MTI liquidation: a global effort to recover crypto funds from a Ponzi scheme

Crypto assets, like any innovation, offer both substantial opportunities and significant risks. In today’s global, internet-driven financial landscape, these risks are amplified by the cross-border nature of crypto transactions, complicating fund recovery for liquidators and investors when things go wrong.

A prime example is Mirror Trading International (MTI), an online cryptocurrency trading platform based in Stellenbosch. MTI started trading in April 2019. MTI pooled investments from about 300 000 members across 200 countries, promising high returns and handling roughly $1.7 billion (R32bn).

The platform collapsed in December, halting member payments.

The company was placed under provisional liquidation on 29 December 2020, with a final order granted on 30 June 2021.

Following an application by the joint liquidators on 26 April last year, the Western Cape High Court declared MTI’s business model unlawful as a multi-level marketing, or “Ponzi”, scheme and placed MTI into final liquidation. All transactions were declared void “from the outset”, allowing defrauded investors to claim their lost funds. However, those who profited were also subject to claims by MTI’s liquidators for the return of their gains.

Using MTI as an example, Paul Crosland, a partner at Webber Wentzel, and Jered Shorkend, a candidate attorney at the law firm, unpack the legal intricacies of cross-border crypto liquidations, examining the challenges and risks that come into play when digital assets span multiple jurisdictions.

Cross-border claims

According to standard industry practices, the MTI liquidators adopted the basic strategy that funds recovered from those investors who profited from the scheme, classified as “net winners”, together with the funds recovered from other relevant debtors of MTI, would be used to shore up its deflated estate for controlled distribution to fulfil claims by those who lost funds to the scheme (the “net losers”), as well as to service other relevant expenses and debts.

As alluded to above, MTI’s international reach meant that many of its net winners and net losers were located outside of South Africa. The South African liquidators endeavoured to identify and make claims against, and receive claims from, investors in the United States, the United Kingdom, Australia, Belgium, and other countries, in addition to those in South Africa. This introduced several complications associated with the operation of foreign law.

In the US, independently of the efforts of the liquidators in South Africa, the Commodity Futures Trading Commission (CFTC) instituted proceedings against MTI and its erstwhile chief executive in the Bankruptcy Court of the Southern District of Florida. There, it sought more than $3bn in reparations to investors and administrative penalties.

In Australia, the process of identifying and instituting claims against net winners was threatened by the approach of a three-year deadline for claims in respect of voidable transactions under local company laws. Similar obstacles arose in other jurisdictions.

In each case, these developments threatened to interfere with, or even potentially derail the South African-run liquidation process.

The Model Law on Cross-Border Insolvency

An important tool in international insolvency practice is the Model Law on Cross-Border Insolvency. It was adopted by the United Nations Commission on International Trade Law in 1997, following a rise in international insolvency matters during the 1990s.

The premise of the Model Law is to provide member states with a standard, uniform set of rules for managing and co-ordinating insolvency proceedings that cross borders.

The objectives set out in its preamble include fostering co-operation between courts and authorities in different states, providing greater certainty for trade and investment, and ensuring the fair and efficient administration of cross-border insolvencies to protect all interested persons, including creditors and debtors.

In the context of MTI’s liquidation, the US, UK, Australia, and South Africa are parties to the Model Law. and its provisions were largely availed to MTI’s liquidators, who duly took up the opportunity to use them.

An important concept under the Model Law is the recognition of “foreign main proceedings”, a process whereby local courts recognise and afford credence to foreign-based liquidation proceedings overseen by foreign courts and afford a degree of recognition to the foreign liquidators under domestic law.

In the US, the liquidators instituted proceedings in the US Bankruptcy Court, Southern District of Florida under Chapter 15 of the United States Bankruptcy Code (which domesticates the provisions of the Model Law into American federal law). There, they secured an order that, among other things, stated:

• The South African proceeding is granted recognition as a “foreign main proceeding” under 11 U.S.C. § 1517.
• The South African proceeding and the orders of the South African court (the Western Cape High Court) shall be given full force and effect and be binding on and enforceable in the US against all persons and entities. This includes without limitation the orders of the South African court placing the debtor into an involuntary provisional liquidation, placing the debtor into an involuntary final liquidation, and appointing the liquidator and certifying that he is a liquidator of the debtor.

Additionally, all persons and entities seeking to recover claims from MTI were temporarily stayed from doing so. Consequently, in the proceedings instituted by the CFTC, an order was made awarding the latter its claim but imposing a temporary stay on part of its recovery to accord with the Bankruptcy Court’s recognition of the foreign main proceeding.

A similar process unfolded in the Federal Court of Australia where the South African liquidation was recognised as a foreign main proceeding in two separate orders under the Cross Border Insolvency Act, which is Australia’s equivalent to Chapter 15 of the US Bankruptcy Code. Additionally, the time limit for bringing claims against net winners was extended for 12 months to allow the South African liquidators more time to carry out their work (a step known in Australian insolvency law as a “shelf order”).

Among other things, the Federal Court acknowledged that the South African liquidators had by that stage already secured similar orders in Belgian and Canadian courts.

In December 2023, the Insolvency and Companies Court of England and Wales made a similar order in favour of the liquidators, further adding to this list.

Notably, the Belgian order was secured despite the fact that Belgium is not a party to the Model Law. This demonstrates that, although the Model Law is a helpful tool for liquidators, the absence of the Model Law’s adoption in a particular jurisdiction is not an absolute bar to the co-ordination of insolvency proceedings.

Read: Global recognition for MTI joint liquidators’ statutory powers grows

The MTI case highlights the complexities of navigating cross-border insolvency proceedings in today’s globalised commercial environment. The successful co-ordination between jurisdictions, facilitated by instruments such as the Model Law on Cross-Border Insolvency, underscores the importance of skilled and experienced liquidators and attorneys.

These professionals must adeptly manage the intricate web of international legal frameworks to protect creditors’ interests and maximise the debtor’s assets.

As global commerce continues to evolve, the lessons learned from MTI’s liquidation will serve as a valuable guide for future cross-border insolvency cases, emphasising the need for preparedness, expertise, and international collaboration.