IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
`
`C.A. No. 2023-0026-PAF
`
`PUBLIC VERSION
`
`FILED MARCH 21, 2023
`
`))))))))))))))))))))))))))
`
`ARTUR SCHABACK, individually on
`behalf of himself, and derivatively on
`behalf of Paxful Holdings, Inc.,
`Plaintiff/
`Counterclaim-Defendant,
`
`v.
`MOHAMED AZAB YOUSSEF,
`
`Defendant/
`Counterclaim-Plaintiff,
`
`and
`
`JUDE CHIDI OGENE,
`Defendant,
`
`and
`
`PAXFUL HOLDINGS, INC.,
`
`Nominal Defendant/
`Nominal Counterclaim-
`Defendant.
`
`PLAINTIFF/COUNTERCLAIM-DEFENDANT’S OPENING BRIEF IN
`SUPPORT OF HIS CROSS MOTION FOR PARTIAL SUMMARY
`JUDGMENT AND ANSWERING BRIEF IN OPPOSITION TO
`DEFENDANT/COUNTERCLAIM PLAINTIFF’S
`MOTION FOR PARTIAL SUMMARY JUDGMENT
`
`EFiled: Mar 21 2023 04:40PM EDT
`Transaction ID 69595260
`Case No. 2023-0026-PAF
`
`
`
`C.A. No. 2023-0026-PAF
`
`PUBLIC VERSION
`
`FILED MARCH 21, 2023
`
`))))))))))))))))))))))))))
`
`ARTUR SCHABACK, individually on
`behalf of himself, and derivatively on
`behalf of Paxful Holdings, Inc.,
`Plaintiff/
`Counterclaim-Defendant,
`
`v.
`MOHAMED AZAB YOUSSEF,
`
`Defendant/
`Counterclaim-Plaintiff,
`
`and
`
`JUDE CHIDI OGENE,
`Defendant,
`
`and
`
`PAXFUL HOLDINGS, INC.,
`
`Nominal Defendant/
`Nominal Counterclaim-
`Defendant.
`
`PLAINTIFF/COUNTERCLAIM-DEFENDANT’S OPENING BRIEF IN
`SUPPORT OF HIS CROSS MOTION FOR PARTIAL SUMMARY
`JUDGMENT AND ANSWERING BRIEF IN OPPOSITION TO
`DEFENDANT/COUNTERCLAIM PLAINTIFF’S
`MOTION FOR PARTIAL SUMMARY JUDGMENT
`
`EFiled: Mar 21 2023 04:40PM EDT
`Transaction ID 69595260
`Case No. 2023-0026-PAF
`
`
`
`MORRIS JAMES LLP
`
`Lewis H. Lazarus (#2374)
`K. Tyler O’Connell (#4514)
`Kirsten A. Zeberkiewicz (#4573)
`Aubrey J. Morin (#6568)
`Samuel Bashman (#6751)
`500 Delaware Avenue, Suite 1500
`Wilmington, DE 19801-1494
`302.888.6800
`Attorneys for Plaintiff/Counterclaim-
`Defendant Artur Schaback, individually on
`behalf of himself, and derivatively on behalf
`of Paxful Holdings, Inc.
`
`Dated: March 14, 2023
`
`4
`
`
`
`IV.
`
`V.
`
`Page(s)
`TABLE OF AUTHORITIES ...................................................................................iii
`PRELIMINARY STATEMENT ...............................................................................1
`NATURE AND STAGE OF PROCEEDINGS.........................................................4
`STATEMENT OF FACTS........................................................................................8
`I.
`PAXFUL’S FORMATION AND STRUCTURE ...........................................8
`II.
`EVENTS LEADING TO THE FILING OF THIS ACTION .......................10
`III.
`SCHABACK UNCOVERS ADDITIONAL INFORMATION
`AND AMENDS HIS COMPLAINT, ADDING A COUNT FOR
`APPOINTMENT OF A CUSTODIAN UNDER SECTION 226.................14
`PAXFUL’S BOARD IS DEADLOCKED AND THAT
`DEADLOCK IS CAUSING IRREPARABLE INJURY ..............................16
`RUN LEGITIMATELY AND WITHOUT LOOTING,
`PAXFUL COULD BE A PROFITABLE COMPANY ................................18
`ARGUMENT...........................................................................................................20
`I.
`STANDARD OF REVIEW ..........................................................................20
`II.
`APPOINTMENT OF A CUSTODIAN IS APPROPRIATE
`UNDER § 226(A)(2).....................................................................................22
`A.
`The Paxful Board is Deadlocked ........................................................23
`B.
`As a Result of the Deadlock, Paxful is Suffering and
`Continues to Be Threatened with Irreparable Injury ..........................23
`Paxful’s Stockholders Cannot Break the Deadlock ............................25
`The Court Should Exercise Its Discretion to Appoint a
`Custodian Empowered with the Authority Set Forth in the
`Plaintiff’s Proposed Order ..................................................................26
`
`C.
`D.
`
`TABLE OF CONTENTS
`
`i
`
`
`
`A.
`
`
`III. APPOINTMENT OF A RECEIVER TO
` IS NOT APPROPRIATE .......................................27
`Paxful Does Not Satisfy the Statutory Requirements of
`Section 273..........................................................................................27
`In Any Event, Paxful Should Not Be
` at This
`Time ....................................................................................................29
`CONCLUSION .......................................................................................................33
`
`B.
`
`ii
`
`
`
`TABLE OF AUTHORITIES
`
`Page(s)
`
`Cases
`Balch Hill P’rs, L.P. v. Shocking Techs., Inc.,
`2013 WL 588964 (Del. Ch. Feb. 7, 2013)..........................................................25
`Banet v. Fonds de Regulation et de Controle Café Cacao,
`2010 WL 1066993 (Del. Ch. Mar. 12, 2010) ...............................................20, 21
`Bentas v. Haseotes,
`769 A.2d 70 (Del. Ch.2000) .........................................................................21, 22
`Bighorn Ventures Nevada, LLC v. Solis,
`2022 WL 17948659 (Del. Ch. Dec. 23, 2022) ...................................................22
`Brzoska v. Olson,
`668 A.2d 1355 (Del. 1995).................................................................................20
`Gabelli & Co. v. Liggett Grp., Inc.,
`1983 WL 18015 (Del. Ch. Mar. 2, 1983),
` aff’d, 479 A.2d 276 (Del. 1984) ........................................................................21
`Giancarlo v. OG Corp.,
`1989 WL 72022 (Del. Ch. June 23, 1989) .........................................................30
`Haley v. Talcott,
`864 A.2d 86 (Del. Ch. 2004) ..............................................................................21
`Hoban v. Dardanella Electric Corp.,
`1984 WL 8221 (Del. Ch. June 12, 1984) .....................................................24, 26
`Kleinberg v. Cohen,
`2017 WL 568342 (Del. Ch. Feb. 13, 2017)......................................23, 24, 25, 32
`In re Maull,
`1994 WL 374302 (Del. Ch. June 9, 1994) .........................................................20
`In re McKinney-Ringham Corp.,
`1998 WL 118035 (Del. Ch. Feb. 27, 1998)........................................................28
`
`iii
`
`
`
`Mennen v. Wilmington Trust Co.,
`2015 WL 1897828 (Del. Ch. Apr. 24, 2015), adopted by 2015 WL
`3630508 (Del. Ch. June 10, 2015)..................................................................8, 20
`Miller v. Miller,
`2009 WL 554920 (Del. Ch. Feb. 17, 2009)..................................................31, 32
`In re Rohlf,
`2011 WL 3201798 (Del. Ch. July 12, 2011) ......................................................20
`In re Shawe & Elting LLC,
`2015 WL 4874733 (Del. Ch. Aug. 13, 2015)...............................................26, 29
`Shawe v. Elting,
`157 A.3d 152 (Del. 2017)............................................................................passim
`Statutes
`8 Del. C. § 226..................................................................................................passim
`8 Del. C. § 273..................................................................................................passim
`26 U.S.C. § 409A.....................................................................................................10
`Other Authorities
`2 DAVID A. DREXLER, ET AL., DELAWARE CORPORATION LAW AND
`PRACTICE § 30.01 (2011)....................................................................................23
`BLACK’S LAW DICTIONARY (11th ed. 2019)............................................................23
`Ct. Ch. R. 56 ............................................................................................................20
`
`iv
`
`
`
`PRELIMINARY STATEMENT
`Artur Schaback and Mohamad Azab Youssef admittedly do not agree on
`
`much these days. They disagree about the access to Company records that should
`
`be provided to a director to permit him to exercise his duties. They disagree about
`
`the legitimacy of ever-increasing expenditures to previously undisclosed entities that
`
`are depleting the Company’s coffers at an alarming rate. And, most fundamentally,
`
`they disagree about the future prospects of the once highly profitable Company that
`
`they co-founded back in 2015. But one thing that they do not disagree about is that
`
`continuing to run the Company as it has been run over the past year and a half is
`
`untenable. The current corporate governance regime requires Schaback to beg for
`
`whatever breadcrumbs of information that Youssef might throw his way and then
`
`beg for ways to verify that information. As a result of Youssef’s unilateral actions
`
`freezing Schaback out of the corporate governance process in order to further his
`
`own illegitimate goals, and the troubling facts Schaback has learned when he finally
`
`was provided with some information, the parties will never work together in a
`
`collaborative way again. Paxful cannot be governed in accordance with its
`
`foundational documents. There is undisputed deadlock at the Board and stockholder
`
`level and there can be no path forward for Paxful until that deadlock is broken.
`
`Both parties seek the appointment of a custodian or receiver to break that
`
`deadlock. Schaback seeks the appointment of a custodian pursuant to Section
`1
`
`
`
`226(a)(2) and 226(b) who is empowered to investigate and report on how the
`
`Company should proceed. Youssef, however, seeks the appointment of a receiver
`
` who would solely be empowered with the ability
`
` the Company or, in the alternative, the discretionary appointment
`
`of a custodian or receiver pursuant to Section 226 with similarly limited authority.
`
`The breakdown of the relationship between the Company’s founders and co-
`
`directors has spawned litigation in this Court and, as a result of the deadlock and the
`
`fact that one of the two directors has been frozen out from meaningful participation
`
`at the management or Board level for well over a year, the Company has been thrown
`
`into a tailspin and continues
`
` at an unsustainable pace. The only
`
`way to stop the bleeding is to appoint a custodian, and the only way to ensure that
`
`the Company is put on the correct, value-maximizing path—be that as a going
`
`concern or otherwise—is to allow an independent custodian with unfettered access
`
`to Company records and resources to properly assess the situation and determine
`
`what that path forward will look like.
`
`It is not surprising that Youssef wants to limit the custodian’s authority to
`
`. Youssef has taken and
`
`continues to take steps
`
` Youssef acknowledges, however, that
`
`2
`
`
`
`
`
`
`
` requires a stockholder vote that he has, thus far, been unable to obtain.
`
`Pursuing a
`
`
`
` (which, in any event, is
`
`inapplicable here) allows him to bypass that requirement. Youssef also asks if this
`
`Court determines (as it must) that
`
` does not apply—that this Court
`
`“otherwise order” the appointment of a custodian under Section 226 who is solely
`
`empowered with the ability to
`
`.
`
`Such an appointment is a rare and extreme remedy that is not appropriate here.
`
`For these reasons and the reasons set forth below, this Court should exercise
`
`its discretion to appoint a custodian pursuant to Section 226(a)(2) and 226(b), with
`
`the authority set forth in the proposed form of order filed contemporaneously
`
`herewith, and the entry of summary judgment on that issue is appropriate. For the
`
`same reasons, this Court should deny Youssef’s attempt to bypass a stockholder vote
`
`by forcing through a
`
` either by utilizing an inapplicable statutory
`
`provision or by asking this Court to exercise its discretion to appoint a custodian
`
`with powers limited in an extraordinary manner that is at odds with Section 226’s
`
`statutory regime.
`
`3
`
`
`
`NATURE AND STAGE OF PROCEEDINGS
`Schaback initiated this action by filing his Verified Complaint, a Motion to
`
`Expedite, and a Motion for a Status Quo Order, on January 11, 2023. In his
`
`Complaint, Schaback alleged that Youssef manipulated the corporate machinery of
`
`Paxful in clear breach of his fiduciary duties as the Company’s Chief Executive
`
`Officer (“CEO”) and one of the two directors on Paxful’s board of directors (the
`
`“Board”), by engaging in a scheme to
`
` Paxful in order to siphon its assets
`
`to himself. See Amended and Supplemental Verified Complaint1 (the “Amended
`
`Complaint”) ¶¶ 1-2.
`
`On January 17, Schaback filed a Motion for the Hiring of Neutral Authorized
`
`Counsel for Paxful (with the Motion to Expedite and the Motion for a Status Quo
`
`Order, the “Motions”). The Court set a hearing on the Motions for January 25, 2023.
`
`On January 26, 2023, the Court granted Schaback’s Motion for the Hiring of Neutral
`
`Independent Counsel and granted a status quo order broadly prohibiting Youssef and
`
`others at Paxful from engaging in non-ordinary course transactions (the “Status Quo
`
`Order”). On February 1, 2023, the Board approved the hiring of Richards, Layton
`
`& Finger, P.A. (“RLF”) as Company’s neutral, independent counsel.
`
`1 Cited herein as “Compl. ¶ __.”
`
`4
`
`
`
`On February 2, Youssef filed his answer to the Verified Complaint as well as
`
`his Verified Counterclaims (the “Counterclaims”). In his Counterclaims, Youssef
`
`asserted that “Youssef and Schaback are [] on the road to being hopelessly
`
`deadlocked as Class B stockholders and co-directors regarding the proper course of
`
`action for Paxful” and that “failure to make the correct decision could have
`
`disastrous consequences for
`
`the Company,
`
`its principals, employees and
`
`stockholders.” Counterclaims ¶ 110. Youssef’s Counterclaims also included a claim
`
`for
`
`
`
`.” As part of that
`
`claim, Youssef asserted that “the Company is hopelessly deadlocked, requiring
`
` and appointment of a Receiver.” Counterclaims
`
`¶ 140.
`
`Around that same time, Schaback began to learn new troubling information
`
`concerning certain actions, discussed in greater detail herein and in the Unsworn
`
`Declaration of Artur Schaback in Support of Cross-Motion for Summary Judgment2
`
`(the “Declaration”) attached hereto, taken by Youssef, Ogene and others at the
`
`Company in furtherance of the
`
` scheme. After uncovering these facts, on
`
`February 21, 2023, Schaback filed the Amended Complaint asserting new
`
`allegations and claims and adding Ogene as a defendant. On that same day,
`
`2 Cited herein as “Dec. ¶ __.”
`
`5
`
`
`
`Schaback filed a Motion for Contempt alleging violations of the Status Quo Order,
`
`as well as a Motion for the Appointment of a Receiver Pendente Lite. The Amended
`
`Complaint alleges that the Board is “irreconcilably-divided”, that “[t]he status quo
`
`continues to threaten Paxful with extreme, imminent, irreparable harm” and that a
`
`custodian should be appointed pursuant to “Sections 226, 279 and 291 of the
`
`Delaware General Corporation Law, as well as the Court’s inherent equitable
`
`authority and discretion”. Compl. ¶¶ 174-178.
`
`The Court held a status conference on February 23, 2023 to discuss the Motion
`
`for Contempt, the Motion for a Receiver Pendente Lite and the Amended Complaint.
`
`At that conference, the Court asked the parties to provide a status report in two-
`
`weeks’ time to apprise the Court about discussions regarding the Plaintiff’s Motion
`
`to Appoint a Receiver Pendente Lite and attempts by the parties to resolve this matter
`
`through a final order appointing either a custodian or receiver. Later that day, the
`
`Court extended the Status Quo order until the end of March, 2023.3
`
`On March 8, 2023, after discussions had failed to result in an agreement on a
`
`final order appointing either a custodian or a receiver, Youssef filed a Motion for
`
`Partial Summary Judgment as to Counterclaim III and for Appointment of a
`
`3 See Transcript of February 23, 2023 Telephonic Status Conference and Rulings of
`the Court at 6:2-7.
`
`6
`
`
`
`Receiver4 (the “Youssef Summary Judgment Motion”). On March 9, 2023, the
`
`parties filed the status report requested by the Court wherein Plaintiff stated his
`
`intent to file an opposition to the Youssef Summary Judgment Motion and a cross-
`
`motion in support of the appointment of a custodian on March 14, 2023. The parties
`
`also agreed to confer on March 15 concerning a briefing schedule and to contact the
`
`Court for oral argument dates for those motions at the Court’s earliest convenience.
`
`This is Schaback’s Opening Brief in Support of his Motion for Partial
`
`Summary Judgment and Answering Brief in Opposition to Youssef’s Motion for
`
`Partial Summary Judgment.
`
`4 Cited herein as “MSJ ¶ __”.
`
`7
`
`
`
`I.
`
`STATEMENT OF FACTS5
`PAXFUL’S FORMATION AND STRUCTURE
`Paxful was co-founded by Schaback and Youssef in 2015. See Youssef’s
`
`Answer to the Amended Complaint6 ¶ 28. Paxful has a two-member Board and,
`
`from Paxful’s inception, Schaback and Youssef served as the two co-directors on
`
`the Board. Ans. ¶ 30. In addition to serving on the Board, Youssef serves as the
`
`Company’s CEO and Schaback serves as the Company’s COO. Id. As CEO,
`
`Youssef holds day-to-day “authority for management of business, affairs and
`
`operations of the Corporation subject to the authority of the Board of Directors . . .”
`
`Am. Compl. Ex. B (Paxful Bylaws) § 6.2. As COO, Schaback is responsible for
`
`overseeing the day-to-day operations of the Company. See Am. Compl. Ex. A
`
`(Paxful’s Action Taken by Unanimous Consent of Board of Directors in Lieu of an
`
`Organizational Meeting dated June 5, 2019) § 15.
`
`5 The facts recited herein are taken primarily from the Declaration. While many of
`the facts about whether Youssef is liable for the misconduct alleged in the underlying
`claims are disputed, none of the disputed facts “are [] material to the legal issue
`presented by the motion” and thus “do[] not preclude summary judgment.” Mennen
`v. Wilmington Trust Co., 2015 WL 1897828, at *3 (Del. Ch. Apr. 24, 2015), adopted
`by 2015 WL 3630508 (Del. Ch. June 10, 2015). Instead, these facts are being offered
`to demonstrate the valid nature of the deadlock and the irreparable harm caused by
`such deadlock from Schaback’s perspective, and to assist any custodian the Court
`may appoint in seeking redress for harm to Paxful.
`6 Cited herein as “Ans. ¶ __.”
`
`8
`
`
`
`Paxful’s Bylaws provide that “[t]he officers of the Corporation shall hold
`
`office until their successors are elected and qualified or until their earlier death,
`
`resignation or removal . . . Any officer elected or appointed by the Board of
`
`Directors may be removed at any time, with or without cause, by the affirmative vote
`
`of directors having a majority of the total votes of the total number of directors
`
`constituting the entire Board of Directors.” Am. Compl. Ex. B § 6.5(a).
`
`There are two different classes of Paxful stock, Class A and Class B.
`
`Schaback and Youssef each hold roughly 45% of the Class A stock and 50% of the
`
`Class B stock. Ans. ¶ 33. The remainder of Class A stock is held by three individual
`
`stockholders. Id. Pursuant to Paxful’s Charter, Paxful’s Class B stockholders—
`
`Schaback and Youssef—have super voting rights. Ans. ¶ 34. Specifically, Paxful’s
`
`Charter provides that “each holder of Class A Common Stock shall have the right to
`
`one (1) vote per share . . . and each holder of Class B Common Stock shall have the
`
`right to ten (10) votes per share.” Am. Compl. Ex. C (Charter) § 4.2.1.1. Class B
`
`stockholders also are entitled to certain protections including a requirement that a
`
`majority vote of Class B stockholders is necessary for, among other things,
`
`“acquisitions, sales and liquidation/dissolution.” Id. § 4.2.1.3.
`
`Paxful’s Bylaws provide that “the business and affairs of the Corporation shall
`
`be managed by or under the direction of the Board of Directors, which may exercise
`
`9
`
`
`
`all such powers of the Corporation and do all such lawful acts and things, subject to
`
`any limitation set forth in the Certificate of Incorporation or as otherwise may be
`
`provided in the Delaware General Corporation Law.” Am. Compl. Ex. B § 3.6.
`
`There is a two-thirds director vote requirement for the Board to act. Id. § 4.5. Thus,
`
`as Schaback and Youssef are the only directors, both directors must vote to approve
`
`an action for it to be valid. Id.
`
`II.
`
`EVENTS LEADING TO THE FILING OF THIS ACTION
`As discussed in greater detail in the Amended Complaint, beginning in late
`
`2021, Youssef began to implement a strategy to use Paxful’s resources to freeze
`
`Schaback out of the Company. Dec. ¶¶ 5-10. At all pertinent times prior to February
`
`2022 when Schaback was frozen out of Paxful, Paxful was a highly valuable
`
`company. Dec. ¶ 4. For example, in 2021, a valuation based on projections that
`
`Schaback and Youssef approved that was prepared to comply with 26 U.S.C. § 409A
`
`valued Paxful at over
`
`. Dec. ¶ 10. As part of Youssef’s strategy to
`
`freeze Schaback out, Youssef initiated an internal investigation into alleged
`
`misconduct by Schaback and suspended his traditional access to information. Dec.
`
`¶ 11. On June 9, 2022, Schaback received a one-paragraph letter indicating that he
`
`was terminated as an “employee” but not as COO.7 Dec. ¶ 10.
`
`7 The “testimonies” that Youssef purportedly relied upon in connection with the
`internal investigation were from Youssef’s co-conspirators Dmitrii Moiseev and
`10
`
`
`
`In light of Youssef’s conduct toward Schaback and the changes he unilaterally
`
`made at the Company, Schaback understood it was not viable to return to Paxful in
`
`a day-to-day role. Dec. ¶ 12. Schaback considered bringing suit against Mr. Youssef
`
`for breaches of fiduciary duty for depriving him of his rights to help govern Paxful
`
`and receive Company information; however, he was aware that his attorneys’ fees
`
`and expenses for any lawsuit he might bring likely would not be advanced by the
`
`Company whereas Mr. Youssef’s fees in defending any such lawsuit likely would
`
`be paid by the Company. Dec. ¶ 13. Schaback continued to hope for a dialogue
`
`about a mutually acceptable
`
`. Dec. ¶ 14. Since he was frozen out in
`
`February 2022, however, he only received
`
`
`
`both of which, as described in the Declaration and the Amended Complaint, were
`
`clearly unacceptable on their face. Dec. ¶ 15; Compl. ¶¶ 66, 89.
`
`At a Board meeting in late September, Youssef and Ogene announced two
`
`proposals. Dec. ¶ 16. The first, which Schaback approved, was to cause Paxful to
`
`. Dec. ¶ 17.8 The second proposal was
`
`
`
`Sergei Oleynikov who, as explained in the Declaration and the Amended Complaint,
`had and continue to have significant roles in the looting of Paxful. Dec. ¶ 9; Compl.
`¶¶ 131-135.
`8 Youssef and Ogene would attempt to twist Schaback’s approval as support for
`. Dec. ¶¶ 17, 108. Traditionally,
`
`11
`
`
`
`to seek out
`
` Dec. ¶ 18. While Schaback approved
`
`this proposal and contacted certain potentially interested parties, without a working
`
`Paxful email account or access to basic information concerning the Company, it was
`
`a futile exercise. Id.
`
`Another Board meeting was held on November 18, 2022. Dec. ¶ 20. At that
`
`board meeting, Youssef, Ogene and Natalia Baskakova, whom Schaback understood
`
`to be an employee in the finance department, represented that Paxful’s
`
`. Id. Youssef proposed that the Company should be
`
`
`
`
`
`
`
`. See Transcript of Audio Recording of November 18, 2022
`
`Board Meeting at 10. Youssef and Ogene also represented that Mr. Youssef’s
`
`marketing efforts resulted in Mr. Youssef obtaining a
`
`
`
` to an entity identified as
`
` Dec. ¶ 21.
`
`Schaback and Youssef also discussed Paxful’s reserves, which Schaback and
`
`Youssef previously set aside to protect the Company from certain potential
`
`contingent liabilities –
`
`
`
`
`
`amounts to
`the overall revenue derived from all transactions
` of Paxful’s revenues. Id.
`
` of Paxful’s revenues; whereas,
` has comprised
`
`12
`
`
`
`
`
`. Paxful’s ordinary operations did not require reserves. Dec. ¶ 22. As of
`
`November 2022, Youssef and the Company informed Schaback that Paxful had
`
` in reserve, which at present trading values would be worth roughly
`
`
`
`
`
`. Id.
`
`Schaback did not approve of the
`
`transaction at the November 18,
`
`2022 Paxful Board meeting, and expected to be shown a final version of that
`
`agreement prior to providing final approval. Dec. ¶ 24. Following the meeting,
`
`Schaback confirmed in writing that he did not approve of any such transaction, or of
`
`the
`
` of Paxful in general. Id. From that period of time
`
`through the filing of the Complaint, Schaback repeatedly made requests for
`
`information concerning the
`
` transaction and for other basic Paxful financial
`
`information. Dec. ¶ 25. Mr. Youssef and Mr. Ogene in particular refused to provide
`
`that information. Id.
`
`On or about January 12, 2023, Schaback initiated this action which focused
`
`on the two areas of suspect transactions and potential self-dealing of which Schaback
`
`was aware at the time: (i) the
`
`Transaction and (ii) the potential for the
`
`Company to
`
`,
`
`
`
` Dec. ¶ 26.
`
`13
`
`
`
`Schaback also sought the entry of the Status Quo Order prohibiting the Company
`
`from engaging in non-ordinary course transactions. Compl. ¶ 111. The submitted
`
`sworn statements opposing the entry of a Status Quo Order averred falsely that there
`
`was no need for the order because no non-ordinary course transactions were
`
`occurring and there was “nothing to enjoin”. Dec. ¶¶ 27-30. However, as Schaback
`
`would later discover, Youssef and Ogene instead were accelerating secret plans to
`
` Paxful while continuing the business without Schaback’s involvement.
`
`Dec. ¶ 32.
`
`III.
`
`SCHABACK UNCOVERS ADDITIONAL INFORMATION AND
`AMENDS HIS COMPLAINT, ADDING A COUNT FOR
`APPOINTMENT OF A CUSTODIAN UNDER SECTION 226
`On January 31, 2023, Ogene asked Schaback to approve payments to Gemean,
`
`a company owned by Youssef’s high school friend. Dec. ¶¶ 39-40. Schaback did
`
`not approve the payments, instead asking for more information on multiple
`
`occasions which Schaback never received. Dec. ¶ 40. Schaback also learned about
`
`large, non-ordinary course transfers of Paxful’s Bitcoin to a Turkish entity called
`
`“EMiR”. Dec. ¶ 42. The amounts of the transfers and the manner in which they
`
`were made were highly troubling. Id. In addition, Schaback received information
`
`that Paxful was transferring employees from its Tallinn, Estonia and Manilla,
`
`Phillipines offices to entities outside of Paxful’s ownership structure. Dec. ¶ 43. On
`
`14
`
`
`
`February 3, 2023, Schaback sent a books and records demand to RLF, seeking
`
`documents relating to these discoveries. Dec. ¶ 44.
`
`Beginning on February 13, 2023, Schaback finally began to receive access to
`
`Company information from RLF—including QuickBooks files, the Company’s
`
`Bamboo HR system and the Company’s envoice.eu system—which he believes
`
`confirmed ongoing wide-ranging fraud beginning in Mid-2022. Dec. ¶¶ 51-55.
`
`Schaback quickly analyzed the information, which demonstrated that Youssef had
`
`caused the Company to take
`
` from Paxful from July 2022 to January
`
`2023 in unauthorized, non-ordinary coustaturse transfers. Dec. ¶ 53. After making
`
`these discoveries, Schaback filed the Amended Complaint, a Motion for Contempt
`
`for breaching the Status Quo Order, and a Motion for the Appointment of a Receiver
`
`Pendente Lite. Dec. ¶ 54. Specifically, Schaback has become aware of the following
`
`categories of fraudulent transactions:
`
` transferred to the
`• Large payments presently totaling over
`Turkish entity EMiR that deviate significantly from Paxful’s traditional
`business practices and appear to be fraudulent in nature. Dec. ¶¶ 56-81.
`Youssef now claims EMiR contracted with one or more other entities in
`foreign jurisdictions who in turn contracted with individual human
`contractors. Dec. ¶ 69. However, the amounts paid are
` the amount
`paid in the past for similar employees or contractors. Dec. ¶¶ 71-72. EMiR
`does not appear to be a legitimate software development company. Dec. ¶ 68.
`It does not have a website publicizing software or web development services
`and its physical address, Amediye Mah. Necmeddin Okyay Sok. No:2 İç Kapı
`No:3 Üsküdar / İSTANBUL, appears to belong to a clothing company. Id.
`One subcontractor receiving payments through EMiR is Dekslektika—an
`
`15
`
`
`
`entity formed by Youssef, and former Paxful employees and Youssef cohorts
`Moiseev and Oleynikov. Dec. ¶¶ 75-76. Youssef and Paxful employees
`working with Youssef have not answered Schaback’s and RLF’s questions
`relating to the EMiR payments. Dec. ¶ 78.
`
`• The transfer of Paxful employees to one or more different entities not
`owned by Paxful. Dec. ¶¶ 82-92. These employees are being forced to sign
`non-disclosure agreements in connection with those transfers. Dec. ¶ 82.
`Based on all of the information available to Schaback, Youssef has been re-
`hiring Company employees at non-Paxful entities, including an entity called
`MareMars OU, in order to further his plans to
`
` Dec. ¶¶ 90-92. From December 27, 2022 to February 2,
`2023, Mr. Youssef caused the Company to make large, non-ordinary-course
`payments of well over
` to MareMars OU that were not disclosed
`to Schaback. Dec. ¶¶ 86-87.
`
`, with another
`• Large, non-ordinary course payments of over
` invoice allegedly pending, to Gemean, an entity owned by
`Youssef’s high-school friend. Dec. ¶¶ 93-99. Schaback requested detailed
`information concerning the work being done and the man-hours involved, but,
`to date, Schaback has not been provided with that information. Dec. ¶ 98.
`
` to another
`• Large, non-ordinary course payments of at least
`entity based in Turkey called KALEM İŞ GÜVENLİK İTHALAT
`İHRACAT SANAYİ (“KALEM”). Dec. ¶¶ 100-103. From the limited
`publicly available information, it appears to be a clothing and underwear
`company. Dec. ¶ 102. Schaback has requested but has not yet received
`information relating to these payments or this entity. Dec. ¶ 103.
`
`IV. PAXFUL’S BOARD IS DEADLOCKED AND THAT DEADLOCK IS
`CAUSING IRREPARABLE INJURY
`The parties concede that they are deadlocked and, in light of the history to
`
`date, there is no possibility that Youssef and Schaback will ever work together
`
`constructively again as directors, officers and stockholders of Paxful. Dec. ¶ 115.
`
`16
`
`
`
`At all times since Youssef froze Schaback out of Paxful in February 2022, Schaback
`
`has been deprived of any reasonable opportunity to act as a fiduciary for Paxful and
`
`protect it from the types of wrongdoing alleged in the Amended Complaint and the
`
`Declaration. Dec. ¶ 116. Schaback is, justifiably, not able to trust any information
`
`provided by or under the direction of Youssef without a full opportunity to
`
`corroborate such facts. Dec. ¶ 117. That is because Youssef has instructed the
`
`Company’s former officers (all of whom now appear to be “consultants” or
`
`“contractors”) not to provide Schaback with pertinent information and has
`
`affirmatively misled Schaback about important Company information. Id.
`
`Since early 2022, Schaback has expended great personal resources in his
`
`efforts to obtain Company information and prevent Youssef from improperly
`
`exercising control to the detriment of the Company. Dec. ¶ 118. Schaback continues
`
`to expend personal resources prosecuting this litigation and through efforts to obtain
`
`information from the Company via books and records requests, as directed by the
`
`Court, including numerous follow up requests and communications with Company
`
`counsel. Id. Schaback’s recent discovery that Paxful has been looted since August
`
`2022 to the present (and continuing) means that devoting further resources premised
`
`on stopping an unlawful
`
` via the
`
`transaction and
`
`
`
`17
`
`
`
` as Schaback originally intended cannot provide the benefits that he
`
`hoped and expected for Paxful. Dec. ¶ 119.
`
`In his present position, Schaback is not able to stop the ongoing
`
`
`
`through improper “expenses.” Dec. ¶ 120. Nor can Schaback reasonably continue
`
`to devote extensive personal resources to the process of communicating information
`
`requests through counsel and seeking redress for all such claims in Court. Id. That
`
`is because Schaback still lacks the necessary information, authority and practical
`
`ability to protect Paxful from Youssef. Id. In addition, the parties agree that Paxful
`
`is facing certain important
`
`
`
`. Dec. ¶ 22.
`
`V.
`
`RUN LEGITIMATELY AND WITHOUT LOOTING, PAXFUL
`COULD BE A PROFITABLE COMPANY
`While Schaback does not dispute that there is deadlock, he does dispute that
`
`the parties’ deadlock means that it is in Paxful’s and its stockholders’ best interest
`
`to
`
`. Dec. ¶ 122. Run legitimately,
`
`and without additional looting by Youssef, Paxful would remain a highly valuable
`
`company. Dec. ¶ 123. Paxful was formed to provide, and continues to provide,
`
`important services as a Bitcoin exchange for customers, particularly in developing
`
`nations, who lack sufficient access to traditional financial institutions. Dec. ¶ 124.
`
`Paxful has never been in the business of trading (speculative or otherwise) in Bitcoin
`
`18
`
`
`
`or other cryptocurrencies. Id. Rather, Paxful derives all of its revenue from
`
`transaction fees from providing a service that remains important to millions of
`
`potential customers worldwide. Id.
`
`Before Schaback was frozen out of Paxful, it was always a highly profitable
`
`Company. Dec. ¶ 125. It always experienced positive cash flow, and it had no debt.
`
`Id. Even over the past year, as Youssef and his
Accessing this document will incur an additional charge of $.
After purchase, you can access this document again without charge.
Accept $ Charge
Still Working On It
This document is taking longer than usual to download. This can happen if we need to contact the court directly to obtain the document and their servers are running slowly.
Give it another minute or two to complete, and then try the refresh button.
A few More Minutes ... Still Working
It can take up to 5 minutes for us to download a document if the court servers are running slowly.
Thank you for your continued patience.
This document could not be displayed.
We could not find this document within its docket. Please go back to the docket page and check the link. If that does not work, go back to the docket and refresh it to pull the newest information.
Your account does not support viewing this document.
You need a Paid Account to view this document. Click here to change your account type.
Your account does not support viewing this document.
Set your membership
status to view this document.
With a Docket Alarm membership, you'll
get a whole lot more, including:
- Up-to-date information for this case.
- Email alerts whenever there is an update.
- Full text search for other cases.
- Get email alerts whenever a new case matches your search.
One Moment Please
The filing “” is large (MB) and is being downloaded.
Please refresh this page in a few minutes to see if the filing has been downloaded. The filing will also be emailed to you when the download completes.
Your document is on its way!
If you do not receive the document in five minutes, contact support at support@docketalarm.com.
Sealed Document
We are unable to display this document, it may be under a court ordered seal.
If you have proper credentials to access the file, you may proceed directly to the court's system using your government issued username and password.
Access Government Site
