United States v. Twenty-Four Cryptocurrency Accounts

473 F.Supp.3d 1

UNITED STATES of America, Plaintiff,

v.TWENTY-FOUR CRYPTOCURRENCY ACCOUNTS, Defendants.

No. 19-cv-3098 (DLF)

United States District Court, District of Columbia.

Signed July 20, 2020

Zia Mustafa Faruqui, U.S. Attorney's Office for the District of Columbia, Washington, DC, for Plaintiff.

MEMORANDUM OPINION

DABNEY L. FRIEDRICH, United States District Judge

This action arises out of an investigation by the Internal Revenue Service and the Department of Homeland Security into a child pornography website called Welcome to Video (the Website). Compl. ¶ 2, Dkt. 1. Following that investigation, the United States initiated this forfeiture action in rem against twenty-four cryptocurrency accounts (the Defendant Properties) containing U.S. dollars, Bitcoin, and other forms of cryptocurrency allegedly used in connection with the Website's criminal activities. Before the Court is the government's Motion for Default Judgment against the Defendant Properties. Pl.’s Mot. for Default J. (Pl.’s Mot.), Dkt. 11. For the reasons that follow, the Court will grant the motion.

I. BACKGROUND

A. Factual Background¹

Bitcoin, like other so-called "cryptocurrencies" that have emerged in recent years, is a virtual currency traded over the Internet and controlled through computer software rather than issued by a bank or government. Compl. ¶ 7. Bitcoin is sent and received using a virtual "address" made up of a unique string of characters akin to a bank account number; each address is controlled through a password, or private "key." Id. Bitcoin and other cryptocurrencies are bought and sold on online "exchanges," which allow customers to exchange virtual currencies for conventional money and vice versa. Id. The value of these currencies fluctuates; one Bitcoin was worth $11,573 in March 2018. Id. Every Bitcoin transaction is recorded on a decentralized public ledger called the "blockchain." Id.

The Website is a Tor-based² Internet site that "host[s] and distribute[s] image and video files depicting child pornography." Id. ¶ 9. Customers receive content from the Website by redeeming "points," which can be obtained by uploading child pornography videos, referring new customers to the site, or by paying various quantities of Bitcoin. Id. ¶ 14. The Website directs customers seeking to pay for points to online Bitcoin exchanges and "assign[s] a unique [Bitcoin] address for each [Website] customer account to receive payments and assign points appropriately." Id. ¶ 15. The Website set up over 1.3 million Bitcoin addresses over the course of its operations, id. , and between June 2015 and March 2018, the Website "received at least 420 [Bitcoin] through at least 7,300 transactions worth over $370,000." Id. ¶ 17.

Over the course of their investigation, law enforcement officials compiled a list of thousands of unique Bitcoin addresses associated with the Website, including one assigned to an undercover agent who created an account. Id. ¶ 16. That agent "paid [Bitcoin] to [the Website] and used the [W]ebsite to download child pornography video files" multiple times. Id. ¶ 18. During the agent's investigation, the government reviewed the Website's source code and traced its IP address to Jong Woo Son, a telecommunications provider in South Korea. Id. ¶ 19. South Korean officials subsequently executed a warrant at Son's home, where they located and seized the Website's server and storage media. Id. ¶ 21. The evidence corroborated that the Website was dedicated to the distribution of child pornography and "generally identified" which customers were associated with which payments to the Website. Id. ¶ 22. In addition, "[a] review of a sample of the payments to [the Website] cross-referenced against the username and download data from the server revealed that payments to [the Website] corresponded with the user downloading videos from [the Website]." Id.

By analyzing the blockchain, the government identified three different Bitcoin exchanges (the Exchanges) that had hosted transactions between the Website and the Defendant Properties. Id. ¶¶ 24–25; see also id. Attach. A. Each of the Defendant Properties had transferred Bitcoin on at least one occasion to a Bitcoin address controlled by the Website; for each account, at least one of the payments was linked to a specific user name that downloaded content from the Website.

Id. at ¶ 25. Law enforcement obtained a warrant for the Defendant Properties and subsequently seized all twenty-four cryptocurrency accounts. Id.

B. Procedural History

On October 16, 2019, the United States filed a verified complaint for forfeiture in rem of the Defendant Properties. Dkt. 1. The government posted notice on http://www.forfeiture.gov for thirty consecutive days from November 21, 2019 until December 20, 2019. See Decl. of Publication, Dkt. 3. No claims were filed in response to that publication before January 19, 2020. Aff. in Supp. of Default ¶ 7, Dkt. 8. The United States also identified potential claimants of the Defendant Properties using legally mandated "know-your-customer" information collected by the Exchanges, Pl.’s Mot. at 21, and then sent notice to those potential claimants through certified mail, email, or both. Aff. in Supp. of Default ¶ 5(a). No potential claimants had filed a claim to the Defendant Properties as of June 8, 2020. Id. ¶ 6.

The Clerk of the Court entered a warrant for arrest in rem of the Defendant Properties on April 2, 2020. Dkt. 6. On June 12, 2020, the government filed an affidavit for default, Dkt. 8, and on June 23, 2020, the Clerk of the Court entered default. Dkt. 10. The United States filed the instant motion for default judgment on June 24, 2020. Dkt. 11.

II. LEGAL STANDARD

The Federal Rules of Civil Procedure empower district courts to enter default judgment against a defendant who fails to defend its case. Fed. R. Civ. P. 55(b)(2) ; Keegel v. Key West & Caribbean Trading Co. , 627 F.2d 372, 375 n.5 (D.C. Cir. 1980). While federal policy generally favors resolving disputes on their merits, default judgments are appropriate "when the adversary process has been halted because of an essentially unresponsive party." Mwani v. bin Laden , 417 F.3d 1, 7 (D.C. Cir. 2005) (quotation marks omitted).

Obtaining a default judgment is a two-step process. First, the plaintiff must request that the Clerk of Court enter default against a party who has failed to plead or otherwise defend. Fed. R. Civ. P. 55(a). The Clerk's entry of default establishes the defendant's liability for the well-pleaded allegations of the complaint. Boland v. Providence Constr. Corp. , 304 F.R.D. 31, 35 (D.D.C. 2014). Second, the plaintiff must apply to the court for a default judgment. Fed. R. Civ. P. 55(b). At that point, the plaintiff "must prove his entitlement to the relief requested using detailed affidavits or documentary evidence on which the court may rely." Ventura v. L.A. Howard Constr. Co. , 134 F. Supp. 3d 99, 103 (D.D.C. 2015) (internal quotation marks and alterations omitted). "[T]he defendant's default notwithstanding, the plaintiff is entitled to a default judgment only if the complaint states a claim for relief." Jackson v. Corr. Corp. of Am. , 564 F. Supp. 2d 22, 27 (D.D.C. 2008) (quoting Descent v. Kolitsidas , 396 F. Supp. 2d 1315, 1316 (M.D. Fla. 2005) ).

Pleading requirements in civil forfeiture actions are governed by the Supplemental Rules and by the Federal Rules of Civil Procedure, to the extent they are "not inconsistent with the[ ] Supplemental Rules." Fed. R. Civ. P. Supp. R. A(2). Supplemental Rule G establishes the requirements for a complaint in such an action. As relevant here, the complaint must be verified, state the grounds for jurisdiction, describe the property "with reasonable particularity," identify the statute under which the action is brought, and "state sufficiently detailed facts to support a reasonable belief that the government will be able to meet its burden of proof at trial." Fed. R. Civ. P. Supp. R. G(2). "Before a default judgment is entered pursuant to a complaint for forfeiture in rem, the government must also show that it complied with the notice requirements contained in the Supplemental Rules." United States v. $1,071,251.44 of Funds Associated with Mingzheng Int'l Trading Ltd. , No. 17 Civ. 01166, 2018 WL 3949962 at *5 (D.D.C. 2018).

III. ANALYSIS

A. Notice

Supplemental Rule G(4) requires the government to provide two forms of notice in a forfeiture action in rem: notice to the public via publication and notice to potential claimants via direct notice. See Fed. R. Civ. P. Supp. R. G(4)(a), (b). Notice by publication must describe the property, state the time to file a claim and answer, and name the government attorney to be served with the claim and answer. Fed. R. Civ. P. Supp. R. G(4)(a)(ii). Such notice is sufficient if it is published "on an official internet government forfeiture site for at least 30 consecutive days." Id. G(4)(iv)(C). Here, the government posted notice of this forfeiture proceeding on http://forfeiture.gov for 30 consecutive days, starting on Nov 21, 2019 and ending on December 20, 2019. Aff. in Supp. of Default ¶ 7; see Decl. of Publication. The notice stated that "[a]ny person claiming a legal interest in the Defendant Property must file a verified Claim with the court within 60 days from the first day of publication." Decl. of Publication at 2–3. No claims were filed in response to the publication by January 19, 2020. Aff. in Supp. of Default ¶ 7; see also Fed. R. Civ. P. Supp. R. G(5)(a)(ii)(B) (requiring any claim to be filed "no later than 30 days after final publication of ... legal notice under Rule G(4)(a)"). This satisfied the government's obligation to provide notice by publication. See Fed. R. Civ. P. Supp. R. G(4)(a)(iv)(C).

Direct notice must be sent "to any person who reasonably appears to be a potential claimant" and "by means reasonably calculated to reach the potential claimant." Id. Supp. R. G(4)(b)(i), (iii)(A); see ...