Patagon Management LLC v. Wu

Background

Patagon Management LLC filed an amended complaint seeking injunctive relief against Wei “Max” Wu. The complaint asserted claims for breach of contract, the unregistered offer and sale of securities under Sections 5 and 12(a)(1) of the Securities Act of 1933, unjust enrichment, money had and received, specific performance, a constructive trust, and an equitable accounting.

The dispute concerned SPA tokens and assets held in cryptocurrency wallets associated with the Spartacus DAO. Patagon alleged that it purchased SPA tokens from Wu under an agreement that included promises concerning token holders’ governing rights, redemption opportunities, and development of the DAO. Patagon further alleged that Wu refused to redeem the tokens and transferred, removed, or misused assets from the DAO treasury.

The court had previously issued a temporary restraining order requiring Wu to show cause why a preliminary injunction should not issue. The court held a hearing on May 4, 2023, but Wu did not appear.

Court’s Analysis

A preliminary injunction is a court order issued before final judgment to prevent immediate harm while the case continues. The court found that Patagon established four required factors: immediate and irreparable harm; a likelihood of success on the merits or a substantial question about the merits; a balance of hardships favoring Patagon; and a public interest supporting the injunction.

For irreparable harm, the court found a significant risk that Wu could dissipate the DAO treasury or transfer assets into untraceable cryptocurrency accounts. It relied in part on Patagon’s affidavit stating that Wu had already transferred, removed, or moved treasury assets in violation of the temporary restraining order. The court stated that the speed and anonymous nature of cryptocurrency transactions made freezing the assets necessary to preserve the status quo.

On the merits, the court found that Patagon was likely to succeed, or at least had shown substantial questions, on each asserted claim. For breach of contract, the court found that the purchase of SPA tokens created an enforceable contract and that Wu failed to perform promises concerning DAO features, token redemption, and governing rights. For unjust enrichment and money had and received, the court found that Patagon had shown Wu accepted or retained money and other benefits that allegedly belonged to Patagon and other investors.

Regarding the Securities Act claims, the court found that Patagon was likely to establish that the SPA tokens and SPA bonds were securities. The court described the tokens as representing equity interests in a for-profit venture, capable of secondary-market sales, and marketed with reasonable expectations of profit based on Wu’s efforts. It also found that the securities were sold without registration and that Wu took steps to distribute them through online platforms and the Spartacus website and blog.

The court also found likely success on the claims for specific performance, a constructive trust, and an equitable accounting. It found that Wu was obligated to honor token holders’ vote to dissolve the DAO and redeem the tokens, that Patagon had no adequate legal remedy, and that Wu allegedly wrongfully held and transferred cryptocurrency that should not be retained. For the accounting claim, the court found a fiduciary relationship, difficulty tracing cryptocurrency, a lack of an adequate legal remedy, and a failure to provide requested transparency.

Order

The court ordered Wu, and anyone acting together with him, anywhere in the world, not to abscond with, transfer, remove, or otherwise move assets in four identified cryptocurrency wallets or in any other account or blockchain-based wallet containing Spartacus DAO assets, including SPA or DAI, under Wu’s control. After service, Wu would be considered to have actual notice of the order, and violations could be considered and prosecuted as contempt of court.

The court ordered that Patagon was not required to provide a bond. It also found good cause for alternative service through two email addresses believed to be associated with Wu, a non-fungible token sent to blockchain addresses believed to be associated with him, and a Discord forum where he was known to be active. The papers were to be served within ten days of May 8, 2023.