Court Documents Show Cryptsy CEO Predicted Exchange Would Fail

Court documents suggest that the controversial digital currency exchange Cryptsy was expected to fail weeks before it announced its insolvency.

AccessTimeIconFeb 26, 2016 at 9:27 p.m. UTC
Updated Sep 11, 2021 at 12:09 p.m. UTC
10 Years of Decentralizing the Future
May 29-31, 2024 - Austin, TexasThe biggest and most established global event for everything crypto, blockchain and Web3.Register Now

Weeks before disclosing that the digital currency exchange Cryptsy was insolvent, CEO Paul Vernon told a Florida divorce court in a financial affidavit that he expected the operator of the exchange to fail.

was filed on 22nd December – less a month before Cryptsy would go on to claim that it had been the target of a debilitating hack in 2014 that left it insolvent and with millions in customer liabilities.

At the time, Vernon said that the exchange, which largely focused on alternative cryptocurrencies, had been able to stay afloat thanks to fee income, but that profits had dried up, leading to the exchange’s collapse. Activity on Cryptsy remains frozen, with no customer update since 1st February, according to a notice on the exchange’s website.

The affidavit, filed amidst a months-long divorce case, shows that Vernon indicated his belief that Project Investors, the operator of the exchange, would "dissolve" in the near future because of a drop in exchange income.

He wrote:

"Due to downturn in profits, not currently taking a salary. Expect corporation to dissolve due to economic conditions."

The existence of the affidavit features in an amended complaint filed on 22nd February by two Florida law firms currently pursuing a class action lawsuit against Cryptsy, an action that came after months of customer complaints about withdrawal delays and mounting allegations that the exchange was insolvent or on the verge of collapse.

At the time, the withdrawals and related platform issues were largely blamed on technical problems. Vernon, however, would later tell CoinDesk that the theft was hidden from customers because the exchange "did not want to cause a panic".

A major change in the amended complaint is the inclusion of Lorie Ann Nettles, Vernon’s ex-wife, as a defendant. It is alleged that customer funds held by Cryptsy were diverted to pay for personal expenses for Nettles and Vernon, including the purchase of a roughly $1.4m waterfront property in Palm Beach County, Florida.

The filing states:

"Upon information and belief, the Marital Settlement Agreement which VERNON and NETTLES devised to distribute between them their marital assets was, in whole or in part, a sham and was fabricated by VERNON and NETTLES as a means of unlawfully and improperly transferring to NETTLES many of the assets secreted away from the CRYPTSY customers."

Attorney David Silver said that his firm has filed a motion to appoint a receiver for Cryptsy, and to date, has been unable to serve Vernon, who told CoinDesk in January that he was traveling in China.

"A legitimate company would be addressing these issues head-on, and my question is, where is anyone from Cryptsy to address this lawsuit that has been going on for a month now," he told CoinDesk. "Where is Paul Vernon?"

Vernon did not immediately respond to a request for comment.

Disclosure

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk employees, including journalists, may receive options in the Bullish group as part of their compensation.


Learn more about Consensus 2024, CoinDesk's longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.