Paxful co-founders’ litigation cites misappropriation of funds, money laundering, U.S. sanctions evasion

A bitter dispute between Paxful's co-founders in Delaware courts may have led to the crypto marketplace's sudden closure.

A bitter dispute between Paxful’s co-founders, Artur Schaback and Mohamad (Ray) Youssef, in Delaware's courts may have been the real reason behind the Bitcoin marketplace’s sudden closure on April 4. 

Schaback and Youssef, who started Paxful in 2015 with a shared passion for Bitcoin (BTC), are now litigating the company’s control, with several accusations against each other, according to court documents. The allegations include misappropriation of company funds, money laundering and evasion of United States sanctions against Russia, among others.

Founders disagree

Schaback was the chief operating officer of Paxful until February 2022, when he was allegedly blocked from participating in the company’s operations over disagreements with Youssef — Paxful’s CEO — about the marketplace’s future and operations, including conflicts about “the legitimacy of ever-increasing expenditures to undisclosed entities.”

According to Schaback’s claims in the lawsuit, a large quantity of Paxful’s Bitcoin has been transferred to a Turkish entity called “EMiR,” which he claims is not a legitimate software company. “It does not have a website publicizing software or web development services and its physical address [...] appears to belong to a clothing company.”

Dekslektika, a St. Petersburg, Russia-based company owned by former Paxful directors, is a subcontractor allegedly receiving payments from EMiR. As per the court filings, those entities were accused of being behind “massive non-ordinary-course transactions” that began after Schaback was frozen out of the company’s operations. “There is no legitimate business purpose for these transfers,” says the lawsuit.

In comments to Cointelegraph, Youssef classified the claims as "ridiculous." According to him, the accusations center around salary payments to a Turkish engineering company working for Paxful. “He [Schaback] blocked these salary payments to our engineers with these accusations, claiming they were fake and even that they were performing no such services. He played an insane game of chicken until the entire team of 80 engineers stopped working. [...] Mr. Schaback himself was forced to admit that this was a critical mistake and authorized these engineers to be given their back pay at a board meeting,” noted Youssef.

Youssef’s point of view

Youssef claimed his co-founder’s legal tactics “bordered on terrorism” and cost Paxful many employees and directors. “His accusations were so slanderous that we lost our GC, CTO, CISO, VP of finance and VP of HR. He even went after our law firm, McDermott Will and Emery, one of the most respected law firms in the United States, demanding they be removed from representing us in Delaware,” he told Cointelegraph.

Under the imminent resignation of his team, Youssef said it was impossible to keep Schaback at Paxful.

“Artur and I were homeless for a time in NYC while we built Paxful. He came from a working-class family like me, and we bonded over many things. He worked hard in the beginning and added value. I respected that he took care of his family. Sometime around 2018, he began to change. I covered for him, but when the entire ELT threatened to resign, I had to accept the ugly truth that he had changed and was not who I thought he was.”

Schaback’s point of view

In an interview with Cointelegraph, Schaback said Youssef took unilateral action to shut down Paxful on April 4. “Mr. Youssef’s actions were meant to consolidate power in a jurisdiction outside that of the United States and to remove me and other shareholders from his plans.”

Schaback said he has limited access to information in the company and hasn’t been involved in day-to-day operations for 18 months.

“Mr. Youssef and I had fundamental differences in Paxful’s product direction and corporate governance, and you can see by his current actions that his goal all along was to remove Paxful from U.S. jurisdiction due to regulatory pressure.”

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