August 28, 2019

Kleiman v Wright, part 5

With a decisive ruling by Judge Reinhart during the August 26 hearing into contempt of court by Craig Wright in the lawsuit brought by Dave Kleiman's estate, the case is more or less over after the judge imposed significant sanctions against Wright. Let's dig into what went down during this hearing.


If you need to catch up on what this trial is about, check out the three previous entries in this blog series:

In particular, the part 4 blog post is still fresh at the time of this writing, so I'll skip summarizing the case here.

The August 26 hearing

Following the previous hearings, during which witnesses for both sides as well as Craig Wright himself were heard, the August 26 hearing was scheduled to hear closing arguments from both sides and a possible ruling by Judge Reinhart, the judge presiding over the discovery process in the case, on whether to hold Wright in contempt or impose sanctions.

It turned out to be quite a ruling.  (Twitter thread)

But let's not get ahead of ourselves, and go through the events of the hearing. As usual, the full transcript is available at the end of the post.

Closing argument by Wright's counsel (Amanda McGovern)

Wright has been ordered to produce a list of his bitcoin holdings as of the end of 2013, has claimed that this is impossible to comply with (due to the information being locked up in a trust), and is under a burden to reasonably prove this. As a sign of good faith he has produced some lists of bitcoin addresses, such as the mining rewards of the first 70 blocks and an estimated list of mined addresses numbering almost 28,000. (See previous posts for a critical review of these submissions.)

Craig testified and swore that if he could provide these addresses he would; we are told it makes no sense that he wouldn't, and that Wright's credibility or lack thereof is not evidence. (Wright did own bitcoins during 2013; he bought a couple on MtGox. We've seen no evidence that he ever mined or owned any before that.)

To counter the argument that it's unbelievable that someone would intentionally give up control over a massive number of bitcoins, Wright instead argues that it's even less credulous to think someone would want to be associated with an invention that became used for heroin markets and pedophilia centers. Besides, the bitcoins weren't worth billions back when Wright supposedly gave them up. (Sure, but if you're trying to cut ties, why have the coins return to you years later?)

A point is made about how Steve Shadders testified that public addresses wouldn't be useful to the trial anyway, since all you can do with a public address is check whether a coin is still there or has already been spent; they don't prove identity or ownership by themselves. (True, but they still form part of how we normally do demonstrate ownership for bitcoins. This point later ends up deemed irrelevant for a different reason though.)

In short, Wright has done all he can to try to try to follow the court order, but it is simply impossible for him to get that information out of the Tulip Trust and its complicated encrypted files. No witness has been provided that rebuts Wright's testimony on this point, instead the plaintiff spent most of the time during previous hearings pointing out modifications to various documents, suggesting their entire argument is based on attacking Wright's credibility.

We get told that the information may yet turn up in January 2020; Wright has claimed that before Kleiman died he supposedly set up bonded couriers to deliver keys shards to the encrypted Tulip Trust cache to be delivered to Wright in 2020 (there are multiple variations of the story with different exact dates). There's also a possibility that maybe there's something on Kleiman's drives.

Much of the argument boils down to an emphatic plea: Why would Craig Wright risk sanctions by the court if he could simply produce what has been ordered?

At one point, the defense argues:

          To take a leap and claim and argue that Dr. Wright
should be foreclosed from a defense, a robust defense in this
case, on claims of an oral general partnership, a default
judgment for half the Bitcoin, some sort of punitive sanction
stated publicly about his intentions regarding this Court's or
regarding the inability to comply with this Court's order is
simply not proportionate to the facts and circumstances that
have been presented and the evidence that's been presented on
this issue.

(Spoiler: Judge Reinhart ended up striking most of Wright's defenses and ruled that the partnership and 50/50 ownership stake in any bitcoin assets be established as facts as punitive sanctions.)

Craig Wright addresses the court

Wright apologizes if he's come across as misleading or evasive; he often comments to people without realizing what they're missing, so they don't understand the full answer.

He believes he'll know the addresses by January, plus he's exploring other possibilities like legal aspects. Wright then glides into talking about the doctorate he's working on, which is about worldwide freezing orders, which will surely be very helpful to judges like Reinhart himself. There will be ways for law enforcement to seize and recover bitcoin whether people like to admit that or not. (This quickly starts to sound more like how Wright talks to his followers than a court address, but ultimately the address is quite brief.)

The judge questions Wright's counsel

The judge starts out by praising McGovern for having made an excellent presentation of Wright's case. He does however draw attention to an April 18 affidavit stating that Wright was not a trustee of any trusts, yet only three weeks later Wright swore an affidavit saying that he was. "How is one of those not willfully false?"

The defense attempts to excuse itself by saying it had incomplete information and was operating under time pressure at the time. The judge is not having it; he gave the defense two months to prepare, and approved the defense lawyers flying all the way to England to get information directly from Wright.

The judge then asks why Wright swore that the trust contained bitcoins, but later swore that the trust only holds keys, not bitcoin. (The "keys" here refer to the supposed encryption keys to a file storage. The storage in turn supposedly contains random seeds for a deterministic wallet. Wright has previously been specific that the bitcoin private keys themselves are not stored in the trust.)

The defense tries to explain this by saying that the legal structure and the technical structure of the trust are different. Based on the judge's follow-up questions it becomes clearer that he finds it questionable that the trust would take ownership of private keys directly (or the means to generate them) rather than making actual currency transactions, especially since Wright's statements on the subject are inconsistent.

Lastly the judge asks how it can be a "blind trust" if Wright is a trustee. Wright's counsel says they had received an organizational chart that later didn't match the trust document, and possibly there was some ambiguity in the use of the word "blind". (To normal people, this reads: "Craig Wright lied.")

Upon discussing the production of a list of bitcoin addresses, the judge comments that he actually never asked for "public addresses". The court asked for a list of bitcoin holdings, and Wright's side interpreted that as asking for a simple list of addresses. The judge then questions why Wright's side later started arguing that public addresses are meaningless, when it was originally their side that opted to use them as a means of demonstrating bitcoin holdings? McGovern is struggling to answer the barrage of questions, though the judge is sympathetic to her position.

          THE COURT: And I've always been very scrupulous to
use the term "holdings," assuming that, as purporting to be
the creator of Bitcoin, Dr. Wright would be in a very good
position to tell me what data point I needed to know. And if
I was at the wrong data point, he was going to tell me.
          MS. McGOVERN: Right.
          THE COURT: I didn't hear that until June 28th --
          MS. McGOVERN: I understand.
          THE COURT: -- that I had the wrong data point.
          MS. McGOVERN: I understand, Your Honor. I
          THE COURT: So as I said, you're a very good
advocate, Ms. McGovern. Your client has put you in a horrible
position. You are doing everything you can to save him, and
you're doing a great job of it.

Closing argument by Kleiman's counsel (Vel Freedman)

Freedman starts out by saying that this is a unique case. The true client (Dave Kleiman) is deceased, with Dave's brother Ira Kleiman suing Wright based on admissions by Wright that Dave owned a large number of bitcoins in this trust. Plaintiffs are arguing that Wright has "perjured, forged and deceived his way through the discovery process".

Going over all of Wright's misrepresentations would take forever, so the plaintiffs will focus on just the ordered list of bitcoin holdings. They go over the history of the requests and orders, and start listing Wright's contradictions. Initially Wright claimed:
  • "Dave has no rights to the trust, no ownership of the trust, no knowledge of the setup of the trust."
  • "Dave was asked simply to hold a part of some documents and keys that were split using Shamir's Secret Sharing scheme so that he did not even know what he was actually holding."
  • Neither Wright nor anyone else ever put bitcoin into the trust, and that it never held or came to hold bitcoin private keys.
Later, after Wright realized he needed an excuse for why he can't produce a list of his own bitcoin holdings, Wright pivoted and claims he transferred all his mined bitcoins into a blind trust in 2011.

After the court told Wright to get the necessary information from the trustees, Wright stalled for time and later claimed that actually in 2011 he just "took steps to consolidate his bitcoin", then in October 2012 "Tulip Trust I" was formed around his mined bitcoins, with a number of different trustees including himself, and with a complicated encryption scheme protecting the bitcoin keys. He also submitted a sworn statement and swore to the authenticity of several documents (which the plaintiff's expert witness tore to shreds as blatant forgeries).

In short, Wright knew he was in trouble, yet at every step he willfully compounded his lies and submitted forged evidence (only to later claim it wasn't him).

Continuing the story, since Wright by this point had identified the trustees, the court was rightfully asking why he hadn't asked the trustee to produce a list of holdings for the court. At the June 28 hearing, Wright swore under oath that he paid to set up Tulip Trading before 2012 (actually an aged shelf company bought in 2014) and that he remembers receiving the June 24, 2011 email from Dave Kleiman (actually a forgery created in October 2014).

The supposed 2012 Tulip Trust I document too was shown to be a more recent forgery (embedded font files are from 2015), and it names as a beneficiary the Tulip Trading company that Wright didn't buy until 2014. In response to all this, Wright only offered the bald assertion that he "was hacked".

The defense says Wright is an unrepentant liar that doesn't hesitate to keep lying, even in court. Almost every one of the supposed Tulip Trust I trustees are under Wright's control, challenging his assertion that he's unable to open the encrypted file. (Actually one of the trustee positions is "the holder of Satoshi Nakamoto's PGP key", which isn't Wright, although he very much claims to be. If Wright wants to shoot himself in the foot, who is the plaintiff to argue otherwise?)

Faced with being expected to be able to open the file, Wright pivoted yet again, and began painting Dave Kleiman as the originator and main trustee of the Tulip Trust, now saying that even all of Wright's trustees combined don't have enough key shards to access what the court asks for. Wright was claiming he will still recover those missing keys from beyond Kleiman's grave though, as Kleiman is supposed to have set up bonded couriers to return the keys to Wright.

All of this seemingly just to conveniently keep Wright from knowing anything about his supposed billions in bitcoin until the time is right! Wright also can't seem to keep his stories straight about details like the key combinations required for this supposed encrypted file. 8 of 15, 12 of 15, 3 of 5?

"The problem with not telling the truth is that it gets hard to keep track of what story you've told", says Freedman.

In fact, no one has even seen this mysterious encrypted file. Even Steve Shadders, who testified about his work to reconstruct part of it, admitted that he has never seen it. And Shadders' list? It's inaccurate to the point of being useless (on account of its overinclusiveness), it's based on a mere 12 hours of work, based on public research from years ago, and it's missing well-known Satoshi addresses.

The plaintiffs argue that Wright willfully and in bad faith refused to comply with the court's order, and that the court should see through his repeated deceptions and forgeries and properly sanction him for his misconduct, with severe misconduct warranting severe sanctions. Wright has made it clear that he will not play by the rules, and letting him continue pleading his case would simply be affording him with further chances to subvert justice.

Plaintiff's suggested remedy is to strike Wright's pleadings, in addition to declaring the claimed bitcoin assets as 50% belonging to Kleiman.

Follow-up by Wright's counsel

"Game Over" would not be fair, argues McGovern (referring to the impact of the proposed sanctions on Wright's ability to defend himself). They say "you can't mine together during the relevant time period", and they're going to prove it. (Not sure what that means; has Wright pitched some new story?)

It's also argued that it would be unfair to rule that everything Wright achieved from the age of 18 until Kleiman's death should 50% belong to Kleiman. Wright has a right to argue his case in a fair trial, they argue. (But the issue at hand is that Wright hasn't been arguing fairly.)

Perjury with respect to documents didn't happen, because no one proved that all those documents were forged by Wright himself, argues McGovern. Nor has there been any proof that Wright is a fraudster, a perjurer or has willfully failed to comply with orders. (Though he has stated self-contradictory things under oath...?)

They want the trial to continue running its course in front of a jury, and they will prove their case in the time remaining. The proposed sanctions are far too wide-ranging, equivalent to handing Kleiman a win.


The judge announces that he has considered the totality of everything presented in the case so far, and is ready to make a decision.

First, however, he explicitly notes that he is not deciding on whether Craig Wright is Satoshi Nakamoto. (Wright has already outright lied about this, saying the judge found that Craig and Dave as a group were Satoshi. This is a complete fabrication.)

Second, he is not making a finding on how many bitcoins Wright controls. For the purposes of this proceeding, he will assume that Wright had some bitcoin then and now, but there hasn't been any amount ascribed to the assets owed to Kleiman

The ruling as issued by the judge on the bench is basically the same as the written order (see this Twitter thread for a point-by-point breakdown).

The judge first goes through what possible sanctions are on the table if he rules in favor of plaintiffs:

          So before the Court are a couple of legal
principles. One is Rule 37 of the Federal Rules of Civil
Procedure, which authorizes the Court to award attorney's fees
against a party and/or the party's counsel as a sanction for
certain discovery-related conduct. The sanction can be
attorney's fees. They can also be what I will call
substantive sanctions, such as Mr. Freedman discussed in his
remarks, deeming facts to be proven, prohibiting certain
defenses, striking pleadings, and everything up to and
including a default judgment.

Rule 37 provides ways to punish someone who acts in bad faith in a trial, compensate extra costs incurred by such behavior, and exact penalties to discourage similar conduct in the future. The more severe sanctions are only employed in the most egregious cases of misconduct.

In addition, the judge was asked to consider whether Wright should be held in contempt of court (something which can entail more severe punishments, including jail time). There's both criminal contempt and civil contempt. Judge Reinhart cannot himself hold someone in contempt, but would have to refer the facts to the district judge (Judge Bloom).

The judge completely rejects Wright's testimony about the alleged Tulip Trust, finding that it's not only not supported by evidence, but defies common sense. Wright has claimed to have created Bitcoin to be digital cash with an evidentiary trail, but there's no evidentiary trail for the ~1 million bitcoins he claims to have mined. There's a convoluted story about how Wright meticulously set up a trust to hold his bitcoins, that he has supposedly lost control over due to the deceased Dave Kleiman having held a controlling number of key slices, with Wright's only hope being that a bonded courier arrives in 2020 with the decryption keys, failing which he will lose the ability to access billions of dollars worth of bitcoin, and he says he doesn't care. The judge finds this completely inconceivable.

Judge Reinhart says Wright does not impress him as someone telling the truth. When favorable to him, Wright has an excellent memory and a scrupulous attention to detail. Otherwise, he's belligerent and evasive. Wright immediately became defensive when presented with evidence that documents he provided were fabrications, making vague comments about hackers.

All in all, Wright's testimony is not credible on its face. He has directly contradicted himself at different times, including in front of the judge. There's substantial credible evidence that documents produced by Wright to support his position are fraudulent and forged. Other documents were in direct conflict with Wright's testimony. While it's true there's no direct evidence Wright himself forged these documents, there's no evidence that anyone else would have had a motive to. The judge finds that there is a strong and unrebutted inference that Wright willfully created fraudulent documents.

According to the judge, the totality of evidence does not substantiate that the Tulip Trust even exists, and he finds that Wright's testimony to the existence of the trust to be intentionally false.

The judge finds Wright's later argument that public addresses are meaningless to be particularly disturbing, as it was Wright's side that framed the discussion around public addresses as the way to indicate bitcoin holdings in the first place. If Wright is the self-proclaimed creator of Bitcoin and a person very careful about their terminology, if addresses were useless then Wright should have informed the court of this long ago instead of wasting the court's time.

This in itself is sufficient to warrant sanctions says the judge, but he also wants to comment on the alleged encrypted file that Wright claims is held by the Tulip Trust and contains the information needed to access the bitcoins.The judge finds that this file does not exist, and that Wright's testimony to the contrary was perjurous. Further, the judge takes an extra moment to note how Wright falsely stated that Shamir's Secret Sharing involves ordering of key slices — a technical point that I find it charming that the judge researched and brought up.

Dismissing Wright's argument that he would never risk going to jail if he could simply produce the list, the judge instead finds Wright's story far harder to believe. There are many reasons someone like Wright would lie in his position.

After days of testimony, hearings and pleadings, the sole evidence supporting Wright's claim that he cannot comply with the court order is his own uncorroborated, incredible testimony, which is wholly insufficient. Further, the judge finds that Wright's perjury is so egregious in itself that punishing such behavior takes priority over other concerns when it comes to determining an appropriate remedy.

In summary, the judge rules that:

  • Wright has not proved that he's unable to comply with the court's order.

  • The evidence does not rise to the level required for criminal contempt, so he will not refer contempt charges to Judge Bloom.

  • There is clear and convincing evidence to support civil contempt, however the judge believes the other sanctions are a sufficient penalty in this case.

  • Wright has to pay Kleiman's attorney's fees for these proceedings. However, Wright's misconduct is his own, and his counsel is not held liable.

  • As punishment for Wright's misconduct, the judge orders the following sanctions under Rule 37:

    • That Wright and Kleiman entered into a 50/50 partnership is treated as established fact, i.e. it is simply assumed to be true and Wright will not be allowed to argue against it.

    • Likewise, that all bitcoins mined by Wright in 2013 or earlier was joint property belonging to W&K when it was mined.

    • Likewise, that all Bitcoin-related intellectual property developed by Wright prior to Kleiman's death is now owned 50/50 by Kleiman and Wright.

    • Likewise, that any bitcoins mined by Wright prior to Kleiman's death, including any assets traceable to those bitcoins, is now owned 50/50 by Kleiman and Wright.

    • Wright's affirmative defenses that Kleiman in some way surrendered his legal rights are stricken as being inconsistent with the above determinations.

This is not a default judgment, and the judge apparently did not strike Wright's affirmative defenses in a punitive sense, but the outcome is almost the same. Wright can no longer argue that Kleiman didn't own 50% of assets or that he gave his rights away, which will make it extremely hard to defend himself in the remaining trial. It's almost as if the judge ruled that the plaintiff's claims can no longer be proven wrong.

Again, the judge did not rule on what the W&K assets actually are, only that whatever they were, Kleiman will be considered to own 50% of them. The claims of vast riches held in W&K came only from Wright himself, and it's already been determined that his claims should be considered non-credible. Indeed, this blog series started out by debunking one set of bitcoins claimed to belong to this mythical trust.

At the same time, the judge defined the ownership claims quite widely, so it's not impossible that something could exist, such as IP Wright worked on at the time. Whether that would have any value is another question...


▶  Full court transcript