Anton Piller Orders enter the digital realm

by | Dec 21, 2022 | Uncategorized

The Ontario Superior Court of Justice appears ready to give old-fashioned legal remedies a role to play in the most modern of litigation after a judge granted an Anton Piller Order (APO) in an alleged cryptocurrency hack that is currently gripping the province’s tech sector.

APOs — known colloquially in legal circles as civil search warrants — remain among the most intrusive and powerful procedural remedies available in civil litigation matters, almost 50 years after they were first recognized in various common-law jurisdictions in the mid-1970s.

These special preservation orders — obtained on an ex parte basis — allow one party to enter the other’s property and seize evidence, supervised by an independent third party who holds on to the seized items until the dispute is settled.

The judges who granted those first APOs were on the cutting edge of jurisprudence, but they could never have imagined the scenario facing Justice Frederick Myers in the recent case of Cicada 137 LLC v. Medjedovic, which involved a cryptocurrency platform, a teenaged student, and missing digital tokens with a value of $15 million.

The facts
The plaintiff in the case holds cryptocurrency tokens on behalf of investors in Indexed Finance, a decentralized finance platform based on the Ethereum blockchain.

According to Justice Myers’ decision, a “quick but thorough” investigation carried out by the plaintiff identified Andean Medjedovic — a 19-year-old master’s student at the University of Waterloo — as the prime suspect in a hack of the system that moved tokens worth a total of $15 million into his own digital wallet.

The corporation then moved for an APO to preserve the tokens and find the passwords critical for taking control of the wallet.

Four criteria for granting an APO
Justice Myers granted the plaintiff’s motion, finding that it had met all four of the essential conditions for an APO set out by the Supreme Court of Canada in its landmark ruling Celanese Canada Inc. v. Murray Demolition Corp:
• A strong prima facie case
• Potentially serious damage resulting from the defendant’s alleged misconduct
• Convincing evidence that the defendant has incriminating material in its possession
• A real possibility that the defendant may destroy evidence before the discovery process gets underway
However, the more notable elements of the case came in Justice Myers’ discussion of the digital assets at the heart of the dispute. The judge declined to settle any debate over the nature of digital assets as property, but said that it was enough at this stage “to find that people invested value to obtain control of the tokens that the defendant appears to have taken.”

He also took note of the substantial value of the assets at play, as well as the plaintiff’s expert evidence on the magnitude of hacking events in the crypto field.

“As this new form of investing and commerce grows, it is fundamentally important to the stability of the economy and the online marketplace that the integrity of these assets be maintained. The investing and transacting public need assurance that the law applies to protect their rights. Despite what some might think, the law applies to the internet as it does to all relations among people, governments, and others,” Justice Myers wrote.

Lessons learned
There are still plenty of events to unfold and potentially new laws to be made in the Cicada matter. Since the APO was granted, Medjedovic briefly emerged from hiding to admit to moving the tokens, suggesting that he will defend the transfers as legitimate because he was merely exploiting a weakness in the programming code that was publicly available to any other user of the blockchain technology, before quickly going to ground again.

Meanwhile, a separate class action has been launched on behalf of investors whose tokens were subject to the hack.

However, with the granting of the APO, the case has already provided an important demonstration of the court’s willingness to intervene in matters related to the hacking of digital assets.

Justice Myers’ decision sends a clear signal that he and his colleagues on the bench are looking at these new and developing areas of the economy, and recognizing that parties to transactions need and deserve legal protection.

Despite ongoing volatility in the cryptocurrency market, there is no sign of a serious decline in interest from investors or the general public. As the sector becomes increasingly mainstream, legal disputes are certain to follow, and this ruling offers litigants some comfort that the court’s treatment of cryptocurrency assets will be in line with its approach to paper money and other more tangible assets.