US Govt, Bitfunder operator Jon Montroll clash over restitution amount

As the sentencing of Jon Montroll, the operator of Bitcoin-related services WeExchange and Bitfunder.com, approaches, the arguments between the US Government and the defendant regarding what the appropriate penalty has to be are becoming more intense. 

It has already become apparent that the parties in the criminal case disagree on whether the defendant should get a probationary sentence or a prison term. The latest filings with the New York Southern District Court reveal that the disagreement spreads to the amount of restitution sought.

The Government requests that the Court order the defendant Jon Montroll to pay restitution to the victims of his scheme to defraud them in connection with the purchase and sale of Ukyo.Loan securities.

Montroll deceived investors and potential investors in a security he devised, Ukyo.Loan. Montroll launched this product on or about July 18, 2013. Montroll held Ukyo.Loan customer funds in the same commingled account as users of his Bitfunder and WeExchange services.

Beginning on July 28, 2013, Montroll’s systems were exploited by malicious users to access bitcoins held in the commingled account. Over the course of four weeks, those malicious users wrongfully extracted thousands of bitcoins that belonged to Montroll’s customers and investors. Importantly, the Exploit occurred in stages over a period of weeks.

Instead of immediately disclosing the Exploit to his users and investors on July 28, 2013, such that existing investors could redeem their shares for face value as promised, and thus reclaim their funds, before the Exploit reached its conclusion, Montroll concealed the existence of the Exploit, the Government notes. Further, on at least one occasion, Montrol falsely represented to customers that BitFunder was commercially successful.

Following the start of the Exploit, Montroll raised approximately 973 bitcoins through continued marketing of the Ukyo.Loan securities.

By the end of the Exploit, more than 200 Ukyo.Loan customers suffered losses, including those that invested before the Exploit began (and were deprived of their opportunity to withdraw before hackers took their funds) and those who invested after the Exploit began (who were deceived into believing they were buying a security related to a profitable business).

Following a meet and confer process, the Government has revised its proposed restitution figure to $183,530.04 compared to $212,629.32 initially sought. The defendant, however, disagrees.

In a Letter filed earlier today with the Court, the defense argues the Court should enter an order of restitution in the amount of $167,438 and should credit Jon Montroll with having already paid $137,367.55 towards that amount, leaving $30,070.45 in unpaid restitution.

The heart of the defense’s argument is that the reason why purchasers of Ukyo Loans were not able to redeem their Ukyo Loans is emphatically not because Montroll failed to disclose the hack. It is because, within the first 28 hours of the hack, more than 77% of the Bitcoins held in the WeExchange system had been stolen and, only 14 hours later, more than 99% of the Bitcoins previously held in the WeExchange wallet had been stolen. According to the defense, even if Jon Montroll had disclosed the hack after the first 28 hours of the hack, it would have been impossible for anyone with a claim to Bitcoins held in the WeExchange wallet to get more than a miniscule portion of their Bitcoins back.

Based on the restitution information provided to date, the Court should credit Jon Montroll with restitution payments of:

• a $20,000 payment to the Registry of the Court;

• a $25,000 payment to the victims of misappropriation;

• $76,495.49 in payments to the post-hack purchasers of Ukyo Loans; and

• $15,872.06 in other payments to the post-hack purchasers of Ukyo Loans,

towards his agreed-upon restitution of $167,438, leaving total unpaid restitution of $30,070.45.

The case continues at the New York Southern District Court.