A group of Russian lawyers claims that it has found a path to financial remuneration for victims who lost bitcoin in the historic 2014 Mt. Gox hack. But one blockchain lawyer, as well as other creditors, are cautioning that the deal being offered is more sour than sweet.

The news comes after a dizzying saga for victims of the hack, whose only hope of resolution seemed to be through a civil rehabilitation case via the Japanese court system. But now Russian law firm Zheleznikov and Partners alleges that there’s another way.

A member of the Moscow Bar Association, the firm published its “Mt Gox Russian Recoveries Proposal” on September 12, 2019. The document lays out a step-by-step plan to recover between 170,000 to 200,000 bitcoin stolen in the Mt. Gox heist (this represents roughly a fifth of all funds filched from what was the most popular bitcoin exchange at the time). The firm says it would give creditors remuneration in fiat based on the exchange rate at the time of recovery and equal to the number of bitcoin lost in the hack.

The cost? 50-75 percent of the recovered funds and $320 an hour for its services (only to be paid if the funds are recovered). This, among other concerns, has critics screaming, “Run for the hills.”

“Tl;dr, the terms offered by the ‘Russian Recovery’ lawyers are unreasonable and I will not accept them. I also question their motives,” Daniel Kelman, a partner at Kelman PLLC who has worked extensively on the Mt. Gox case, wrote in a Medium post.

New Lead?

Zheleznikov and Partners claims to have identified Russian individuals involved in the theft, and it wants to launch a criminal case to shake them down in court; it has opted for this route instead of a civil class-action suit due to complications with cryptocurrency’s classification in Russian law and the fact that the funds have not yet been found. To launch a criminal case, though, it needs creditors to come forward to show police that there’s enough interest to launch an investigation.

The firm is using its brand recognition among police and other officials in Russia as a primary selling point as to why “only [it] can do this.”

“Our firm has developed these relationship [sic] over several years through our track record of professional conduct and mutual respect for our colleagues working in law enforcement,” the brief reads. “Russian police and other law enforcement agencies in Russia recognise and distinguish our firm both acting as advocate for the defendants (in some cases) and as advocate acting for victims of crimes, including theft and fraud, in other cases.”

In addition, it has claimed in a creditors forum to have secured some $1 million in an unrelated case against the now-defunct Wex exchange, bolstering its professional credibility. This prior experience, it suggests, taken in tandem with its entrenched status among Russian officials, poises it better than others to prosecute those it has identified as being involved in the theft.

Not So Fast, Says Another Mt. Gox Lawyer

Only Zheleznikov and Partners refuses to give specifics about the case or disclose these ostensibly malicious actors. Kelman believes this raises a serious ethical issue.

“The Russian Recovery lawyers have stated they will not disclose specific facts about the case because once they share them we are free to take them to a different law firm,” his post reads. “News flash: that’s how the legal services market works. If a lawyer has a good case, they show it to their client and offer a fair price. If the client trusts the lawyer, the client then goes with the obvious solution staring them in the face. These lawyers have treated their engagement like it’s a mystery box, asking us to first gamble with a majority of our right to recovery before we can take their legal strategy out of its package. This is an unethical way to solicit clients, no legal engagement should this closely resemble a carnival game.”

He’s also unsure that the legal team’s alleged leads are anything new. Alexander Zheleznikov, the firm’s primary partner, told CoinDesk that his firm has reason to believe some of the stolen bitcoin were entangled in BTC-e, another now-dead exchange, which gave birth to Wex.

This has been well documented and investigated, Kelman wrote, saying that “[i]t’s no secret the MtGox bitcoins were laundered at BTC-e.”

Alexander Vinnik, believed to be BTC-e’s chief operator, was arrested in Greece in July 2017 at the U.S. Department of Justice’s request; he is awaiting extradition orders to either Russia, France or the U.S.

“The Russian Recovery lawyers have stated they will not disclose specific facts about the case because once they share them we are free to take them to a different law firm. News flash: that’s how the legal services market works.”

“The Russian Recovery lawyers have been following BTC-e closely and I am sure they are aware that the US Department of Justice (DOJ) recently filed a civil action against BTC-e and Vinnik for money damages. This civil action is separate from any criminal action,” Kelman wrote (emphasis his own). “This begs the question of whether the Russian Recovery lawyers’ secret information is just advance knowledge of what DOJ has planned … if anyone has knowledge about the whereabouts of BTC-e’s bitcoins I’d wager it would be the legal representative of the law enforcement agency that has spent the past few years investigating where those bitcoins went … [so] the Russian Recovery lawyers wouldn’t deserve a lion’s share of our cut for acting as vultures picking at BTC-e’s carcass.”

“Blatant” Opportunism

Speaking of that lion’s share, Kelman thinks the law firm’s fees are ludicrous. But this figure, which the firm calls “very generous,” is necessary (according to them) given the unconventional nature of the case and “reflects the market price for litigation finance given the risks and costs involved” — not to mention that it could take years of litigation.

Kelman, though, believes the fee has everything to do with the firm’s decision to file a criminal case instead of a civil class action.

“Why hasn’t this been done?” he asks. “Simply put, filing a class action would throw a wrench in plans to claim 50 of the winnings because contingency fees are not legal in Russia. A Russian court would not approve a contingency fee and these lawyers would instead only be making an honest $350 an hour.”

Kelman has lambasted the fees as “a blatant attempt to capitalize on the hopelessness that many MtGox creditors feel after five years of legal proceedings.”

He also takes issue with its use of Andy Pag, a Mt. Gox creditor himself and former BBC journalist who founded Mt. Gox Legal, a group to represent the interest of the exchange’s creditors.

Zheleznikov and Partners hired Pag to write the recovery proposal, and he also sold his creditor claim to the law firm, Kelman claims in his post. Not only does this make him a “counter-party” in this whole ordeal, it also presents a clear conflict of interest, Kelman argues.

“Andy is sitting on two chairs; one as a trusted advisor on the governance board of MGL, another as a paid facilitator of the other party … his conflicted position would, at the very least, cause him to be less motivated to question the veracity of the Russian Recovery lawyers and adequately vet the abnormalities in their offer,” per Kelman. “He is in fact advocating in favor of the offer. He has in fact placed himself in a position where his incentives are directly at odds with our own best interests. This makes it hard for me to afford much weight to his opinion here.”

After publication of this story, Pag reached out to Bitcoin Magazine and said that Kelman’s allegation that he sold his claim to Zheleznikov and Partners is false. He did, however, sell it to an undisclosed investment fund.

“Abnormal” Legal Behavior

All in all, the Russian firm’s case is unscrupulous at best, Kelman thinks. And he’s not alone: a handful of Bitcointalk forums have raised red flags as well, likening the proposal to a “con job.” There’s also the issue of creditors potentially paying twice for legal fees if both the Russian team and the Japanese trustee are successful in their recovery efforts.

With a deadline nearing for creditors to back the firm’s legal action, Kelman — while admitting that his diagnosis is subject to speculation over who will recover which funds — is cautioning creditors to stay away from what he brands as “abnormal” legal behavior.

“It’s possible the Russian Recovery lawyers are hit with a DOJ subpoena to disclose the information they’re sitting on,” he wrote. “I’m admittedly speculating, but we have to pick a horse in this race and my bet is that there will eventually be more than one horse to bet on. I am not prematurely placing my bet on lawyers who have been acting in a manner that is, to put it politely, abnormal.”

This article has been updated to correct the price point of the firm’s services and Kelman’s allegation that Pag sold his claim to the firm.