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  Aug 16, 2018 at 18:21 UTC

Matthew Liston, 26, has taken four Augur associates to court for conflicts that arose out of his termination from the company.

In a lawsuit filed in San Francisco County, California, Liston has alleged 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 acts of fraud, breach of contract, trade theft and coercion that left him empty-handed without a stake in Augur's initial coin offering (ICO) and bound to a broken settlement agreement that failed to acknowledge him as a co-founder.

Named as defendants 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 California, processing the initial coin offering transactions and misappropriating his 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.

Augur held one of the first ICOs. Between August 7 and September 5, 2015, the project 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.

Outcomes of events — from sports to political news — could be predicted in a censorship-resistant manner and rewarded for accuracy with a native cryptocurrency: in other words, betting, but without the worry of platform providers and government bureaucrats taking control.

Three years after the ICO, in a time when cryptocurrency funding mechanisms have gained mainstream momentum, reputation coins have traded as high as $100 per REP, token holders have profited up to 200 times on their principal investments, and Augur has matured into a staff of 15 developers, designers and researchers.

Advised by Ethereum co-founder Vitalik Buterin and Lightning Labs co-founder Elizabeth Stark, the project is launching its main network in July 2018 in what the industry has hailed as one of the more compelling experiments in blockchain designed by the award-winning IDEO design group.

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.

The legal action 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.

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

"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 on April 19 and amended it on May 10 to incorporate other information applicable to the claims. Balloun did not immediately respond to requests for comment from CoinDesk, nor did Costello, Peterson and Cooley LLP attorney Patrick Gibbs, who is 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 and successfully pitched the business to Costello for an investment. 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. "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."

Despite getting the all-clear from Peterson and Costello, Liston butted heads with them over the technological and commercial vision of the Augur Project. Push eventually came to shove and, on October 24, 2014, Peterson and Costello removed Liston from Dyffy and its board of directors, a power play that Gardner allegedly "instigated and conspired with Defendants Peterson and Costello" to take him down and install new management. Krug replaced Liston as director and Peterson as chief technology officer, and Peterson stepped in for Liston as chief executive officer.

When Liston left, they proceeded to unlawfully move his intellectual property and financial assets into the Forecast Foundation non-profit established in Oregon state on December 23, 2014, the lawsuit alleges. Liston had preserved contractual ownership within Dyffy and maintained all rights to his work, capital and shares in the attempted merger or acquisition, but never signed off on anything affecting transfers of his token design, assets and equity, as he says he adapted the Truthcoin research 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.

Not over yet

The paper ties 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. Krug, Gardner and Costello allegedly 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.

Yet they were keen on severing these lingering contractual associations. In the months 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 reputation tokens.

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 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 wanted to obtain legal counsel to review the documents but, 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, "capitulated to Dyffy and Costello's demands under duress" and signed the two agreements on April 19, 2015, finally putting an end to the matter.

Liston now 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 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 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 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 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 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.)

Peterson 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, according to the lawsuit. "You're not a co-founder, so no," Peterson rebuffed appeals in November 2015 to identify Liston's role at Augur.

When Liston started working as chief strategy officer for Gnosis, a decentralized ethereum application similar to Augur, Peterson then reached out to Liston's boss Martin Köppelman in 2017 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-founder status in two January 2018 tweets and getting Forecast Foundation OÜ to send a cease-and-desist letter wrangling Liston into refraining from publicly claiming co-foundership as he had done in posts that triggered Peterson's disavowal.

A representative of Augur shortly thereafter 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."

Apart from these incidents, Peterson has advanced a vastly differing account of Augur's origin story in the public eye, CoinDesk has found. 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 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 said, also criticizing the project for compensating software engineer Zackary "Zack" 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. Hess has since set up 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 the company had been vying for 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.

Another source familiar with the matter, however, said 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. Augur ultimately switched from the original blockchain to its second-generation successor after Liston departed.

Since moving on from Augur, Liston has 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 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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