United States Securities and Exchange Commission v. Qin

Background

The Securities and Exchange Commission (SEC) brought this action against Stefan Qin and entities he owned or controlled. The court had appointed a receiver to preserve and recover property belonging to those entities, including property derived from investors in the Sigma Fund and the VQR Fund, property held in trust, and property allegedly transferred improperly.

The receiver moved to compel Nasir Adaya and Phuong Nguyen to turn over approximately $3.5 million in digital assets. The receiver divided the assets into two groups. The first group, called the VQR Assets, consisted primarily of digital assets connected to Adaya’s market-making work for the INJ token. The parties disputed whether Adaya performed that work for himself or for VQR, an entity in the receivership. The second group, called the Sigma Assets, consisted of digital assets that the receiver traced to money taken from Sigma Fund investors and later transferred through accounts associated with Adaya and Nguyen.

The respondents also moved to strike portions of Mark Porter’s declaration and to seal exhibits attached to Eric Chen’s declaration. The parties had previously agreed that the disputed assets would be converted to U.S. dollars and held in an escrow account while the court decided the motion to compel.

Motion to Strike

The court granted in part and denied in part the respondents’ motion to strike. It allowed portions of Porter’s declaration that directly summarized underlying financial and blockchain records, described wallet addresses, or explained the sources of the information. It did not strike Porter’s statement explaining the last-in-first-out (LIFO) tracing method, finding that the method was a basic process within the understanding of an ordinary juror.

The court struck portions that expressed opinions about ownership of the assets, including the conclusion that the disputed assets were receivership property. The court stated that ownership was the issue before it and that it did not rely on the challenged portions except to identify certain accounts.

Motion to Compel Turnover

The court applied a preponderance-of-the-evidence standard, meaning that the receiver had to show that it was more likely than not entitled to possess the alleged receivership property.

VQR Assets. The court denied the receiver’s request to compel turnover of the VQR Assets. Although VQR employees performed some work involving the INJ token and Adaya used a VQR Binance account, the court found that the receiver had not shown that VQR owned the assets. Evidence supported the respondents’ position that Injective Labs or the Open DeFi Foundation hired Adaya individually, rather than VQR, for the market-making work. The compensation arrangements were later documented in agreements involving Antifragile Management LLC and the Open DeFi Foundation, and Chen stated that the agreement was with Adaya, not VQR.

The court also found that VQR had not identified evidence showing that it was hired for the work or was tracking it for compensation. It rejected the receiver’s reliance on Adaya’s employment agreement because the agreement was with Montgomery Technologies LLC, and the court was not aware of an employment agreement between Adaya and VQR. The court further stated that even a possible breach of that agreement would not necessarily make Adaya’s profits receivership property, and no breach-of-contract claim had been brought or briefed. Because the receiver failed to prove ownership of the VQR Assets, the court declined to trace them.

Sigma Assets. The court granted the receiver’s request to compel turnover of the Sigma Assets. It accepted Porter’s tracing of those assets using the LIFO method and found that the assets transferred to Adaya could be traced back to deposits of Sigma Fund investor money. The court ordered turnover of assets in the Nguyen Account having a corresponding value of $529,202.16, which was the value of the Sigma Assets when they were taken from the receivership entities and deposited into accounts controlled by Adaya.

Motion to Seal

The court denied the respondents’ motion to seal exhibits A, B, D, and E to Chen’s second declaration. The court found that the exhibits were judicial documents because they were relevant to the court’s decision on the motion to compel. The respondents relied mainly on a third party’s confidentiality designation and did not identify specific privacy interests or other considerations outweighing the public’s presumptive right of access. The court nevertheless permitted redaction of all but the last four digits of wallet addresses.

Disposition

The court concluded that the motion to compel turnover was granted in part and denied in part, the motion to strike was granted in part and denied in part, and the motion to seal was denied. Within five business days after entry of the order, $529,202.16 from the escrow account was to be turned over to the receiver, and the remaining escrowed funds were to be returned to the respondents. The respondents were also directed to publicly file versions of the Chen exhibits complying with the order by April 5, 2024.