In a high-profile case before the U.S. Southern District of New York, legal teams have stepped up efforts to transfer $71 million in frozen ether to victims of terrorism, following last month’s devastating cross-chain attack on Aave that resulted in a $230 million loss. The lawsuit now pivots on a novel legal argument: that the attack constituted fraud rather than theft, a position aimed squarely at countering Aave’s recent legal bid to release the funds.
Background of the attack and lawsuit
Cybersecurity and analytics firms Chainalysis and TRM Labs have traced the April Aave hack to the North Korea-linked Lazarus Group. The attackers generated unauthorized rsETH tokens and used them as false collateral on Aave, subsequently borrowing real ether against these deposits. Thanks to fast action by blockchain developers, approximately $71 million was frozen on the Arbitrum chain before it could be liquidated.
Attorneys representing the victims submitted a 30-page briefing highlighting a significant distinction in U.S. law: that fraudulently acquired assets temporarily grant the perpetrator actual ownership rights. Their argument stresses that the law treats theft and fraud differently, which could affect who legally controls the frozen ETH.
According to the attorneys, “The law is unequivocal; a deceived party not only gives up possession, but also temporary ownership to the fraudster… just as Charles Ponzi gained victims’ money through the scheme bearing his name.”
Invoking the TRIA statute
Legal teams have also invoked the Terrorism Risk Insurance Act (TRIA), a U.S. federal statute adopted after 9/11. Under TRIA, victims with court judgments against state sponsors of terrorism can collect damages from any assets within U.S. jurisdiction tied to those states. The plaintiffs argue that seizing the frozen ether under TRIA is lawful, which, if accepted by the court, could weaken Aave’s position under New York property law.
The legal documents also question Aave’s standing over the frozen assets. Citing Aave’s own user agreement, which states the company has no direct access to, control over, or custody of user funds, the legal team argues that Aave may lack the legal authority to demand the release of the ether in court.
Crypto sector responses and recovery efforts
Another major point in the case is that users may not urgently need access to the frozen ether. The DeFi United recovery fund, initiated by leading firms in the sector—including Aave—has already raised $327.95 million, more than four times the amount currently frozen.
The next significant hearing is scheduled at the Manhattan federal court on Wednesday, May 6, when both sides will present their arguments. The outcome could set important precedents regarding decentralized finance (DeFi) platforms and the legal standing of international assets in the U.S.
