On September 26, 2024, Swan Bitcoin – a bitcoin financial services company – filed a lawsuit against former employees and contractors for allegedly filching key components of its bitcoin mining business. According to Swan’s initial court filing, the team leads and contractors responsible for its mining operation mass resigned on August 8 and 9, 2024, taking with them “highly proprietary and confidential Bitcoin mining business, technology, trade secrets, property and personnel.”

New information from the defendants’ court filings, as well as Swan business documents Blockspace Media obtained, call into question whether or not Swan ever substantively controlled its mining business or had legal claim over it.

Denying Swan’s allegations in their opposition filing on September 30, 2024, the defendants claim that “Swan does not have a mining business of its own…what Swan has called its mining business is really just the separate entity called 2040 Energy.” Instead, they claim that it owns a minority stake in the joint venture 2040 Energy, which Swan established with Tether to manage the operation. By its own admission in an investor deck that Blockspace Media obtained, Swan states that it owns 20% of the joint venture to Tether’s 80%, and that it cannot take any profits from the mining operation until its investors recoup their funding. 

Swan framed the walkout as a corporate coup, branding it a conspiracy orchestrated by key internal personnel who ran Swan’s mining division. Concurrent with the walkout, Tether informed Swan on August 9 that it placed Swan’s former team members and contractors in charge of the mining operations, under the umbrella of their newly formed company, Proton Management.

Per the investor deck, the mining operation at the center of the suit required $400 million of capital and generated $84 million in the first half of 2024.

It appears, though, that Swan was not contractually entitled to any of this revenue. 

The Summer 2024 investor deck states that Swan and Tether constructed the joint-venture in such a way that Swan would only begin profit sharing once investors received a return on their capital. Blockspace Media obtained a July 2024 Swan shareholder letter that reiterates the point, stating that investors must receive 100% return on their capital before Swan can see profit from the mining operation.

The letter also states that Swan was negotiating to extricate its mining business from the JV in order to start generating revenue for itself. To this end, on July 22, 2024, Swan CEO Cory Klippsten announced that it would be ceasing its relationship with Tether specifically for the managed mining business. According to the letter, Swan and Tether had a handshake agreement to make this switch on April 1, 2024, but the two parties never signed a legally binding agreement to this effect. 

As the lawsuit suggests, these negotiations invariably broke down. And what’s more, the suit itself – and the exodus of Swan mining personnel that precipitated it – appears to be the culmination of an internecine struggle between Swan and Tether for its mining business. 

“Amidst increasing mismanagement by Swan’s executive team, which negatively impacted 2040’s ongoing operations and future growth, resulting in mass layoffs, the Individual Defendants resigned from Swan in August 2024,” the defendants’ opposition filing reads. 

Swan alleges its mining business was stolen out from underneath it, but the defendants’ initial filings in response to the suit raise questions regarding the exact shareholder agreement for the 2040 Energy joint venture – and whether Swan has legal claim to the mining operations at all.

Swan Mining: A Timeline

Swan’s bitcoin mining business began on June 1, 2023, when a Swan employee turned the company’s attention to a bitcoin mine in Tasmania, Australia operated by DAME technologies. Michael Alexander Holmes, one of the defendants in the case and Klippsten’s acquaintance, was working with DAME to secure series A funding at the time.

On June 2, 2023, Klippsten contacted Tether CFO Giancarlo Devasini, who agreed to fund a bitcoin mining operation that Swan would manage. Over the next month, Swan started hiring for its mining division and purchasing ASIC miners, with Holmes working as a contractor to source ASICs and additional mining sites. By July 2024, Swan Mining’s operations were spread across 10 sites, representing 11.5 EH/s under management. 

Swan Chief Investment Officer, Raphael Zagury, led the operation and managed Swan’s deployment at DAME. By July, the mining team included 12 Swan employees and contractors.

During this beginning phase, Swan began building its Bitcoin Network Operating Center (BNOC), a dashboard for monitoring Swan’s disparate mining sites. One of the primary accusations of Swan’s lawsuit is that the defendants stole proprietary aspects of the BNOC system, while the defense claims that the BNOC contained no proprietary trade secrets, nor did it belong solely to Swan.

Swan and Tether established a funding vehicle, Energy 2040, on July 28, 2023, which Tether fully capitalized. In their opposition filing, the defendants’ state that “Tether provided all of the funding for 2040 Energy, while Swan employees and contractors operated the mining operations, with Swan maintaining a minority stake in the business.” Cory Klippsten served as 2040 Energy’s CEO until he was removed from this position on August 13, 2024. 

In February 2024, Swan says in its complaint, the two companies were in talks to renew the agreement and establish a new joint-venture, 2140 Energy. By May 2024, Swan and Tether expanded the scope of the partnership with a managed mining service, a new business line aimed at high-net-worth individuals and institutions with a minimum allocation of $100 million. 

Swan and Tether’s mining partnership unravels

For whatever reason, negotiations soured regarding the new 2140 Energy agreement, and Swan announced on July 22, 2024 that it was shuttering its managed mining services. This coincided with Swan laying off roughly 45% of its workforce (70-80 persons, according to the defendants’ opposition filing).

The shakeup to Swan’s mining business seems to have impacted its wider operations as well as its aspirations to raise a series C in anticipation of an IPO. Swan was allegedly in talks with Tether to lead this series C, which it opened on July 11, and it claims in its original complaint that Zach Lyons, a principal at Tether advisor Marlin Partners, told Swan that Tether was considering allocating $25 million to the round. 

A July 2024 investor letter states that Swan was hoping to raise $75 million in its series C for a valuation of $1.2 billion, but it walked back these aspirations on July 24 and amended the fundraise to $30 million at a $300 million valuation. A Swan investor deck for the amended series C filing states that the mining joint-venture generated $84 million in revenue in the first half of 2024; Swan’s financial services generated $6 million in 2023 and the company projects $13 million in revenue for 2024, according to the same document.

In the shareholder letter, Swan revealed that it was still engaged in what it calls self-mining operations with Tether, but that it can not realize any profit sharing from this operation until it returns 100% of investor capital (the defendants have claimed that the mining venture 2040 Energy was funded entirely by Tether). The lack of near-term cash flow seems to be one of the motivating factors behind Swan refactoring its series C, as well as the business restructuring that precipitated the July 22 layoffs. In the same letter, Swan notified shareholders that it was working on peeling off part of the self-mining segment from its partnership with Tether. According to the letter, Swan and Tether had a handshake agreement to make this switch on April 1, 2024, but the two parties never signed a legally binding agreement to this effect. 

To this end, Swan claims in its lawsuit that Zagury had spoken with Guilherme Gomes, Swan’s president at the time, about spinning off Swan’s mining division into a standalone business. met with Lyons on July 11 to discuss spinning off Swan’s mining division from 2040 Energy. Zagury then met with Tether CFO Giancarlo Devasini on July 20, Swan alleges, to discuss making Zagury a board member of 2040 Energy and transferring custody of the joint venture’s bitcoin treasury to an account in Zagury’s name. 

In what appear to be notes from Zagury regarding the July 11 meeting, which Swan included in its filings, Zagury scrawled shorthand notes about his call with Zach, including:“[h]e sees no value in Swan at all … This is where the value is…They know that - even G … Capital went nowhere … Bitdeer done without shit on Series C … Cory has to realize they can take away tomorrow.”

Following Zagury’s meetings with Lyons and Devasini, Swan claims that the defendants downloaded proprietary data of Swan’s BNOC system from Swan’s GitHub from July 15 to August 8, 2024. This culminated in the defendants’ resignations on August 8 and 9, 2024. Swan claims that this resignation was the apotheosis of the defendants’ stated “rain and hellfire” scheme to steal Swan’s business; in their opposition filing, the defendants claim the walkout was “a result of Swan’s escalating crisis, lack of transparency, and mismanagement, particularly in its mining operations.”

On August 9, Tether’s counsel served Swan with a Notice of Event of Default. The opposition filing from the defendants states that Tether’s counsel told Swan that it “was in breach of its obligations to 2040 Energy.” On August 12, 2040 Energy removed Cory as CEO of the joint venture, and on August 13, Tether informed Swan that Proton Management would be taking over “operational and administrative functions” for the mining operation. 

A question of ownership

The bulk of Swan’s lawsuit rests on its claims that the defendants stole proprietary information from Swan’s mining business, but the defendants deny any such theft – and they also question whether or not Swan can lay claim to such documents and information, arguing that they were the purview of 2040 Energy. 

“...all of this work was admittedly done on behalf of 2040 Energy for its mining business, so Swan cannot credibly claim that this information is Swan’s (sole) property,” the filing reads, continuing to claim that the alleged stolen information can not be considered trade secrets, either.

The defendants are also asking to dismiss the case on a number of technicalities. To start, they are claiming that California’s Central Court has a lack of jurisdiction over Proton Management. They also claim that Swan only notified them about the lawsuit on September 26 through email, a day after Swan filed the original complaint.

“Before sending the email on September 26, Swan never informed Proton about the pending litigation, never asked it to accept service of the Complaint, never sent a demand letter regarding the alleged misappropriation of confidential information and intellectual property, never made a demand that Proton preserve documents, and never discussed participating in expedited discovery,” the filing claims. 

All in all, the most consequential accusation the defendants make in their opposition filing is that Swan owned no mining business at all and has no majority claim to the entity 2040 Energy, which is supposedly responsible for the entire mining business in question. By its own admission in its investor deck, Swan indicates that it is a minority shareholder in 2040 energy and that it could not see profits from the venture until Tether recouped 100% of its investment. 

Finer details of the shareholder agreement are redacted from court filings, but the information in this agreement is likely the key to the whole case. The defendants have also made claims that Swan breached this agreement, but they have failed to specify how. 

In their filings, the defendants have requested that the court keep further documents related to the case under seal, arguing that there is confidential information that would be detrimental to both 2040 Energy and Swan’s business interests.