Defendants Delivered 'Stripped Down' Version of Crypto Algorithm, Alleges Complaint
Data promised to cryptocurrency platform Nemo under an agreement spanning 2013-2020 “was not delivered by XYZ as agreed,” alleged a breach of contract complaint Wednesday (docket 2:24-cv-00737) in U.S. District Court for New Jersey in Newark. The suit names as defendants XYZ Financial Markets, QTrade Capital Partners, Barry Friedman, Llewellyn Jones, Derrick Kaiser, Jeffrey Sassoon and John and Jane Does 1-10. It also names ABC Corps. 1-10 as “fictitious and unknown” defendants.
Sign up for a free preview to unlock the rest of this article
Export Compliance Daily combines U.S. export control news, foreign border import regulation and policy developments into a single daily information service that reliably informs its trade professional readers about important current issues affecting their operations.
The complaint describes defendant XYZ, based in Westfield, New Jersey, as a “shell company purporting to be in the business of utilizing QTrade intellectual property and advancing the purposes of QTrade and its principals.” Westfield-based QTrade “shares intellectual property with XYZ including, but not limited to, trading algorithms cloaked behind the XYZ entity,” it said. Friedman, Jones, Kaiser and Sassoon are identified as “partners” at XYZ and QTrade, with Sassoon having additional titles of chief operating officer and chief financial officer at QTrade, it said.
Nemo and XYZ entered into an IP purchase agreement June 6, 2022, in which XYZ agreed to sell to Nemo its crypto market algorithm, source code and pseudo code, plus sample configurations including characteristics of other reliant software, required fields, update frequency, derived data and fill rates, the complaint said. The algorithm was used in trading crypto from November 2013 to January 2020, and was trading Bitcoin and Ethereum against U.S. dollars, euros and the Singapore dollar, it said.
XYZ agreed to “finalize any closed loop functions, identify what in the code will be 'closed off’ and ensure all core trading logic and pricing is provided as part of the Purchase Assets,” the complaint said. The consideration payable in accordance with the IP purchase agreement was in the form of an equity swap with a “vesting schedule, consulting fees and profit sharing,” the complaint said.
In July 2022, software files were delivered to Nemo purporting to be the most recent versions of files when XYZ last traded cryptocurrency in 2021, said the complaint, but the “Market Making Algorithm” delivered was “incomplete, stripped down, and not functional,” the complaint said. The algorithm had “amateur references to reading prices” from Yahoo Finance instead of professional trading code references, it said.
Nemo also discovered certain code was missing in the algorithm, which was “stripped to the point of being totally inoperable,” the complaint said. Fill rates, update frequency and derived data were required deliverables in accordance with the IP purchase agreement, but the requisite data “was not delivered by XYZ as agreed,” it said. Nemo then exercised its right to terminate the IP purchase agreement, it said.
In late 2023, in the course of termination-related discussions, Friedman disclosed to Nemo that itBit/Paxos paid XYZ/QTrade a flat fee on volume “and instructed them to lose money on every trade to prioritize volume," said the complaint. If that's true, it would "constitute a false statement and misrepresentation to Nemo concerning the risks associated with running code that is essentially designed to lose money,” the complaint said.
In response to Nemo’s termination related to the purchase agreement, Nemo received a letter from counsel for XYZ/QTrade stating “or otherwise conceding” information that, for the first time, “readily acknowledged the lack of full disclosure and the limitations on the deliverables as was bargained for by Nemo,” the complaint said. Though Nemo was aware of a general relationship between XYZ and itBit/Paxos, a company specializing in blockchain and cryptocurrency, XYZ “had not disclosed to Nemo potential confidentiality issues," arising out of that relationship and which “arose as an impediment to deliver” in accordance with its agreement with Nemo, it said.
XYZ “failed to make any pre-execution disclosures as to confidentiality issues, limitations and/or encumbrances as required” under the companies' IP purchase agreement, which “specifically requires that any limitations, encumbrances, confidentiality, pre-existing contracts,” and other material disclosures be annexed to the purchase agreement as exhibits, it said. No disclosures were made or annexed to the agreement, it said.
Nemo asserts counts of rescission of IP purchase agreement vs. XYZ. Against all defendants, it claims common law fraud; violation of the New Jersey Consumer Fraud Act; conspiracy to commit fraud, negligent misrepresentation, tortious interference with existing and prospective business relations, promissory estoppel, and breach of express and implied warranties. Additional counts are piercing the corporate veil/alter ego liability and breach of covenant of good faith and fair dealing, the complaint said.
Nemo seeks an order declaring that the IP purchase agreement is “rescinded, voided, and otherwise invalidated” and that Nemo has no liability to defendants. It seeks actual, future, treble, punitive, exemplary, statutory, economic and compensatory damages; injunctive relief; attorneys’ fees, legal costs and interest.