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 lawsuit that the April 18 rsETH exploit was not theft but fraud, directly countering Aave’s attempt to void a lien notice blocking the release of the assets.
In a 30-page opposition brief filed in the Southern District of New York, a lawyer representing the North Korean terror victims argues that the exploit was not a smashing theft but a fraudulent loan transaction, and that fraudsters who acquire property through fraud can gain legal title to it, even if it can later be overturned.
“What actually happened is that North Korea borrowed assets from users of the ‘Aave Protocol’ and did not pay them back, and when the ‘Aave Protocol’ tried to liquidate North Korea’s security, the ‘Aave Protocol’ unluckily discovered that the security was worthless,” the new filing reads.
“The law is crystal clear that a fraud victim transfers title, not merely possession, to a fraudster…Charles Ponzi obtained, through his now eponymous scheme, ‘dismissible title’ to his victims’ cash,” it continues.
The dispute is traced to a cross-chain bridge exploit last month that drained about $230 million from Aave, the largest decentralized lending protocol by total value locked.
An attacker widely attributed to North Korea’s Lazarus group of forensic firms, including Chainalysis and TRM Labs, minted unbacked rsETH tokens, used them as collateral on Aave’s lending markets, and borrowed real ether against the worthless deposits.
Developers linked to the Arbitrum blockchain later intercepted around $71 million before it could be paid out.
The filing also escalates the dispute beyond New York property, 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 U.S. property belonging to that country.
If the court accepts that theory, Aave’s earlier arguments about property rights in New York may have less weight.
The filing also questions whether Aave even has legal standing to challenge the freeze, citing the company’s own terms of service, which say it does not have “possession, custody or control” over user assets, a core aspect of decentralized finance.
Lawyers also pointed out in the case that the affected users may not need the frozen ether at all. DeFi United, an industry-led recovery fund Aave himself is a part of, has raised $327.95 million as of Tuesday morning — more than four times the disputed $71 million.
A hearing is scheduled for Wednesday, May 6, in federal court in Manhattan.
