The lawsuit against the former financial custodian to the digital asset exchange Kraken has reached a boiling point. Payward Inc., the parent company of Kraken, has accused Etana Custody and its CEO Dion Brandon Russell of being involved in orchestrating a Ponzi-like fraud scheme. In a second amended complaint filed in a Colorado federal court on May 4, 2022, Payward has escalated its previous breach of contract lawsuit against Etana into a full blown fraud lawsuit. Payward alleges that Etana misappropriated over $25 million of customer reserve funds belonging to Kraken to sustain Etana’s failing operations.
A Deep Dive Into the Alleged Deception
At the core of this lawsuit is the accusation that Etana ignored the strict rules of financial custody. Payward claims the firm secretly commingled Kraken’s dedicated customer reserves with its own corporate money. The lawsuit alleges that at least $16 million was funneled directly into high-risk Seabury Trade Capital notes. When those notes defaulted, it created a massive hole in the custodian’s balance sheet. Furthermore, the complaint alleges Russell personally directed this misuse while issuing fake dashboard balances to clients, falsely indicating their money was secure.
The Withdrawal Standoff
The first signs of cracks in the Kraken organization’s foundation were finally present as of April 2022. The executive personnel within the organization had started to express concerns regarding possible problems with their proxies and requested that approximately $25 million be withdrawn from their reserve account. Rather than fulfilling their request, however, Etana began to delay the transfer of funds indefinitely. Payward claims the custodian used fabricated reconciliation problems and technical excuses to delay handing over the cash. In reality, the lawsuit states that the firm simply lacked the liquidity to fulfill the massive withdrawal request because the money was already gone.
A Ponzi-Style Operation
As the financial walls closed in, the custody provider allegedly resorted to desperate measures. Because the original reserve funds were squandered on failed investments and operating expenses, Etana scrambled for cash. The court filing asserts that the firm began using incoming deposits from newer clients to cover the glaring shortfalls from older accounts. Payward’s legal team characterized this specific pattern of shifting money around to mask missing funds as a classic Ponzi-like enterprise.
Regulators Intervene Amid Mounting Debts
In 2022, the failure of the Etana company occurred when the Colorado Division of Banking issued a cease and desist order against the business. This order initiated a statutory liquidation process which ceased the existence of the company as an entity. An independent court-ordered receiver is managing the insolvency of the company by recording the collection and disposition of all property owned by the bankrupted company. According to the most recent report from the receiver, there appears to be about $6.83 million in cash and cash equivalents available from the bankrupt estate; however, the balance sheet of the bankrupt company indicates that the bankrupt estate is suffering from substantial financial difficulties. The total liabilities of the bankrupt company exceed $26 million, most of which are directly related to the Kraken liability claim.
Server Shutdowns and the Hunt for Answers
The road to recovery financially is still difficult due to Challenges with technology and legal issues as well as Etana’s digital assets being held on AWS (Amazon web services) were cut off at a point in time when AWS had ceased accepting payment (specifically for lack of payment). While the federal case is currently paused against the bankrupt Etana entities, the lawsuit is moving forward aggressively against Russell. The former executive faces severe personal liability for civil theft and fraud. With the receiver choosing not to mount a vigorous defense, Payward’s recovery hopes now depend entirely on the claims process and potential insurance payouts.
