Use drained assets to fund litigation

Summary

As you have probably seen, Laurence Day and I (Dillon Kellar) have filed a class-action lawsuit with the Ontario Superior Court of Justice in Toronto, Canada against Andean Medjedovic on behalf of users affected by the Indexed Finance attack.

As two people heavily involved in the project, Laurence and I feel we have the best understanding of the Indexed Finance protocol and are thus best positioned to explain the intricacies of the attack to the court, which will be very important as the case moves along and the court determines how existing laws apply to it. We have already done significant work on this front with our legal team, culminating in several hundred pages of evidence and explanations of Indexed Finance and the attack on it.

While we personally lost a small amount from the attack, our primary motivation is to return the stolen assets to the rest of the community, which lost far more. Our secondary motivation is to demonstrate to the DeFi space (and would-be hackers in it) that existing laws very much apply to our industry, and to do so in a way that sets a good precedent for future litigation.

We have been paying the rather significant legal fees for this case using a combination of our personal assets and some assets we had previously set aside for project development. We have done so in anticipation of eventually being repaid by the DAO, but with the understanding that the community may refuse to do so. Regardless of how the litigation is funded, we have every intention of seeing it through.

We are asking the DAO to give us roughly $750,000 worth of SUSHI recovered from the affected index pools, of which about $200,000 will be used to pay for expenses that have already been incurred and the rest will be set aside for future costs. Should there be any remainder at the end of the case, we will return it to the DAO treasury or to the compensation plan approved by the DAO if one has been deployed.

Class Action Information

Class action lawsuits require “certification”, in which the court recognizes the lawsuit as a class action and the representative plaintiffs come to officially represent the class. The class action has not yet been certified, but we anticipate that it will be as there has been no alternative class proposed and the court recognizes the importance of this case.

Class actions in Ontario follow the "opt-out" model, meaning that, after certification, all class members who do not wish to be part of the class action will be given an opportunity to opt-out, and will be free to pursue their own action with their own lawyer.

The notice of action and all written arguments and exhibits can be read here: https://drive.google.com/drive/folders/1BtZy-xt_KrQGKQ1ZhukBPXB-slXfmTBW?usp=sharing. The court file number is CV-21-00673984-00CP.

Significant steps in the case (including settlement) will require court approval and include an opportunity to object. Laurence and I will be sharing updates as they occur on Discord and Twitter, contingent on approval from our legal team.

Should we win, the return of the recovered assets is a process that will be decided on by the court. As a result, we can not say how it will work; however, we believe that the fairest distribution would be a pro-rata return of recovered assets according to losses suffered by both direct holders of the affected tokens and liquidity providers for their external markets, including those on secondary blockchains. This would include losses suffered via market correction in the immediate aftermath.

Rationale

Laurence and I have hired a truly excellent legal team. Jason Gottlieb of Morrison Cohen is advising the legal strategy from the US, while Stockwoods LLP (Gerald Chan, Fredrick Schumann, Stephen Aylward, and Alexandra Heine) is litigating the case in Canada.

Jason is a prolific cryptocurrency attorney widely recognized as one of the top crypto lawyers in America. Stockwoods is a highly regarded litigation firm with a history of winning very complex cases and successfully arguing in front of the Supreme Court of Canada; while not as focused on the crypto space, they’re brilliant, award-winning lawyers who wrapped their heads around the situation almost immediately.

We’re confident that this legal team represents the best chance of successfully litigating this case, and of setting a precedent that is fair to everyone.

We have opted to pay for services rendered rather than on a contingency basis. This means that we are responsible for paying legal fees outright, but the lawyers will not receive a portion of the recovered assets should we win. While this has been more of a burden for us financially, it will result in the greatest return of assets to affected users if we are successful.

If we do not receive funding, we will be unable to finance the entirety of this case and will likely need to switch to a contingency basis, which would result in fewer returned assets for victims of the hack. We are asking that the community entrust us with the necessary funding to litigate this the right way and return the greatest amount of stolen assets to affected users.

Because the project has been so negatively impacted by the hack, it is not possible to fund the lawsuit using the treasury’s NDX. The treasury also does not have much in the way of other unencumbered assets to tap, and more importantly, we don’t believe the project’s ability to fund itself should be sacrificed; however, it does have a significant amount of capital in the form of the assets recovered from the index pools when they were disabled and drained in November.

These assets were taken from the index pools to stop the bleeding from arbitrage, with the intention of using them for a compensation plan for affected users. If they are used for that purpose, they will cover less than 10% of the losses. Alternatively, if about half of the recovered assets are used to fund this litigation, they could eventually result in the return of the majority of total losses if the suit is successful.

If the DAO accepts our proposal, we will provide as much transparency into the lawsuit and its expenses as we can without violating attorney-client privilege or otherwise damaging the case. We will periodically disclose our legal fees and will provide a full accounting of the expenses at the conclusion of the case.

Indexed Finance Attack Response Corp.

Laurence and I have created a corporation as a 50/50 partnership called Indexed Finance Attack Response Corporation, with the purpose of financing this litigation. This proposal will transfer the requested SUSHI to a gnosis wallet controlled by Laurence and me which exists solely for IFAR business. Its assets will not be mixed with our personal assets except for the initial repayment of our previous expenses.