Lawyers seeking to seize $71 million in frozen ether for victims of North Korean terrorism changed their legal strategy on Tuesday, arguing in a new court filing that the April 18 rsETH exploit was not theft but fraud, directly countering Aave’s attempt to overturn a restriction notice blocking the release of the assets.
In a 30-page opposition brief filed in the Southern District of New York, a lawyer representing victims of North Korean terrorism contends that the exploit was not a theft but a fraudulent loan transaction, and that under old U.S. law, fraudsters who acquire property through deception can obtain legal title to it, even if that property is later reversible.
“What really happened is that North Korea borrowed assets from ‘Aave Protocol’ users and did not return them, and when ‘Aave Protocol’ attempted to liquidate North Korea’s collateral, ‘Aave Protocol’ unfortunately discovered that the collateral was worthless,” the new filing reads.
“The law is very clear that a fraud victim transfers title, not simply possession, to a fraudster…Charles Ponzi obtained, through his now eponymous scheme, ‘voidable title’ to his victims’ cash,” it continues.
The dispute dates back to a cross-chain bridging exploit last month that drained approximately $230 million from Aave, the largest decentralized lending protocol by total value locked.
An attacker, widely attributed to North Korea’s Lazarus Group by forensic firms such as Chainalysis and TRM Labs, minted unbacked rsETH tokens, used them as collateral in Aave lending markets, and borrowed real ether against worthless deposits.
Developers linked to the Arbitrum blockchain subsequently intercepted around $71 million before they could withdraw it.
The filing also takes the dispute beyond New York property law, invoking the Terrorism Risk Insurance Act (TRIA), a post-9/11 federal law that allows people who win court judgments against state sponsors of terrorism to collect those judgments from any property held by the United States that belongs to the country in question.
If the court accepts that theory, Aave’s earlier arguments about New York property law may matter less.
The filing also asks whether Aave has legal standing to challenge the freeze, citing the company’s own terms of service, which state that it has no “possession, custody or control” over user assets, a central aspect of decentralized finance.
The lawyers also noted in the filing that affected users may not need the frozen ether at all. DeFi United, an industry-led recovery fund of which Aave is a part, has raised $327.95 million as of Tuesday morning, more than four times the $71 million in dispute.
A hearing is scheduled for Wednesday, May 6, in federal court in Manhattan.
