Mastercard Ciphertrace Expert Witness Plays Central Role in $29 Million Disgorgement Case

In the summer of 2023, the 13^th District Texas Court of Appeals made its final ruling on a case (Ahlgren III v. Ahlgren Jr.), wherein Pamela Clegg, an expert witness from Ciphertrace, a Mastercard company, set another precedent demonstrating the role of blockchainA blockchain is a shared digital ledger, or a continually up… More analytics in the North American legal system. By assisting the court in tracing the flow of funds and gains made by their misappropriation, Ms. Clegg and her team played a pivotal role in a multigenerational financial dispute and bringing restitution to the affected parties.

Overview of the Case

“After putting up with your irrational conduct for years; after 20 plus years of trusting you… to see my wealth grow and watch you prosper from it, imagine my confusion this fall, having you deny me the right to my own money when I have been offered an opportunity to get out from under your thumb. It is astonishing.”

The above quote is from father to his son in a February 2020 email that was part of an ongoing court case between Frank Ahlgren, Jr. and his son Frank Ahlgren III (also known as “Paco”). Frank Ahlgren, Jr. worked as a reporter from the El Paso Herald-Post and retired in 1997. Shortly thereafter, he entrusted his son (Paco) to manage his assets after his son had asked for such a position. According to the case documents, agreements were made wherein Paco would work solely for the benefit of his father and would not comingle any of his father’s assets with his own. This was all done through a handshake agreement and power of attorney.

Over the years, the son began misappropriating his father’s accounts for various investments, substantially growing what was – presumably – in large part his father’s wealth. These reallocations included positions in hedge funds, real estate and gold, but a vast amount of returns came through investments in bitcoinThe term “Bitcoin” can either refer to Bitcoin the network, … More (BTC). The father claimed that his son, Paco, “commingled trust assets with his own and that Paco accumulated substantial wealth, mainly through purchases of cryptocurrencyA cryptocurrency (or crypto currency) is a digital asset des… More.”

Finally in October 2019, when Ahlgren, Jr. asked for Paco to return his assets to support himself in his old age, his son refused, claiming that he was no longer managing the funds for the benefit of his father. At this point, a multi-year court battle ensued, resulting in an initial verdict of over $43 million in damages and attorney fees. As Scott Douglass & McConnico LLP noted in relation to the initial ruling, it was “the largest damage award to a private plaintiff in Travis County in over 20 years, and the second largest actual damages award to a private plaintiff in the history of Travis County.”

Mastercard’s Role in the Case

As the dispute continued into 2023 and Paco appealed the verdict, Ciphertrace – a Mastercard company – leveraged its proprietary analytical capabilities to trace bitcoin holdings, which provided critical supporting evidence leading to the now 89-year-old Ahlgren, Jr.’s restitution.

Pamela Clegg, Vice President Crypto Investigations and Risk at Mastercard Ciphertrace, testified at the initial hearing that Paco had bought and held a substantial amount of bitcoin from the liquidation of his father’s assets during the period in question. Ciphertrace was able to identify Paco’s initial BTC acquisitions by leveraging records from the cryptocurrency exchangeA cryptocurrency exchange is a business that allows customer… More he used to purchase the assets.

Further, Clegg noted that there were several “hard forks” that took place on the Bitcoin blockchain during this time, for example when Bitcoin Cash (BCH) forked from the original network. She demonstrated to the jury that Paco liquidated 2,798.21 of Bitcoin Cash received from this fork into 310.12 BTC and received an additional 107.31 BTC from the fork into Bitcoin Gold.

Taken together, Clegg proved that Paco held at least 2,798 BTC on August 1, 2017 and, more importantly, that these funds were directly traceable to the proceeds from the sale of real estate purchased with his father’s assets. Ms. Clegg was able to use both on-chain and off-chain data to analyze Paco’s flow of funds, meaning money movements that took place on the Bitcoin blockchain as well as those on traditional fiat rails respectively. By reviewing the transaction logs at cryptocurrency exchanges that Paco used to buy and sell cryptocurrency, she was able to paint a complete picture of Paco’s dealings and trace the proceeds of his father’s misallocated funds with specificity.

Clegg also provided the court with insights into the process of “mixing” cryptocurrencies, a process wherein either a service or decentralized protocol will collect funds from multiple senders and return to those individuals the same amount they sent in minus a fee. This effectively obfuscates the flow of funds so that the connection between sender and receiver cannot be traced through the mixer. It was shown that Paco sent his BTC to the popular mixing protocol CoinJoin in February 2018 and again in 2020. As such, it was not possible to directly trace the flow of his funds after the use of these servicesGeneral services, including non-profits, forums and news sit… More.

Nevertheless, this case proved not only to be important for settling a familial financial dispute, but also to show how blockchain analytics experts like Ciphertrace have a key role to play when digital assets are found to be at the heart of increasingly complex legal proceedings across the world.

Lessons from the Final Judgement: Tracing Flow of Funds & Establishing Crypto Ownership

This case highlights a very interesting point as it relates to the legal system’s perspective on cryptocurrency tracing, even with the efforts actors like Paco take to obfuscate their money trail. In the appeal, Paco and his legal team sought to assert that there was insufficient evidence that he held any bitcoin due to those assets having been “washed” in a mixer and therefore untraceable after February 2018. However, the court rejected this argument, stating:

“Again, appellants cite no legal authority for the proposition that a defendant may render evidence insufficient by making disputed assets untraceable, and we have found none… Were we to accept appellant’s position, we would be providing a perverse incentive for trustees to avoid liability for their fiduciary breaches by making trust assets untraceable. Therefore, we decline to do so.”

Simply put, this means that a bad actor’s efforts to make their cryptocurrency untraceable may not insulate them from liability related to fraud, misappropriation of funds and other financial crime.

Digital Assets to Play an Increasing Role in Legal Proceedings

As digital assets and their underlying technologies continue to proliferate, courts and legislatures are taking notice.  ClarkeModet notes that there is a clear trend in governments around the world setting legal precedents or drafting legislation that expressly invokes blockchain and cryptocurrency tracing as admissible evidence. In the United States, this is reflected in Arizona’s 2018 Electronic Transactions Act, Illinois’ 2020 Blockchain Technology Act or key updates to the Delaware General Corporation Law.

The statistics make this picture even clearer. In Ciphertrace’s March 2023 Cryptocurrency Crime and Anti-money Laundering Report, it was noted that the Internal Revenue Service seized approximately $4 billion in digital assets by the end of Q3 2022 – up half a billion from the previous year. Additionally, some forensic investigators are now seeing about 25% of their divorce-related cases involve some elements of cryptocurrency, such as in a recent case involving the overturning of $500,000 worth of BTC a husband attempted to hide during his divorce settlement.

Mastercard Ciphertrace has also set other important precedents in this space, such as when CEO David Jevans testified in a February 2019 forfeiture hearing in the Ontario Superior Court of Justice. The case involved drug trafficking, illegal firearms purchases and a CDN$1.4 million forfeiture. This marked the first use of an expert witness for a bitcoin forfeiture hearing as well as the first seizure of cryptocurrencies by Canadian Police.

Stephanie L. Tang recently wrote in the Penn State Law Review, “Considering virtual currencies are gaining popularity in real estate deals, private equity transactions, and even being used as collateral in loan agreements, virtual assets have demonstrated their staying power.”

Indeed, it is commonly known in the anti-money laundering community that asset forfeiture is one of the most important deterrents for would-be financial criminals. We are now seeing that this is especially true for digital assets, where experts can trace the flow of funds across the blockchain. It is clear that blockchain analytics has a vital role to play on this front. So, whether it is stopping darknet crime lords or untrustworthy children,  Ciphertrace offers critical capabilities and tools that support financial crime risk management in the evolving cryptocurrency ecosystem.

Contact Ciphertrace Professional Services

Our risk management consulting and advisory services team can assist you with every aspect of a crypto investigation, from tracing to helping law enforcement, to testifying in support of our analysis. We also enable clients to better build, implement and enhance compliance controls to mitigate financial, reputational and regulatory risks associated with cryptocurrency and VASP exposure. Complete the form below to contact our investigations team.

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