Court Documents Show Cryptsy CEO Predicted Exchange Would Fail

Weeks before disclosing that the digital currency exchange Cryptsy was insolvent, CEO Paul Vernon told a Florida divorce court in a financial affidavit that he expected the operator of the exchange to fail.

The affidavit

was filed on 22nd December – less a month before Cryptsy would go on to claim that it had been the target of a debilitating hack in 2014 that left it insolvent and with millions in customer liabilities.

At the time, Vernon said that the exchange, which largely focused on alternative cryptocurrencies, had been able to stay afloat thanks to fee income, but that profits had dried up, leading to the exchange’s collapse. Activity on Cryptsy remains frozen, with no customer update since 1st February, according to a notice on the exchange’s website.

The affidavit, filed amidst a months-long divorce case, shows that Vernon indicated his belief that Project Investors, the operator of the exchange, would "dissolve" in the near future because of a drop in exchange income.

He wrote:

"Due to downturn in profits, not currently taking a salary. Expect corporation to dissolve due to economic conditions."

The existence of the affidavit features in an amended complaint filed on 22nd February by two Florida law firms currently pursuing a class action lawsuit against Cryptsy, an action that came after months of customer complaints about withdrawal delays and mounting allegations that the exchange was insolvent or on the verge of collapse.

At the time, the withdrawals and related platform issues were largely blamed on technical problems. Vernon, however, would later tell CoinDesk that the theft was hidden from customers because the exchange "did not want to cause a panic".

A major change in the amended complaint is the inclusion of Lorie Ann Nettles, Vernon’s ex-wife, as a defendant. It is alleged that customer funds held by Cryptsy were diverted to pay for personal expenses for Nettles and Vernon, including the purchase of a roughly $1.4m waterfront property in Palm Beach County, Florida.

The filing states:

"Upon information and belief, the Marital Settlement Agreement which VERNON and NETTLES devised to distribute between them their marital assets was, in whole or in part, a sham and was fabricated by VERNON and NETTLES as a means of unlawfully and improperly transferring to NETTLES many of the assets secreted away from the CRYPTSY customers."

Attorney David Silver said that his firm has filed a motion to appoint a receiver for Cryptsy, and to date, has been unable to serve Vernon, who told CoinDesk in January that he was traveling in China.

"A legitimate company would be addressing these issues head-on, and my question is, where is anyone from Cryptsy to address this lawsuit that has been going on for a month now," he told CoinDesk. "Where is Paul Vernon?"

Vernon did not immediately respond to a request for comment.

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