Following Friday’s ruling by a Tokyo District Court to halt Mt. Gox’s bankruptcy proceeding in favor of civil rehabilitation, one of the world’s largest Mt. Gox creditors with a claim worth close to $250,000,000, retained Newport Beach Attorney Oliver Wright to explore litigation financing.
Bankrupt bitcoin exchange Mt. Gox made headlines and history last Friday when the Tokyo district court presiding over its liquidation reclassified the bankruptcy as a civil rehabilitation. Not only does this set up Mt. Gox creditors for a potential windfall that would otherwise have accrued to shareholders such as infamous former CEO Mark Karpeles, but it also marks the first time in Japan’s history that a defunct company, with no plans of future operations, has, or will have been, “rehabilitated.”
Bitcoin is the world’s first cryptocurrency and the first decentralized digital currency, with a current market capitalization nearly double that of General Motors. As a recent Investopedia article points out, if you purchased $100 in bitcoin in 2011, you would have over $2,000,000 today.
Mt. Gox was once the world’s dominant bitcoin exchange, handling over 70% of all bitcoin transactions globally. But Mt. Gox’s crypto dominance came crashing down in February 2014, when it suspended trading and shuttered its website upon discovering that 850,000 bitcoins were missing from customer accounts. As suspicion and outrage fell upon Karpeles, the former CEO stumbled upon 200,000 bitcoin sitting in a long-forgotten cold wallet. Customers became creditors when Mt. Gox filed for bankruptcy later in 2014, and that 200,000 bitcoin became their only source of recovery. Their hopes and dreams have risen and fallen with the price of bitcoin ever since.
But it wasn’t until 2017, when bitcoin value swelled to as high as $17,000, that the value of those bitcoin assets stretched into the billions and far exceeded Mt. Gox’s liabilities, setting the stage for Friday’s drama. Before Friday, Mt. Gox’s sole asset was valued at its liquidation price of $440 per bitcoin, according to The Verge. Under Japanese bankruptcy law, the enormous gap between the liquidation value and current market value of those bitcoins amounted to a billion-dollar capital gains bonanza payable to Mt. Gox shareholders such as Karpeles instead of its customer-creditors.
Friday’s stunning announcement to halt the bankruptcy liquidation and begin civil rehabilitation means that creditors will get the windfall instead of Karpeles and that their claims will be paid in bitcoin at its current value, instead of in cash at bitcoin’s 2014 fiat value.
On Friday’s news, one of the biggest Mt. Gox creditors in the world retained Newport Beach Attorney Oliver Wright Esq. to explore litigation finance options. Even with Mt. Gox payouts conceivable by 2019, the litigation road ahead won’t come cheap. Nor has it come cheap, with litigation costs–including the cost of Japan’s preeminent bankruptcy firm–running in the hundreds of thousands of dollars since 2014. Wright seeks to ease his client’s liquidity constraints through litigation financing. No stranger to cases like these, he was a corporate lawyer and trial attorney at Gibson, Dunn & Crutcher, as well as a general partner in numerous high net worth and private equity investment vehicles.
In an interview, Wright gave us insight into the Mt. Gox case and his client’s significant role in it:
Q: Can you give us some insight into your client and his place in the ongoing Mt. Gox saga?
A: My client’s story is uniquely Mt. Gox. Like so many other Mt. Gox claimants, he is someone who saw a lot of promise in crypto and bitcoin going way back to before it was fashionable. But he was perhaps more consistent and deliberate than others in putting his money where his mouth was. Between 2011 and 2012 he acquired 35,000 bitcoin for under $75,000. The result is that he is now, I believe, one of the largest Mt. Gox creditors in the world, with a claim worth close to a quarter-billion dollars measured at today’s fiat currency conversion levels. Not bad.
Q: Friday’s ruling from the court in Japan, what’s the significance?
A: I think this is a step in the right direction, as it would seem to deliver Mt. Gox’s surplus asset value to creditors like my client instead of shareholders like the former CEO, whose role in the demise of Mt. Gox remains an open question. I think civil rehabilitation is the correct course from a valuation perspective as well, for it would credit claimants with the capital gains accompanying bitcoin’s rise since the bankruptcy filing, instead of fixing the value at 2014 fiat levels, as had been the case with the liquidation track that it was on before Friday’s ruling.
Q: Why sell a portion of the equity in your client’s claim?
A: Friday’s ruling does indeed put my client in a lucrative position since the Defendant holds over $1.2 billion in assets. But he’s an everyday guy like so many other Mt. Gox creditors. Interestingly enough, he finished law school not too long ago and has just been admitted to medical school starting next year. All of that schooling doesn’t come cheap. Between the cost of his case and schooling both past and future, litigation financing will allow my client to resolve his liquidity issues while bolstering his already impressive legal team lead by Japan’s preeminent bankruptcy law firm.
Q.Why buy a portion?
A: Bitcoin wrapped in an uncorrelated asset like litigation finance equals a uniquely dynamic investment opportunity with appealing risk-adjusted returns. It is a way to balance risk in a larger portfolio and acts as a hedge against unprecedented geopolitical, macroeconomic, and currency uncertainty. Graduating as a lawyer-doctor debt-free is kind of nice too.
Q: Why did he come to you?
A: Only he knows that. But aside from my international legal background and education, I think I have a proven and somewhat unique track record in private investment. I’ve been at the front end of prior trends in distressed investment, like the REO-to-rental space, where I invested in distressed residential assets following the 2008 housing collapse on behalf of high net worth and private equity investors. Most recently, I founded Vanquish Banking, alternative banking, and finance start-up.
Q. Do you think you are setting a precedent in litigation financing for potential windfall clients or most plaintiffs with substantial claims in the future?
A: Perhaps. I think litigation financing is a relatively new phenomenon with enormous potential as an uncorrelated asset class that offers the type of outsized, risk-adjusted returns that private equity has grown accustomed to. It also brings some balance to justice, giving the Davids of the world a powerful litigation tool to fight the Goliaths.