I AM GOING TO GET REALLY LEGAL, REAL SOON… but first I want to take you back to the delights of 1950s television, and that brilliant fictional defense lawyer Perry Mason.
His show ran for ten years. The scripts were always whip-smart. Perry always got his clients off seeming unbreakable charges, however hopeless the case. Every week he’d leave the hapless District Attorney Hamilton Burger reeling as yet one more guiltless defendant marched out of the courtroom.
All the best episodes were based on novels by the late Erle Stanley Gardner. He was an expert practising lawyer himself, who knew the US legal system inside out.
Whatever the nature of each case on the TV show, DA Burger would cast his net as wide as possible. He’d present as much accusatory information as he could find before the judge. And sure as sure, Mason’s fiery responses would include the plea for dismissal: “Your Honor, the DA is on another fishing expedition!”
The latter phrase has become a cliché for the often dubious methods used by US prosecutors to ensnare company bosses (in civil cases) whose industries had previously been either unregulated, or lightly regulated, such as on-line gaming/sports books or crypto.
Where are Kyle and Zhu?
The matter is of much immediate interest. For instance, the founders of the bankrupt crypto hedge fund Three Arrows Capital, Kyle Davies and Zhu Su, have availed themselves of a Backup Plan and have recently “gone dark”. No-one knows where they are. Provided that the personnel involved are NOT doing anything criminal, then I submit that the ability of founders/owners to stay out of the hands of authorities is both legal and clever.
In the 1990’s, former NY Attorney General Elliot Spitzer mastered the technique of the “fishing expedition”. He would charge CEOs with highly dubious allegations and make them do the famous perp walk. Then, hours before the opening bell of the markets, Spitzer would call up the company board and offer them a plea bargain deal. Negotiating from a position of great weakness, the boards would capitulate and concede to charges that Spitzer really had no real chance of winning at trial… solely to save the company share price!
During the time that on-line gaming and sports book sites were coming into their own, I had several founder clients who successfully stayed out the clutches of overzealous American prosecutors. Meanwhile their corporate lawyers adjusted their businesses to new US regulatory rules that had been pushed through by their bricks and mortar Vegas competitors.
These founders continued to legally live and operate in more friendly jurisdictions during this negotiation period. This allowed the company lawyers to negotiate with liquidators, courts and regulators on an even playing field. Their competitors who fell into the hands of the US authorities during this period saw their businesses collapse. My clients then bought these companies for pennies on the dollar.
It is important to remember: Regulators and law enforcement officers will sometimes charge someone even if they may not feel certain that they have a solid criminal case against them. When that person is in jail, they are suddenly more willing to agree to a plea deal. They may even concede to unreasonable conditions imposed by regulators.
The Three Arrows Situation
On 16 June 2022, Three Arrows Capital failed to meet its margin calls. On 22 June, Three Arrows had failed to repay money lent from cryptocurrency broker Voyager Digital. On 27 June 2022, Voyager Digital issued a notice of default against Three Arrows. They alleged they had failed to make the required payments on a Bitcoin and USD Coin loan worth more than $665 million. On the same day, a court in the British Virgin Islands ordered the liquidation of Three Arrows Capital. The fund filed for Chapter 15 bankruptcy to protect its US assets from creditors. As part of that bankruptcy the Three Arrows founders, Kyle Davies and Su Zhu, have now provided a spreadsheet with details of the company’s assets to the liquidators (according to a post from Zhu’s verified Twitter account).
The founders will continue working to find details of other assets. However, according to their tweet, they are displeased with the behaviour of the liquidators. The hedge fund’s liquidators travelled to Three Arrows’ office address in Singapore in late June in an attempt to track the founders down. It appeared dormant: the door was locked, computers were inactive and mail was stuffed under the door.
As is appropriate in this strategy, the liquidators spoke with lawyers for Davies and Zhu via videoconference. They did not speak to the founders directly. It is worth noting that currently the liquidation is a civil matter. No criminal charges have been made against either founder.
So where in the world are Kyle and Zhu?
Rumour has it that the two founders are heading to, or already are, in Dubai. If this is true, then the obvious question would be;
“Is Dubai a viable location to remain during the liquidation proceedings?
Recently Dubai has become very popular with founders in the crypto space. Most notably CZ, the founder of Binance. Visas to enter Dubai by commercial or private jets are relatively easy to obtain. If there are no criminal charges it is possible to obtain a residence permit which then allows a longer stay.
However, it is not a reliable “hideout” if criminal charges are ever levied. The Nigerian fraudster “Hushpuppi” found this out the hard way when he was arrested by Dubai police and flown directly to the US.
It is worth noting that the UAE has extradition treaties with 37 different countries. This includes several whose regulators are likely looking at the actions of Three Arrows Capital
What else should they do besides locating to Dubai?
Both Kyle and Zhu are American citizens and passport holders. It is not known whether they obtained another citizenship such as Singapore. If they are only travelling on US passports, they are at a significant risk.
This is because “their passport” is not really theirs. Rather it is the property of the US. The US allows them to use that passport… right up to the moment that they no longer allow them to use it. Every nation in the world follows a similar system. Your passport is a privilege, but never assume that it is actually your possession!
In short, if their US passport was cancelled while they were in another country such as the UAE or Singapore then they would be trapped in that country. This is because they would not have a travel document which would allow them to enter a third country. In addition, life without a valid passport is not easy. For instance, it may prevent them from making a residence application or opening up banking facilities.
Can they apply for a Citizenship by Investment?
Contrary to popular belief, countries which have Citizenship by Investment programs have screening and due diligence procedures. Therefore, given the publicity surrounding these gentlemen and the possibility of criminal charges in the future, there is no currently operating citizenship by investment program which would consider granting them a passport.
The other thing to remember is that such citizenships are not granted overnight. Rather they take 3 to 4 months. They also require a valid existing passport to successfully process. If the US were to cancel their passports in the near future, they would be trapped.
In short, Kyle and Zhu’s fiscal house is being scorched by a liquidation. Therefore the time to seek the Fire Insurance of a Second passport is long past. If there is any future potential criminal “arson” (i.e. fraud) charges they will have to face the music.
Wat happens in the event of criminal proceedings?
I repeat that there are no criminal charges against Kyle and Zhu at present. But what happens if an authority from a regulator country creates a criminal case against them? The fact that they are currently “off the radar,” will help. It means that the said authority needs to be on very solid ground in their allegations. The criminal charges need to not only seem substantial to their home country but also to where Davies and Zhu are physically residing!
If we look at this as a case study for founders/ key employees of crypto firms then here are the major takeaways:
- Acknowledge that regulation will be coming to your activities. If you want to have reasonable input into how that regulation is ultimately shaped you have to maintain a balance of power in the negotiations;
- Some countries are less prone to be pressured by regulating cases in situations that are NOT clearly criminal in both jurisdictions;
- A passport is the property of the issuing country and if that issuing country is also the country seeking to regulate you, one predictable action will be the cancellation of your passport. Not having a valid passport presents all kinds of practical difficulties including the inability to travel; apply for second passports or residences or even open bank accounts. Therefore the possession of a second passport and permission to reside (as opposed to simply visit) a second jurisdiction or several jurisdictions BEFORE regulators focus on you is key.
In summary, if you operate in the crypto environment you could face a similar predicament to that of the Three Arrows founders. Therefore a strong Back-Up Plan, that will support your asset retention, Second Passport legal status, flexible finance operations and international residence arrangements is essential for you and your businesses future.