The Record-Breaking $152 Million Battle Over Blockchain Betting Tool Augur

FEATURE
Marc Hochstein and Ada Hui
May 25, 2018 at 00:40 UTC  |  Updated  May 28, 2018 at 04:02 UTC

Three years ago, Augur, a prediction market system that runs on the ethereum blockchain, held one of the first initial coin offerings (ICOs), long before the funding mechanism gained mainstream momentum.

Between August 7 and September 5, 2015, the project issued 8.8 million reputation (REP) tokens from a maximum circulating supply of 11 million tokens, each priced below $0.60, to raise over $5 million for the project.

Supported by only a handful of team members, Augur devised a decentralized protocol where outcomes of events could be forecasted in a trustless, peer-to-peer manner and rewarded for accuracy with the financial incentive of a native cryptocurrency: in other words, betting, but without the worry of platform providers or government bureaucrats taking control.

Three years after the ICO, reputation tokens have traded as high as $100 per REP, meaning ICO participants have potentially profited up to 200 times on their principal investments. Meanwhile, Augur has matured into a staff of 15 developers, designers and researchers, collaborating with the award-winning IDEO design group to roll out its beta product interface. Ethereum co-founder Vitalik Buterin and Lightning Labs co-founder Elizabeth Stark have also joined on as advisors. Augur's main network is now expected to launch in July 2018 in what industry veterans have hailed as one of the more compelling use cases for blockchain.

Practically invisible in the midst of the public attention has been a watchful early project member — an absence he claims has been orchestrated as part of a larger conspiracy.

In a civil lawsuit, Matthew Liston, 26, has taken four Augur associates to court, alleging that angel investor Joseph Ball "Joe" Costello, 64, and three other founding members, Jack "John" Peterson, 35, Joseph Charles "Joey" Krug, 22, and Jeremy Gardner, 26, committed fraud, breach of contract, and trade theft in connection with conflicts that arose out of Liston's termination from the company and his stake in Augur's token distribution, leaving him empty-handed.

The lawsuit also includes accusations that after his dismissal Liston was coerced into signing a settlement agreement containing terms Peterson appears to have recently broken. Specifically, Liston says that the Augur team reneged on a promise to acknowledge him as a co-founder, preventing him from earning the same professional recognition among industry peers.

The lawsuit states: "Ironically, Matthew Liston has suffered damage to his reputation."

In addition to the executive team, the San Francisco Bay Area company's initial corporate entity, Dyffy, Inc., has been named as a defendant for allegedly failing to pay Liston back wages owed. Further, the lawsuit names two Forecast Foundation business entities, one registered in Oregon and the other in Estonia, for operating illegally in California while allegedly processing the initial coin offering transactions and misappropriating Liston's holdings from Dyffy.

According to the lawsuit, Peterson, Gardner, and Costello conducted a hostile takeover of Dyffy, Gardner presided as president and Peterson as secretary over the dissolved Oregon non-profit, and all but Costello currently maintain shareholder status in the for-profit Estonian entity, with Peterson at the helm.

At the time of publication, the market capitalization of REP was $455 million. Liston is seeking $38 million in general damages and $114 million in punitive damages for a total of $152 million in collective damages — more than one-quarter of REP's market value.

As such, Liston's legal action constitutes the most significant private lawsuit in cryptocurrency history, superseding even damages sought from industry class-action lawsuits brought against cryptocurrency exchange Coinbase, the Nano cryptocurrency previously known as RaiBlocks, and token-backed marijuana startup Paragon Coin. The numbers, however, fall short of the industry's more infamous class actions, which have totaled half a billion.

Liston's attorney, O. Shane Balloun of Balloun Law, did not immediately respond to requests for comment from CoinDesk. Nor did Costello, Peterson or Patrick Gibbs, the lawyer at Cooley LLP representing the entire defense.

But Krug, who still advises Augur, denied the lawsuit's claims.

"The claims are baseless and inaccurate," Krug said in a prepared statement. Liston, he said, "accepted a cash severance payment and he signed a full release with Dyffy, and we're appalled that he's turned around with a lawsuit three years later." 

Disputing the extent of Liston's role in the project, Krug went on, "there hasn't been a single GitHub commit by Liston, on any of the Augur repositories. He's not a founder of Augur."

In an email to CoinDesk, Gardner wrote that many of the claims are "demonstrably false" and "this is a superfluous lawsuit if there ever was one."

Balloun, a former Gmail and Google Product Search engineer, filed the complaint on Liston's behalf in San Francisco County, California, on April 19, amending it on May 10 to incorporate other information applicable to the claims.

The court has scheduled a hearing in September 2018 for both sides to attend, where the case will be assigned a judge and a trial date will be set.

Losing a company

The civil case Matthew Liston v. Jack Peterson, et. al contends that the antagonism between the Augur co-founders began shortly after June 2014 when Liston registered the Delaware corporation, Dyffy, and hired Peterson.

During this time, the suit says, Liston wanted to pursue a "blockchain-enabled betting and prediction market," but Peterson was unsure about the idea at first.

Eventually, it was the work of another developer in the open-source community that changed Peterson's mind.

After reading the Truthcoin whitepaper, authored by Yale economist Paul Sztorc, Liston claims that he adapted the research into the intellectual property that would come to underlie Augur's REP coin, successfully pitched the idea to secure a financial commitment from Costello, and convinced Peterson to pursue the idea by bringing him into conversations with Sztorc.

As a result, Costello was installed as a Dyffy shareholder and director and Peterson as chief technology officer at Liston's authority, according to the suit.

"[Liston] was the one who found me," Sztorc said in an interview. "He found me and the code I had written and he introduced it to Jack and then he kind of brought Dyffy around into working on this prediction market idea I had published, which was called Truthcoin at the time."

Motivated to build, market, and fund the technology on the Truthcoin model after getting the all-clear from Peterson and Costello, Liston says he then hired Krug and Gardner, the latter of whom conceived the Augur brand name, as well as a software engineer, Zackary "Zack" Hess, who had been working on his own implementation of Truthcoin.

However, arguments over technological and commercial vision erupted in subsequent months over what the team was now calling the Augur Project, the lawsuit says.

Butting heads, Peterson and Costello formally removed Liston from the company and its board of directors on October 24, 2014, a power play Liston alleges that Gardner had "instigated and conspired with Defendants Peterson and Costello" to take him down.

Management shuffled around. At Dyffy, Krug replaced Liston as director and Peterson as chief technology officer, and Peterson stepped in for Liston as chief executive officer. The Oregonian Forecast Foundation non-profit was established on December 23, 2014.

At this point, Liston alleges, Peterson, Krug, Gardner, and Costello unlawfully moved Augur intellectual property, financial assets, and personal stakes from Dyffy belonging to him into Forecast Foundation. Liston insists that the move was illegitimate because he had still preserved contractual ownership within Dyffy, and Forecast Foundation had not been registered and licensed to do business in California, even though Augur operated primarily out of San Francisco.

Through this attempted merger or acquisition, the lawsuit claims, Liston should have maintained all rights to his work, capital, and shares in Dyffy and needed to sign off on anything affecting them, and a transfer of his token design, assets, and equity should have required his permission.

Not over yet

The paper ties to Dyffy came back to haunt Liston.

Even after being fired, the spurned co-founder was held liable for a $15,000 lawsuit filed against Dyffy by a contractor seeking payment for services rendered under his name.

Liston assumes that Peterson, Krug, Gardner and Costello had neglected their fiduciary duty at the time by failing to ensure corporate indemnity defenses be upheld that would have conferred the cost burdens of legal actions from corporate individuals to respective corporate entities.

Costello seemed to be aware of Liston's lingering contractual associations with Dyffy. In the four months that followed the ousting, the lawsuit alleges, Costello verbally and textually harassed Liston to sign a contract certifying that he would not take future legal action against Dyffy, and another contract relinquishing Liston's equity in a buyback deal that would purchase all of his Dyffy shares in return for cash and reputation tokens.

According to the lawsuit, Costello's demands apparently became so increasingly aggressive in "a series of highly coercive, unrelenting, manipulative communications" that manifested in chronically "abusive" phone calls, through which Costello "screamed indignities at him every time they spoke on the phone," to the point where Liston "broke down in frustration."

From April 13 to April 15, 2015, Costello issued repeated time-sensitive ultimatums ordering that Liston either take the deal or leave it.

"If we don't settle this today and tomorrow then you will receive nothing," Costello messaged Liston on April 14, 2015.

"If I don't hear from you in the morning, the answer is that you are not excepting [accepting, sic] the deal and we restructure," Costello warned Liston, who had yet to respond that day, three hours later.

"Two hours left," Costello later drew the line on April 15, 2015.

Liston, hesitant to reciprocate Costello's legal offers, made it clear more than once in the conversations that he had wanted to obtain legal counsel to review the documents.

Lacking the financial resources to scrape together the money for a lawyer and no longer able to withstand Costello's "abusive tactics" which he felt would likely persist, Liston "capitulated to Dyffy and Costello's demands under duress" and signed the two agreements on April 19, 2015, the lawsuit states, finally putting an end to the matter.

But Liston says that he did so too soon, going as far as revising the agreements to get rid of the reputation tokens — 5% of the crowdsale — for $65,000 in all cash because the defendants had "concealed their specific plans for an initial coin offering of the REP token." The tumultuous circumstances around his firing in October 2014 had led him to believe that the reputation tokens were worthless and being offered "to avoid paying him anything of real value," the lawsuit says.

Liston says he later learned that the Augur team's initial coin offering plans were more complex, extensive, and optimistic than had been presented to him. Per contract law, Liston argues, the initial coin offering's projected market valuation and team allocations should have been thoroughly demonstrated in the negotiations.

Additionally, Liston claims, also by law, the coercion and the duress he faced should invalidate the contracts he signed. Had he been given more wiggle room and emotional clarity to negotiate the terms of the agreements with legal advice, Liston believes he would have better understood the initial coin offering and accepted a portion of the reputation tokens that would have ballooned in value to the amount in legal damages he is now seeking.

If not through a direct offer, Liston claims that the Augur team should have endowed him the REP by virtue of his Dyffy shares. His ousting, he reasons, would have met the two elements of a double-trigger acceleration clause — involuntary termination and sale of the company — to automatically vest his company shares in their entirety and convert into an active cut of the ICO.

The sale of the company, Liston says, comes from the Augur team having transferred Dyffy holdings into the Estonian for-profit company, Forecast Foundation OÜ, as they had allegedly done with the Forecast Foundation in Oregon. A characteristic of a company sale is evidenced by Peterson, Krug, and Gardner's corresponding share percentages in Dyffy and Forecast Foundation OÜ, Liston adds.

Violating the agreements

The lawsuit finally alleges that Peterson's refusal to honor Liston as an Augur co-founder as both parties had agreed upon furnishes supplementary proof that Liston had been deceived in the contractual back-and-forth. ("Getting new agreement written up...you are shown as a founder of augur [sic]...," Costello updated Liston on April 16, 2015, three days before executing the final agreement.)

Peterson, Liston says, never meant to accomplish the terms set forth in the negotiations. He demonstrated this by "block[ing] all potential press releases and reject[ing] all public media statements" that mentioned Liston as a co-founder when the initial coin offering went live, the suit says.

Peterson then revealed the fraudulent intent by blowing off Liston's appeals to identify his role at Augur upon discovering the omissions, according to the suit. "You're not a co-founder, so no," Peterson rebuffed Liston in November 2015.

Peterson did not stop there, Liston continues. Over a year later, when Liston started working as chief strategy officer for a decentralized ethereum application similar to Augur called Gnosis in 2017, Peterson reached out to Liston's boss at Gnosis, to "try to convince him to lean on Plaintiff Liston to stop referring himself as a co-founder of Augur."

Again, in January 2018, Peterson denied Liston's co-founder status in two tweets and had Forecast Foundation OÜ send a cease-and-desist letter wrangling Liston into refraining from publicly claiming co-foundership, the suit says.

Shortly thereafter, an unnamed Augur employee emailed FOAM chief executive officer Ryan John King, whose company Liston advises, "using aggressive and disparaging language demanding that FOAM remove the phrase 'Augur cofounder' from Liston's description on FOAM's website."

CoinDesk found that Peterson has also advanced a vastly differing account of Augur's origin story in a StackExchange post made in September 2017 under his online pseudonym "tinybike," even depicting former co-worker Liston as a "random Internet guy" in tweets earlier this year.

Conflicting takes

Sztorc, who wrote a critical expose of Augur in December 2015, told CoinDesk that he sympathizes with Liston, noting the unexpected medical condition of Liston's ex-girlfriend when he was abruptly let go.

Likewise, in the lawsuit, Liston reported "suffering from profound financial and economic pressure" due to the "sustained period of unemployment" resulting from his "sudden termination."

Liston was not the only member of Augur whom Sztorc thought was treated unfairly, the Truthcoin founder reflected, also criticizing the project for compensating Hess meagerly after he developed the early stages of the project, often for hours into the night.

"I was working with the Augur team before it was called Augur. I wrote their first minimum viable product in Python. I taught them Paul Sztorc's design," Hess said. He has since launched Amoveo, described as "an improved version of Augur that costs less to use and doesn't have any REP token" capable of making bets inside bitcoin lightning network channels by connecting markets to an on-chain oracle mechanism.

Asked why Liston had been booted out, Sztorc said that the company had been vying for more technically savvy leadership. The Truthcoin founder remembered that Costello had called him one time asking what the project needed.

"I said, 'It needed programmers.' Matt wasn't really a programmer," Sztorc said.

But while the lawsuit doesn't specify the nature of the disagreements that took place, a source familiar with the matter said that Liston had originally wanted to construct Augur on top of the ethereum blockchain to process predictions more efficiently, but his advice was initially shunned in favor of the bitcoin blockchain.

"[Liston] ended up being right," the source said, pointing out that Augur ultimately switched from the original blockchain to its second-generation successor after Liston departed.

Since moving on from Augur, Liston has also worked at the ethereum project and blockchain software studio ConsenSys. Peterson and Pantera Capital co-chief investment officer Krug are still active with Augur. Gardner has started his own investment firm and was previously an entrepreneur-in-residence at Blockchain Capital. Costello remains on the Augur advisory board and manages a smart building company, Enlighted, Inc. Siemens is expected to close its acquisition of Enlighted in the third fiscal quarter of this year.

Augur symbol via Shutterstock

Matthew Liston v. Jack Peterson, et. al by CoinDesk on Scribd

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