Vitaliy Kozachenko obtains a worldwide freezing injunction against London Football Exchange and its owners and directors
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This article addresses the recent decision of the High Court of Justice in Blockchain Optimization S.A.and Petrochemical Logistics Ltd v LFE Market Ltd, LFE Group Holdings Limited, James (Aka Jim) Aylward, Benjamin Leigh Hunt, White Tiger Global Opportunities Fund and White Tiger Asset Management Ltd [2020] EWHC 2027 (Comm).

The decision deals with (i) the extent of the duty of full and frank disclosure upon a without notice application and the consequences of innocent breaches; (ii) the required standard for demonstrating a good and arguable case upon an application for a freezing injunction; and (iii) the heightened standard for pleading fraud and the relevance of the Defendants’ prior behavior to the presumption of innocence.

Factual Background

The London Football Exchange (“LFE”) purported to be a cryptocurrency platform intended to (i) raise money by selling cryptocurrency; (ii) arrange for a football club stock exchange where participants could purchase football club shares using the cryptocurrency; (iii) create a market where token holders could buy match tickets, football merchandise and participate in events with football players. The main persons behind the project were Mr James Aylward (aka James Abbass Biniaz), Mr Benjamin Leigh Hunt and Mr Konstantino Ghertsos.

In late 2017, following a series of representations made by LFE Founders, Petrochemical Logistics (“PL”) and Blockchain Optimization (“BO”), clients of Fortior Law, advanced loans in the amount of US$ 2.2 for the project. In addition, the Claimants also provided marketing services and assistance to the LFE project, and Mr Hunt and Mr Ghertsos promised to pay US$3 million to the Claimants for their support.

By mid-summer 2018 the Claimants wished to exit from the project. The parties agreed that the loan funds would be repaid by transferring 4.4 million LFE tokens to PL, and it was guaranteed that the minimal price for a token would be US$0.50. Another US$3 million would be repaid to BO as consideration for the marketing services. The tokens were provided to PL, but the US$3 million was never paid.

In 2019 LFE announced a “token swap” of old LFE tokens for new ones. Mr Aylward explained that the new tokens were being issued but PL’s 4.4 million old tokens would not be replaced. Thus, PL’s tokens became worthless. By the time it also emerged that most of LFE entities were either dissolved, have never existed or were set up but have never conducted any business and remained dormant companies. The value of the tokens transferred to PL in July 2018 has been rendered nugatory.

Upon discovering this, the Claimants instructed Fortior Law to file a claim for fraudulent misrepresentation, conspiracy and breach of contract in the High Court of Justice against the LFE companies as well as their owners and Mr Aylward, who appeared to be director/shadow director of the relevant entities. The Claimants also sought an urgent worldwide freezing injunction against the Defendants. On 15 January 2020 Butcher J granted the injunction.

Return date hearing

The Defendants sought to discharge the freezing injunction on the basis that (i) there was no good arguable case of fraud – and there should be a summary judgment in their favour on the fraud claims; (ii) there has been a failure in full and frank disclosure on the part the Claimants’ solicitor, Vitaliy Kozachenko, because Fortior Law, Mr Kozachenko’s firm, represented LFE in an arbitration against a service provider whom LFE failed to pay – it was alleged that because Fortior Law represented LFE, Mr Kozachenko should have known that the project was not a sham and should have disclosed the fact to Butcher J.

Dealing with the issue, the judge, inter alia, referred to Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350. It was noted therein that whether the fact not disclosed is of sufficient materiality to justify or require immediate discharge of the order without examination of the merits depends on the importance of the fact to the issues which were to be decided by the judge on the application. The innocence or otherwise of the non-disclosure is also an important though not decisive consideration.

Sir William Blair found that:

Had he [Butcher J] been told, as he should have been told, that Mr Kozachenko’s firm had also been instructed, it is difficult to see how this would have made any difference to his decision.

The Defendants also submitted that there was no good arguable case of fraud to keep the freezing order in force. The Judge referred to Ninemia Maritime Corp v Trave Schiffahrtsgesellschaft GmbH (The Niedersachsen) [1983] 2 Lloyd’s Rep 600 and Lakatamia Shipping Co Ltd v Toshiko Morimoto [2019] EWCA Civ 2203, where the test of a “good arguable case” in freezing order applications is described. The Judge concluded that the claim satisfied the threshold and dismissed the Defendants’ application to discharge the freezing order.

Application to strike out parts of the claim/summary judgment

The Defendants also applied to strike out parts of the claim related to fraudulent misrepresentation and unlawful means conspiracy.

The Defendants argued that the LFE project was not a sham but rather an ordinary business failure, a good idea which did not “get off the ground”. The project failed, they said, due to commercial reasons which had nothing to do with dishonesty.

The Defendants referred to Three Rivers District Council v Governor and Company of the Bank of England (No.3) [2003] 2 AC 1 at [186], Lord Millett), where it was held that:

“It is not open to the court to infer dishonesty from facts which have not been pleaded, or from facts which have been pleaded but are consistent with honesty. There must be some fact which tilts the balance and justifies an inference of dishonesty, and this fact must be both pleaded and proved”

The Defendants’ case was that none of the allegations of deceit were properly pleaded, alternatively were consistent with the Defendants having acted honestly, and consequently should be struck out.

In reply, the Claimants referred to LFE’s false and paid-for articles and other untrue statements made on their Twitter account as examples of the Defendants having sought to dishonestly manipulate the market in their tokens. Fortior’s investigators have also revealed that the true and original name of James Aylward was in fact Mr James Biniaz. Mr Biniaz was convicted for VAT fraud, assault and robbery in 2010 and sentenced for 22 months’ imprisonment. Apparently in an attempt to hide these prior convictions, Mr Biniaz changed his name to Aylward, his mother’s maiden name.

Having considered all the evidence, Sir William Blair dismissed the Defendants’ strike out and summary judgment applications and ruled that the Claimants’ allegations of fraud have been properly pleaded.

The decision is a further reminder that the English courts will not hesitate to grant the “nuclear weapon” injunctions in investment fraud cases.

In the application before Butcher J the Claimants were represented by Guy Blackwood QC and Turlough Stone (Quadrant Chambers), instructed by Vitaliy Kozachenko (Fortior Law). The Claimants were also assisted by Danil Hristich, Giles Xuereb, Erlan Moldoshev and Sergey Platonov.

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