Lawyers seeking to seize $71 million in frozen ether for victims of North Korean terrorism changed their legal strategy Tuesday, arguing in a new court filing that the April 18 rsETH exploit was not theft but fraud, directly thwarting Aave’s attempt to overturn a cease-and-desist 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 argues that the exploit was not a burglary but a fraudulent lending transaction, and that under longstanding U.S. law, fraudsters who acquire property by deception can obtain legal title to it, even if that ownership is later reversible.
“What actually happened was that North Korea borrowed assets from ‘Aave Protocol’ users and failed to repay them, and when ‘Aave Protocol’ sought to liquidate North Korea’s collateral, ‘Aave Protocol’ unfortunately discovered that the collateral was worthless,” the new filing states.
“The law is perfectly clear: a victim of fraud transfers title, not just possession, to a fraudster…Charles Ponzi obtained, through his now eponymous scheme, ‘revocable title’ to his victims’ money,” he continues.
The dispute stems from a cross-chain bridge exploit last month that drained approximately $230 million from Aave, the largest decentralized lending protocol by total value locked.
An attacker, widely attributed to the North Korean Lazarus Group by forensic firms such as Chainalysis and TRM Labs, created uncollateralized rsETH tokens, used them as collateral on Aave’s lending marketplaces, and borrowed real ether against worthless deposits.
Developers linked to the Arbitrum blockchain then intercepted approximately $71 million before they could cash it out.
The filing also escalates the dispute beyond New York real estate law, invoking the Terrorism Risk Insurance Act (TRIA), a post-9/11 federal law that allows people who obtain legal judgments against state sponsors of terrorism to recover those judgments against any U.S.-owned property belonging to the country in question.
If the court accepts this theory, Aave’s prior arguments about New York property law may carry less weight.
The filing also questions whether Aave has the 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 key aspect of decentralized finance.
The lawyers also pointed out in the filing that affected users might not need the frozen ether at all. DeFi United, an industry-led recovery fund that Aave itself is a part of, raised $327.95 million as of Tuesday morning, more than four times the $71 million contested.
A hearing is scheduled for Wednesday, May 6 in federal court in Manhattan.
