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

FEATURE
Marc Hochstein and Ada Hui
May 25, 2018 at 00:40 UTC  |  Updated  Oct 12, 2018 at 10:09 UTC

26-year-old blockchain entrepreneur Matthew Liston has taken four associates to court for conflicts that arose out of his termination from the cryptocurrency betting startup Augur.

In a lawsuit filed in San Francisco County, California on April 19, Liston has alleged that angel investor Joseph Ball "Joe" Costello, age 64, and three other founding members of Augur, Jack "John" Peterson, 35, Joseph Charles "Joey" Krug, 22, and Jeremy Gardner, 26, committed acts of fraud, breach of contract and trade theft that left him empty-handed without a stake in the company's initial coin offering (ICO) — a tokenized form of crowdsourced fundraising — and bound to a broken settlement agreement that failed to acknowledge him as a co-founder.

Named as defendants in the lawsuit are also Augur's Delaware corporate entity Dyffy, Inc. for failing to pay Liston back wages owed and two Forecast Foundation business entities, one registered in Oregon and the other in Estonia, for operating illegally in the state of California, misappropriating Liston's holdings from Dyffy and processing the ICO transactions without registering them as securities.

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.

The entities were made before Augur held one of the first ICOs between August 7 and September 5, 2015, the lawsuit says, when the company issued 8.8 million reputation (REP) tokens, each priced below $0.60, to raise over $5 million for a decentralized prediction market protocol that would run on the ethereum blockchain.

Advised by Ethereum co-founder Vitalik Buterin and Lightning Labs co-founder Elizabeth Stark, the project for betting on outcomes of events that claims censorship-resistance from platform providers and government bodies is now launching its main network in July 2018 in what the industry has hailed as one of the more compelling blockchain experiments to be designed by the award-winning IDEO design group.

But Liston is seeking $38 million in general damages and $114 million in punitive damages for a total of $152 million in collective damages that could put a damper on those resources — more than one-quarter of REP's market value. Three years after the ICO, in a time when cryptocurrencies have gained mainstream momentum, REP has traded as high as $100 and token holders have profited up to 200 times on their principal investments.

The legal action also constitutes the most financially significant private lawsuit in cryptocurrency history so far, superseding even damages sought by industry class-action lawsuits brought against cryptocurrency exchange Coinbase, the Nano cryptocurrency previously known as RaiBlocks, and token-backed marijuana startup Paragon Coin, which have exceeded more than $100 million in possible payouts.

Krug, who still advises Augur, denied the lawsuit's claims and disputed the extent of Liston's role in the project in a statement to CoinDesk.

"The claims are baseless and inaccurate. He [Liston] 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. There hasn't been a single GitHub commit by Liston, on any of the Augur repositories. He's not a founder of Augur," Krug said.

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

O. Shane Balloun of Balloun Law filed the complaint on Liston's behalf. Balloun did not immediately respond to requests for comment from CoinDesk, nor did Costello, Peterson and Cooley LLP attorney Patrick Gibbs, who is said to be representing the entire defense.

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

In June 2014, Liston registered Dyffy and hired Peterson to pursue a "blockchain-enabled betting and prediction market," the lawsuit says. Peterson, at first unsure about the idea, changed his mind after Liston brought him into conversations with Costello and Yale economist Paul Sztorc.

Liston had read Sztorc's Truthcoin whitepaper about cryptocurrency prediction markets and successfully pitched the business to Costello for an investment, according to the lawsuit. Krug and Gardner were then recruited to Dyffy to work on the project, which they began calling Augur.

"[Liston] was the one who found me," Sztorc said in an interview with CoinDesk. "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."

But getting the all-clear from Peterson and Costello did not seem to be enough. Liston, butting heads with Peterson and Costello, was removed from Dyffy and its board of directors on October 24, 2014, a power play that Gardner allegedly had "instigated and conspired with Defendants Peterson and Costello" to take him down and install new management, according to the lawsuit.

Krug replaced Liston as director and Peterson as CTO and Peterson stepped in for Liston as CEO so that the new Augur leadership could proceed to unlawfully move Liston's intellectual property and financial assets into the Forecast Foundation non-profit established in Oregon state on December 23, 2014, the lawsuit alleges.

This attempted merger or acquisition was unlawful, Liston claims, because he had preserved contractual ownership within Dyffy and maintained all rights to his work, capital and shares past his departure but never signed off on any agreement affecting their transfer, including what he says is the Truthcoin research he had adapted into the product idea that would come to underlie Augur's REP coin.

Forecast Foundation also had not been registered and licensed to do business in California, where Augur operated out of San Francisco, the lawsuit says.

Not over yet

The paper ties came back to haunt Liston. Even after being fired, Liston was held liable for a $15,000 lawsuit filed against Dyffy by a contractor seeking payment for services rendered under his name. Peterson, Krug, Gardner and Costello had neglected their fiduciary duty by failing to ensure corporate indemnity defenses be upheld that would have conferred the cost burdens of legal actions from Liston to Dyffy after he parted ways, the lawsuit alleges.

Yet they were keen on severing these lingering contractual associations. Following the ousting, the lawsuit alleges, Costello verbally and textually harassed Liston to sign an agreement certifying that he would not take future legal action against Dyffy, and another agreement relinquishing Liston's equity in a buyback deal that would purchase all of his Dyffy shares in return for cash and REP.

Costello "screamed indignities at [Liston] every time they spoke on the phone" and issued time-sensitive ultimatums ordering that Liston either take or leave the deal in "a series of highly coercive, unrelenting, manipulative communications" and chronically "abusive" phone calls from April 13 to April 15, 2015 to the point where Liston "broke down in frustration," according to the lawsuit, which cites a series of harrowing messages.

"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 drew the line on April 15, 2015.

Liston, hesitant to reciprocate Costello's legal offers, made it clear more than once in the conversations he wanted to obtain legal counsel to review the documents but, lacking the financial resources to hire a lawyer and unable to withstand Costello's "abusive tactics" which he felt would likely persist, "capitulated to Dyffy and Costello's demands" and signed the two agreements on April 19, 2015, according to the lawsuit.

Liston now says he did so too soon, having went as far as revising the agreements to get rid of the REP 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 the REP tokens were worthless and being offered "to avoid paying him anything of real value," the lawsuit says.

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

Additionally, Liston claims, also by law, the coercion and duress he faced should have invalidated the contracts. 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 ICO and accepted a portion of the REP tokens that would have ballooned in value to the amount in legal damages he is seeking.

If not through a direct offer, Liston claims the Augur team should have endowed him 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.

Augur, by transferring Dyffy holdings into the Estonian for-profit company Forecast Foundation OÜ as they had allegedly done with the Oregonian non-profit Forecast Foundation, sold the company, which is why Peterson, Krug and Gardner have corresponding share percentages in Dyffy and Forecast Foundation OÜ, the lawsuit says.

Violating the agreements

According to the lawsuit, Peterson has repeatedly refused to honor Liston as an Augur co-founder. Because both parties had agreed upon to this term in the settlement, Liston is alleging that the contractual relationship was violated. ("Getting new agreement written up...you are shown as a founder of augur [sic]...," Costello updated Liston on April 16, 2015, the lawsuit references.)

The lawsuit says Peterson has also revealed fraudulent intent in the legal back-and-forth by "block[ing] all potential press releases and reject[ing] all public media statements" for the ICO that mentioned Liston as a co-founder. Peterson rebuffed appeals in November 2015 to identify Liston's role at Augur before the ICO went live, the lawsuit claims.

Two years later, when Liston started working for Gnosis, a decentralized ethereum application similar to Augur, Peterson then reached out to Liston's boss Martin Köppelman to "try to convince him to lean on Plaintiff Liston to stop referring himself as a co-founder of Augur," before altogether denying Liston's co-foundership in two January 2018 tweets, according to the lawsuit.

Peterson even followed up on the offensive by getting Forecast Foundation OÜ to send a cease-and-desist letter post-haste refraining Liston from making those claims as he had done in posts that triggered the Augur frontman's disavowal on social media, the lawsuit continues.

A representative of Augur shortly thereafter emailed Ryan John King, whose blockchain map company FOAM Liston advises, using "aggressive and disparaging language demanding FOAM remove the phrase 'Augur cofounder' from Liston's description on FOAM's website," according to the lawsuit.

Apart from these incidents, Peterson has advanced a vastly differing account of Augur's origin story in the public eye, CoinDesk has found. For example, in a StackExchange post made in September 2017 under his online pseudonym "tinybike," Peterson said he personally knew Liston years ago, but depicted his former co-worker as a "random Internet guy" in tweets earlier this year.

Conflicting takes

Sztorc, who published a critical exposé on Augur in December 2015, told CoinDesk he sympathizes with Liston, noting the unexpected medical condition of Liston's ex-girlfriend when he was abruptly let go. In the lawsuit, Liston reports "suffering from profound financial and economic pressure" around the same time due to the "sustained period of unemployment" that resulted from his "sudden termination" from Augur.

Liston was not the only member of Augur whom Sztorc thought was treated unfairly. The Truthcoin founder criticized the project for compensating software engineer Zackary "Zack" Hess meagerly after he had 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," Amoveo founder Hess commented to CoinDesk.

Amoveo, described as "an improved version of Augur that costs less to use and doesn't have any REP token," connects markets to an on-chain oracle mechanism and makes bets inside bitcoin lightning network channels, according to Hess.

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

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

Another source familiar with the matter, however, said Liston had originally pushed for Augur to be constructed 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. Augur ultimately switched from the original blockchain to its second-generation successor after Liston exited.

Since moving on from Augur, Liston has also worked at the ethereum project and the blockchain software studio ConsenSys. Peterson and Pantera Capital co-CIO Krug are still active with Augur. Gardner is a partner at Ausum Ventures and was an EIR at Blockchain Capital. Costello remains on the Augur advisory board and manages 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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