Case 1:18-cr-00340-LGS Document 193 Filed 10/04/19 Page 1 of 11

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK
------------------------------------------------------x
UNITED STATES OF AMERICA : 18 Cr. 340 (LGS)

- against - :

SOHRAB “SAM” SHARMA, and :

RORBERT FARKAS
:
Defendants.
------------------------------------------------------x

DEFENDANTS’ MOTION TO RETURN ETHER

 Case 1:18-cr-00340-LGS Document 193 Filed 10/04/19 Page 2 of 11

INTRODUCTION

The government is in possession of 100,000 Ether cryptocurrency (the “Ether”)

that was taken from Centra Tech and/or the defendants Sohrab Sharma and Robert Farkas

(“Defendants”) in connection with this pending case. Defendant Sharma provided the

back-up digital key to transfer the Ether to the government in compliance with the seizure

warrants. Pursuant to this Court’s ancillary jurisdiction, the Defendants request that this

Court order the government to immediately return seized Ether to anyone who purchased

Centra Tokens from Centra Tech during its token sale and suffered a loss as a result of its

purchase (“Purchasers”). To date, the government has refused the Defendants’ request to

return the Ether prior to the final resolution of this matter, even though the Defendants

will, without conceding any fault or liability, waive any of their rights to any Ether used

to pay the Purchasers. The government’s refusal to return the Ether now is harming the

Purchasers who are the alleged victims in this case.

The Ether, which by the government’s count totals approximately 100,000 units,

can be returned to the Purchasers in the exact same form it was tendered, without regard

to daily changes in exchange rates.1 However, based on conversations with government

counsel, the defense understands that the government is opposed to returning the Ether

now. The defense further understands that the government will not agree to make a return

in Ether if there needs to be a pro rata distribution. This will occur despite the fact that no

one purchased the tokens in U.S. dollars and the vast majority of the purchasers are

foreigners who do not have dollar-denominated bank accounts. If there is no need for a

1
Most such purchasers used Ether, but a small percentage used other cryptocurrencies like
Bitcoin that Centra Tech then quickly converted to Ether.

1
 Case 1:18-cr-00340-LGS Document 193 Filed 10/04/19 Page 3 of 11

pro rata distribution, the government will consider making a return in Ether if the

Purchasers request a return in Ether.

Resolution of this criminal case and determining whether anyone truly was

harmed is of no consequence to this motion. Rather, what is important is that the

Defendants repeatedly sought the return of Ether to the Purchasers who are alleged

victims and the government has not done so, which continues to harm those whom the

government claims it is trying to protect. Indeed, they are harmed because they are

without their funds and because even if the government prevails, the value of the Ether

(which is highly volatile in price) at issue will likely be far less than it was when the

Purchasers used it to purchase Centra Tokens.2

Thus, this Court should order the government to return the seized Ether to

Purchasers now rather than exchange it for U.S. dollars, regardless of whether there needs

to be a pro rata distribution. The costs of exchanging the Ether to dollars (or other fiat

currencies) 3 is not insignificant (often 0.5% to 3%), and returning dollars makes it

significantly more difficult and costly to return the funds to its rightful owner (i.e., many

of whom are foreigners and none of whom paid in U.S. dollars). To be sure, this Court

can establish a claims process that vets the Purchasers and permits those that suffered any

loss a refund now. The Purchasers are only eligible if they purchased their tokens from

Centra Tech during the sale period and either (1) sold them for a loss; or (2) never sold

the tokens. Those who purchased from Centra Tech but sold for a gain would not be

eligible, neither would those who purchased from third parties.

2
See Defense EXHIBIT A.
3
Fiat currency refers to government-issued currency such as the U.S. dollar.

2
 Case 1:18-cr-00340-LGS Document 193 Filed 10/04/19 Page 4 of 11

Moreover, because the Defendants and the government are both motivated to

make whole all Purchasers, there is no reason to delay this from happening. Granting this

motion helps the Purchasers, which is why this Court should grant it without further

delay.

FACTUAL BACKGROUND

I. Centra Tech’s Cryptocurrency Sale

Centra Tech, Inc., (“Centra Tech”) was established in 2017. Centra Tech’s

business model focused on creating a technological system that would allow persons

having all types of cryptocurrency to spend it in a more familiar way by using a functional

platform like a traditional debit card. The “Centra Card,” as it was called, the “Centra

Wallet,” with which the card was associated, and the “Centra Token,” the cryptocurrency

required to use the card and wallet, permitted customers to spend their cryptocurrency, in

real time, at merchants who accept traditional credit and debit cards as payment.

Centra Tokens were an Ethereum blockchain-based cryptocurrency token,

meaning they ran on the Ethereum network but were not the native cryptocurrency of the

Ethereum network, Ether. 4 The SEC has recognized that Ether is not a security.5 Centra

Tech’s proprietary technology enabled the real-time liquidation of all major

cryptocurrencies at point of sale terminals, including Ether and Bitcoin.

4
Ethereum is a decentralized blockchain platform that operates via distributed computing.
Ether is the native cryptocurrency and unit of the Ethereum blockchain. Ethereum enables a
protocol named ERC-20 that allows companies to issue their own native crypto-currency
under this standard and labeled as a token. This token is able to be used on the Ethereum
blockchain similarly to the Ether unit.
5
See U.S. SEC, Digital Asset Transactions: When Howey Met Gary (Plastic), a speech by
William Hinman (June 14, 2018), https://www.sec.gov/news/speech/speech-hinman-061418
(“Based on my understanding of the present state of Ether, the Ethereum network and its
decentralized structure, current offers and sales of Ether are not securities transactions.”).

3
 Case 1:18-cr-00340-LGS Document 193 Filed 10/04/19 Page 5 of 11

Because Centra Tech’s platform was designed to operate using the Ethereum-

based Centra Token, users of the Centra Card and/or Centra Wallet overwhelmingly used

Ether when paying for Centra Tech’s products, including the Centra Token. To the extent

purchasers used a cryptocurrency other than Ether, Centra Tech converted it into Ether.

During the summer of 2017, Centra Tech began Beta testing6 its card program and

system. By the end of December of 2017, Centra Tech began shipping its full-scale

product operating on the Mastercard network. Between Beta testing and the formal

release, the SEC notified Centra Tech that it was under investigation.

On or about April 2, 2018, the SEC filed its initial complaint against the Defendants

alleging their efforts in creating this new technology platform constituted a “virtual currency

investment scheme.” SEC v. Sharma, No. 1:18-cv-02909 (DLC) (S.D.N.Y. June 7, 2018).

On May 14, 2018, the Defendants were charged in the instant case with securities fraud and

wire fraud. Later, the government seized a total of 100,000 Ether it asserts are proceeds from

the Purchasers.7

II. Sharma and Farkas’ Numerous Efforts to Return Ether to Purchasers Were
Thwarted by the Government

The Defendants have long been willing to return funds to Centra Tech’s aggrieved

customers. Indeed, since as early as December 2017, efforts have been made to work with

both the SEC and the DOJ to return these funds. The government rejected all of them.

Most prominently, the SEC prevented Centra Tech’s effort to refund Ether during the

SEC’s civil investigation when the dollar value of Ether was over $70 million (almost three
6
Beta testing refers to efforts made to test a product through development and utilization of a
prototypical application performing similarly to the intended performance of the final
product. Its utilization is aimed at refining the product until ready for full scale production
and consumption
7
The government has previously contended that only the 91,000 Ether constituted sale
proceeds.

4
 Case 1:18-cr-00340-LGS Document 193 Filed 10/04/19 Page 6 of 11

times the amount the defense understands the government accuses the Defendants of

obtaining from Centra Tech’s customers). The SEC claimed that such a refund was an

“illegal rescission.”8 The price of Ether has subsequently dropped substantially, from $735 to

$178,9 so the customers were indeed already harmed by the government’s refusals.

Although the government alleges in its indictment that over $25 million10 was raised

by Centra Tech, this amount merely reflects the value of the cryptocurrency (mostly Ether)

used at the time of purchase. All purchases of the Centra Token were tendered in

cryptocurrency. This means that Sharma will be prejudiced with respect to the additional

9,000 Ether that the government now claims are Centra Tech proceeds should the Purchasers’

losses exceed 91,000 Ether because Sharma will forgo any claim he may have to the portion

of the additional 9,000 needed to reimburse the Purchasers. Thus, the Defendants seek to

have the entire 100,000 Ether made available for refund if necessary, to make the Purchasers

whole.

The Defendants have also made repeated requests to the government to disclose the

identities of all individuals who have suffered alleged losses to assist with the refund process

and verify their claims. To date, the government has only produced documentation of

approximately $550,000 worth of unverified claims. Setting aside the fact that this number is

significantly less than what the government claims in the Indictment, and information

pertaining to each Purchaser should be disclosed as part of the discovery process, the

government will need to be ordered to provide such information for an effective claims

8
That said, the SEC later required two crypto companies, Airfox and Paragon, to engage in a
purchaser claims process without formal rescission. See U.S. SEC, Two ICO Issuers Settle
SEC Registration Charges, Agree to Register Tokens as Securities, a press release (Nov. 16,
2018), https://www.sec.gov/news/press-release/2018-264.
9
The price is based on Coinmarketcap’s index end of day price, which is widely used within
the industry and by government. The dates chosen were December 17, 2017 and October 4,
2019.
10
The approximate value of the Ethereum at the time of the purchase.

5
 Case 1:18-cr-00340-LGS Document 193 Filed 10/04/19 Page 7 of 11

process.

ARGUMENT

The Defendants seek to have this Court exercise ancillary jurisdiction to effectuate the

return of the Ether.

To be sure, this Court possesses “only that power authorized by Constitution and

statute.” Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S. 375, 377 (1994).

Nevertheless, “the doctrine of ancillary jurisdiction, which recognizes federal courts’

jurisdiction over some matters . . . that are incidental to other matters properly before them,”

exists to fill certain gaps. Id. at 378. To be sure, “[t]he boundaries of ancillary jurisdiction are

not easily defined and the cases addressing it are hardly a model of clarity.” Garcia v.

Teitler, 443 F.3d 202, 208 (2d Cir. 2006).

At its core “ancillary jurisdiction is aimed at enabling a court to administer ‘justice

within the scope of its jurisdiction.’” Id. (citing Morrow v. D.C., 417 F.2d 728, 737 (D.C.

Cir. 1969)); see also Jenkins v. Weinshienk, 670 F.2d 915, 918 (10th Cir. 1982) (“Ancillary

jurisdiction rests on the premise that a federal court acquires jurisdiction of a case or

controversy in its entirety. Incident to the disposition of the principal issues before it, a court

may decide collateral matters.”). “Without the power to deal with issues ancillary or

incidental to the main action, courts would be unable to “effectively dispose of the principal

case nor do complete justice in the premises.” Garcia, 443 F.3d at 208 (quoting Morrow, 417

F.2d at 738 n.36 (internal quotation marks and citation omitted)).

As the Supreme Court put it, ancillary jurisdiction is generally asserted:

[F]or two separate, though sometimes related, purposes: (1) to permit

disposition of claims that are, in varying respects and degrees, factually
interdependent, and (2) to enable a court to function successfully, that is,
to manage its proceedings, vindicate its authority, and effectuate its
decrees.

6
 Case 1:18-cr-00340-LGS Document 193 Filed 10/04/19 Page 8 of 11

Kokkonen, 511 U.S. at 379-80 (1994) (internal citations omitted).

The Second Circuit has often recognized the power of its district courts to exercise

ancillary jurisdiction in matters over which they have original jurisdiction. Garcia, 443 F.3d

at 207-208. For example, the Second Circuit has also held that district courts have ancillary

jurisdiction to “address a motion for the return of seized property.” See Rufu v. United States,

20 F.3d 63, 65 (2d Cir. 1994); Soviero v. United States, 967 F.2d 791, 792 (2d Cir. 1992);

Mora v. United States, 955 F.2d 156, 158 (2d Cir. 1992).11

In addition, the Second Circuit recognizes the district court’s assertion of ancillary

jurisdiction to resolve fee disputes between a party and its attorney arising in litigation in

which the attorney represented the party. See, e.g., Garcia, 443 F.3d at 208, 211-12 (holding

that the district court has ancillary jurisdiction to compel an attorney to return a retainer

obtained to represent a party in the underlying litigation after the district court had ordered

the attorney to withdraw as counsel because of misconduct); see also Cluett, Peabody & Co.,

Inc. v. CPC Acquisition Co., Inc., 863 F.2d 251 (2d Cir. 1988); Novinger v. E.I. DuPont de

Nemours & Co., Inc., 809 F.2d 212 (3d Cir. 1987).12

Here, the Defendants are seeking the exercise of this Court’s ancillary jurisdiction

during their prosecution, to effectuate the return of property they are accused of taking from

the same people and entities the government views as alleged victims in this case.

11
Other circuits have similarly held the exercise of such jurisdiction is appropriate. See, e.g.,
Okoro v. Bohman, 164 F.3d 1059, 1061 (7th Cir. 1999); Thompson v. Covington, 47 F.3d
974, 975 (8th Cir. 1995); United States v. Martinson, 809 F.2d 1364, 1370 (9th Cir. 1987);
United States v. Wilson, 540 F.2d 1100, 1103 (D.C. Cir. 1976).
12
The Second Circuit has also found the exercise of a district court’s ancillary jurisdiction “to
address a motion by a criminal defendant to have his arrest record expunged, and fingerprints
and arrest photographs returned, following dismissal of his indictment.” United States v.
Schnitzer, 567 F.2d 536, 538 (2d Cir 1977). Other circuits are in accord. See, e.g., United
States v. Sumner, 226 F.3d 1005, 1014 (9th Cir. 2000); Morrow v. District of Columbia, 417
F.2d 728, 740 (D.C. Cir. 1969).

7
 Case 1:18-cr-00340-LGS Document 193 Filed 10/04/19 Page 9 of 11

So, while the parties agree as to the propriety of refunding, the government is failing

to effectuate a prompt refund by objecting to this motion. The Defendants take the position

that the cryptocurrency ought to be returned now, in the same form it is in, Ether. The

reasons for this are myriad:

1. The government’s delay in returning the Ether has already harmed the Purchasers
based on Ether price fluctuations. When the SEC refused the Defendants request to
return the Ether it was valued at approximately $70 million. On May 10, 2018 the
government transferred the Ether to a government-controlled wallet. On that date the
Ether was worth approximately $63 million.

2. It is equitable to return that which was taken to begin with. If this was a case
involving an alleged gold heist from bank safety deposit boxes with the bars having
serial numbers attributable to each of its prior owners, it would make no sense to
liquidate the gold at then-prevailing market rates (including fees and costs associated
with the transaction) and then return U.S. dollars to them.

3. A vast majority of the Purchasers are abroad from a multitude of different countries.
As such, they will not have dollar denominated bank accounts or want the funds in
U.S. dollars.

4. Exchanging the Ether for dollars will materially reduce the amount of funds available
to the Purchasers, due to exchange fees, which can range from 0.5% - 3%
(approximately).

5. None of the customers purchased Centra Tokens in U.S. dollars. They therefore may
not want U.S. dollars back. The reason many users of cryptocurrency use
cryptocurrency to begin with is because of their unique nature. For example, they are
entirely digital and can be stored and secured differently than U.S. dollars.

6. Blockchain verification is more efficient that returning the funds in cash as the
payment in Ether was tied to a specific wallet address and immediately returned with
the press of a button.

7. The Purchasers were never asked how they want their property back, which would be
in cryptocurrency as tendered since its value has diminished as a result of government
procedural restrictions.

This is unfair.

As the Second Circuit pointed out in Stein v. KPMG, because the Defendants, “are

already before the court as litigants,” “the relevant facts are generally more accessible” to this

8
 Case 1:18-cr-00340-LGS Document 193 Filed 10/04/19 Page 10 of 11

Court, “and the ability of the court to conduct and dispose of the underlying litigation may

turn on, or at least be greatly facilitated by, resolution of the issues raised in the ancillary

proceeding.” 486 F.3d 753, 761 (2d Cir 2007). Thus, “the efficiencies provided by” the

exercise of ancillary jurisdiction over this matter is clearly “consistent with the limited

jurisdiction of federal courts.” Id.

The call for this Court to exercise its ancillary jurisdiction in this instance is more

than justified given the above. Therefore, this Court should order the government to

identify the Purchasers it contends have suffered a loss and promptly return the proper

amount of Ether to them through a claims process. Again, the Defendants have no

objection to the Ether being used to refund the Purchasers who sold their Centra Tokens

purchased during the token sale period from Centra Tech for a loss or have owned and

held their Centra Tokens the entire time since there purchase from Centra Tech. Those

who purchased from Centra Tech but sold for a gain and those who purchased from third

parties are ineligible. Thus, the Purchasers will all receive what they purportedly lost

before trial begins.

CONCLUSION

For all the reasons above, the Defendants respectfully requests that this Court grant

this motion.

Dated: October 4, 2019.

9
Case 1:18-cr-00340-LGS Document 193 Filed 10/04/19 Page 11 of 11

By:
/s/ Paul D. Petruzzi
Law Offices of Paul D. Petruzzi
Paul D. Petruzzi, P.A.
8101 Biscayne Boulevard, PH 701
Miami, Florida 33138
petruzzi-Law@msn.com

/s/ Brian E. Klein

__________________________
Brian E. Klein
BAKER MARQUART LLP
777 S. Figueroa Street, Suite 2850
Los Angeles, California 90017
(424) 652-7800
bklein@bakermarquart.com

Attorneys for Defendant Robert Farkas

/s/ Gennaro Cariglio Jr.

Gennaro Cariglio Jr.
8101 Biscayne Boulevard, PH 701
Miami, Florida 33138
(305) 899-0438
sobeachlaw@aol.com

/s/ Grant Fondo

Grant P. Fondo, admitted pro hac vice
Goodwin Procter LLP
601 Marshall Street
Redwood City, CA 94063
(650) 752-3100
gfondo@goodwinlaw.com

/s/ Lauren Bowman

Lauren Bowman
Goodwin Procter LLP
620 Eighth Avenue
New York, NY 10018
(212) 813-8800
lbowman@goodwinlaw.com

Attorneys for Defendant Sam Sharma

10
Case 1:18-cr-00340-LGS Document 193-1 Filed 10/04/19 Page 1 of 2

DEFENSE
EXHIBIT A
 Case 1:18-cr-00340-LGS Document 193-1 Filed 10/04/19 Page 2 of 2

1. The value of Ether was one hundred ninety-eight USD ($198) on July 30, 2017 (i.e. the approximate

start of Centra Tech sale).

2. The value of Ether was two hundred ninety-five USD ($295) on October 5, 2017 (i.e. the approximate

end of Centra Tech sale).

3. The value of Ether was seven hundred thirty-five USD ($735) on December 17, 2017 when the SEC

rejected a recession request from Centra Tech’s outside counsel Ballard & Sphar.

4. The value of Ether was three hundred eighty USD ($380) on April 1, 2018 when Defendants Sharma

and Farkas were arrested.

5. The value of Ether was seven hundred twenty-eight USD ($728) on May 10, 2018 when the

Government transferred the Ether from Centra Tech and/or Sharma to the Government controlled digital

wallet.

6. The value of Ether is one hundred seventy-eight USD ($178) on today’s date.