Mango Markets Exploiter Thought a DAO Protected Him. Then US Courts Showed Up
Mango Labs’ $47 million civil suit against crypto trader Avraham Eisenberg isn’t just the latest legal drama to emerge from the destructive exploit of Mango Markets. It’s also a case study in how the ideals of crypto governance take a back seat to real-world contracts law.
Eisenberg, who faces criminal charges over the $114 million escapade, had in October negotiated a settlement with Mango Markets’ decentralized autonomous organization (DAO) that he thought exempted him from civil liability. To him, his trades were legal and used “the protocol as designed.” But, just in case his victims felt otherwise, he negotiated with them to make sure they would not sue.
Representatives for Mango Markets now say the DAO’s own deal should be thrown out for effectively violating contracts law; they’re demanding Eisenberg pay back the DAO. In doing so, Mango Markets may unwittingly highlight how powerless crypto governance is when grappling with the conventional legal system.
Mango Markets was a popular venue for trading crypto tokens and derivatives on the Solana blockchain that is managed by a DAO. Holders of the MNGO governance token vote on everything from token listings to debt repayments. It's widely recognized as one of the most active DAOs in the Solana ecosystem (although the U.S. Securities and Exchange Commission has called Mango DAO governance a sham).
See more: Mango Markets to Resume Crypto Trading, SEC Be Damned
Members of Mango DAO had voted not to hold Eisenberg accountable in exchange for him returning $67 million in crypto. Daffy Durairaj, a co-founder of Mango Markets, even said he’d see to it that Eisenberg was “cleared of any wrongdoing.” Based on his own public gloating over his “highly profitable trading strategy,” Eisenberg thought he was in the clear.
Durairaj and Mango Labs are now leading a lawsuit against Eisenberg to get back the $47 million he kept. It’s seemingly a violation of the agreement – a vote on a smart contract by a DAO – struck between victim and perpetrator.
Eisenberg believed the negotiated settlement put the issue to bed. “I believe all our actions were legal,” he said in a Twitter thread where he self-doxxed as the trader whose massive trades in MNGO and perpetual-futures contracts crippled Mango Markets with bad debt.
But that negotiated proposal holds no legal water, according to lawyers at Canadian law firm McMillan LLP interviewed by CoinDesk.
“The Mango Markets settlement appeared unenforceable from the get-go,” said Benjamin Bathgate, a commercial litigator with the firm.
He and colleague Reuben Rothstein said they were surprised Mango’s core contributors ever proposed invalidating their claims – and surprised, too, that the vote passed.
“However, we were not surprised to see signs that one or more affected users assisted in the criminal investigation. And we were not at all surprised to see, a few days ago, Mango Markets bring a civil lawsuit seeking to render the settlement void and bring a claim against Eisenberg to make its users whole. Not in the least,” Bathgate and Rothstein said in an email.
Indeed, Mango Labs’ suit against Eisenberg casts aside its “negotiated settlement” with Eisenberg as “unenforceable” and requests the court toss it aside.
Eisenberg “forced Mango DAO to enter into an unenforceable settlement agreement – under duress – purporting to release depositors’ claims against him and precluding them from pursuing a criminal investigation,” Mango Labs’ lawyers argue.
In contract law, if a party is forced against its will (i.e., under duress) to enter into an agreement, then that contract is null and void, according to the Corporate Finance Institute.
What’s notable here is that the deal was on a smart contract created with the principals of on-chain governance in mind.
Ascribing uniform principals to anything in crypto is a fool’s errand. But for a movement predicated on the notion that networks of individuals can operate a monetary system better than governments can, it's notable that the boosters of decentralized governance here have ceded their authority to the U.S. courts.
The McMillan lawyers see things a bit more straightforwardly.
“We think (and hope) the fascinating Mango Markets case – of an ill-advised settlement gone awry and effectively being ignored – will put a shock of reality into DAO ecosystems and give their users a reality check,” Bathgate and Rothstein said.
“In their isolated system the votes undoubtedly seem powerful, and they are in a business sense as they operate as a cooperative of sorts aggregating purchasing power,” they said. “But that doesn’t mean that a DAO proposal and vote can cure all ills: like it or not, that’s what the courts are for.”