High Court rejects US$5m claim against Babel Finance co-founder over crypto fund collapse

SINGAPORE – An investor failed in its bid to recover US$5 million from the co-founder of collapsed cryptocurrency company Babel Finance after its investment was wiped out during a mass liquidation of the company’s trading accounts in 2022.

The High Court on Sept 1 found that co-founder Wang Li, who was responsible for Babel Finance’s trading strategies, did not dishonestly assist in any breach of duty owed to investor Parastate Labs.

Justice Sushil Nair, who will become Singapore’s fifth Chief Justice in February 2027, also rejected Parastate’s argument that its investment was held on trust for it, or that the company managing its money owed it fiduciary duties.

He said in a 139-page judgment that the evidence showed Wang had in fact tried to prevent the liquidation of Babel’s accounts on the Deribit cryptocurrency exchange.

The judgment arose from the collapse of Babel Group, which was insolvent by June 2022, with a shortfall of about US$400 million. Babel Finance is the brand name of the group’s cryptocurrency business.

Parastate, a United States-incorporated cryptocurrency investor, had put five million USDT – a cryptocurrency designed to track the value of the US dollar – into one of Babel’s funds in March 2022.

The investment was subject to a three-month lock-up period, with Parastate promised a return of at least 8 per cent.

Both companies agreed that the investment agreement would be governed by Singapore law and that the money would be held in a designated sub-account on Deribit, a cryptocurrency derivatives exchange.

But by June 2022, the cryptocurrency market was in turmoil and Babel was facing serious liquidity problems.

On June 14, Deribit began demanding that Babel top up three of its accounts as their values fell. The exchange said Babel needed to deposit 200 Bitcoin and 2,000 Ether every hour to cover the shortfall.

Babel deposited 200 Bitcoin, but Deribit began liquidating its positions less than an hour later.

Wang complained that the move was “a big hurt”, saying Babel had been one of Deribit’s largest clients for three years.

He also tried to negotiate with the exchange. Among other things, he proposed that Deribit liquidate only one of Babel’s accounts and return the others to Babel’s control, after which the company would make the necessary top-ups within 48 hours.

But Deribit eventually consolidated Babel’s various accounts into a main account before liquidating the trading positions.

The result was a deficit of about US$12.5 million across Babel’s accounts with Deribit.

“This meant that the Babel Group’s customers’ investments, insofar as they were held by the Babel Group… with Deribit, were completely wiped out,” Nair said.

Babel informed its customers on June 17 that the cryptocurrency market had “seen major fluctuations” and that it was “facing unusual liquidity pressures”. It said it would suspend redemptions and withdrawals of all its financial products for an unspecified period.

Parastate discovered that its investment was gone when it tried to withdraw its money on June 19.

It formally demanded the return of the five million USDT the next day.

Wang then told Parastate representative Chen Jiayi that Deribit had liquidated the main account and all its sub-accounts.

Wang said Deribit would not normally have automatically liquidated the accounts because Babel was its “biggest client” and had “rights of non-automatic liquidation”.

He said Deribit had contacted Babel when cryptocurrency prices fell and demanded that it top up its accounts within an hour, but began liquidating them after about 45 minutes.

The sub-account containing Parastate’s investment was “definitely without problem” at that point, Wang said.

Parastate subsequently sued Wang, alleging that he had dishonestly assisted breaches of trust and fiduciary duties by Babel entities.

It argued that Babel held its investment on trust and had breached its duties by failing to intervene when Deribit was consolidating the accounts. Wang’s failure to respond to Deribit’s messages was also said to amount to assistance in the alleged breaches.

Nair rejected the arguments.

He found no evidence that the Babel unit managing Parastate’s money had used the investment as collateral for its own trading. Doing so would have breached its duty to Parastate.

More fundamentally, he found that the company did not owe Parastate fiduciary duties. Such an obligation would have required Babel to put Parastate’s interests ahead of its own.

Parastate had pointed to language in the agreement stating that Babel would manage its assets “on behalf of and for the benefit of” Parastate. It also relied on the words, “We have your best interest in mind”, which appeared on the agreement.

But the judge said the slogan had been widely used by Babel across its businesses.

“To say that this slogan should be elevated to a fiduciary undertaking to act in the sole interests of Parastate was, with respect, a hopeless argument,” he said.

Nair noted that Parastate was a “seasoned cryptocurrency investor” and an institutional investor. Chen, who made investment decisions for Parastate, had about seven to eight years of experience in the cryptocurrency industry.

Parastate had also engaged external lawyers to review its contracts before entering into the investment agreement.

“Parastate’s decision to enter into the (agreement) was therefore a considered commercial decision made with the benefit of legal advice,” the judge said.

He also rejected the argument that Wang had benefited from the liquidation of Babel’s accounts.

The cross-liquidation had caused “great loss” to the Babel Group and had “catastrophic effects” on its asset-management business, he said.

For Wang personally, the collapse of Babel caused the value of his stake in its entities to become “virtually worthless”.

The judge also rejected Parastate’s allegation that Wang had acted dishonestly. Wang had taken various steps to prevent the accounts from being consolidated and liquidated and had “in fact attempted – albeit unsuccessfully – to protect the Babel Group’s customers’ interests (including Parastate’s)”, Nair said.

Parastate had also argued that Babel made misleading statements about its financial strength when soliciting investments.

The judge found that Babel had represented that it had a “healthy balance sheet”, but rejected Parastate’s argument that it could reasonably have understood this to mean that Babel literally had US$7 billion worth of cryptocurrency on its balance sheet.

“To say that they had objectively understood the Babel Group as having US$7 billion of cryptocurrencies across its balance sheet therefore cuts no ice in the face of what was obviously a hyperbolic sales puff,” he said.

He noted that Parastate and Chen were sophisticated cryptocurrency investors and knew that Babel had been valued at US$2 billion in a fund-raising round in May 2022.

Nair dismissed Parastate’s claim in its entirety.

Parastate was represented by FC Legal Asia, while Wang was represented by RCLT Law Corporation.