s criminal investigations of McCaleb.”

Ripple also asked that the disputed funds, currently held by Bitstamp, be deposited with the court.

At press time, Bitstamp's response to these replies, if submitted, was not available for public viewing. Both Ripple and Bitstamp's requests will be heard at the 10th June hearing next week.

CoinDesk will continue monitoring this court case and provide updates as they become available.

Legal image via Shutterstock

BitstampJed McCalebRipple LabsStellar

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