A Maryland federal court has allowed key claims to proceed in a lawsuit that exposes how a cryptocurrency auditing firm worth over $1 million collapsed amid secret merger talks, a founder’s death, and allegations of financial misconduct.
On January 27, 2025, Judge Theodore Chuang ruled that Robert Chen, founder of blockchain security companies Otter Audits and RC Security, must face breach of fiduciary duty and breach of contract claims filed by the estate of his former business partner, Sam Mingsan Chen. The decision keeps alive a legal fight over the dissolution of OtterSec LLC and the fate of company assets that critics say were improperly transferred.
The case centers on whether Chen violated his duties to his business partner while secretly negotiating a sale to Jump Trading, then dissolved their company and purchased its assets for himself after his partner’s death in a car accident.
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From Cybersecurity Competition to $1 Million Startup
OtterSec began in February 2022 when two teenagers met competing in hacking tournaments. Robert Chen, 19, from Washington, partnered with David Chen, 16, from Maryland. The two shared no family relation but bonded over cybersecurity skills.
They created a blockchain auditing business to review smart contracts and cryptocurrency software for security flaws. Because David was underage, his father Sam Mingsan Chen agreed to serve as the legal co-owner while David handled technical work.
On February 14, 2022, Sam signed the operating agreement at his Rockville, Maryland home. The deal split ownership equally: Robert Chen held 50 percent, Sam Chen held 50 percent.
The startup saw immediate success. Within two months, OtterSec generated over $1 million in revenue. The company hired employees and consultants, including several Maryland residents. Court records show David Chen worked on half the client audits and generated 67 percent of the auditing revenue between February and April 2022. He also loaned $292,000 to fund operations and managed the company’s cryptocurrency wallet from his family’s home.
OtterSec built credibility fast. Major blockchain projects including Solana and Sui hired the firm for security reviews. The company’s website drew 200,000 monthly visitors. Its social media following reached 18,000.
Secret Negotiations Trigger Partnership Collapse
In April 2022, the partnership started fracturing. Robert Chen complained David wasn’t devoting enough time to the business. David, still in high school, felt he couldn’t do more.
To ease tensions, David proposed his father transfer 10 percent of his ownership stake to Robert. On April 16, 2022, Sam and Robert amended the operating agreement. Robert’s share jumped to 60 percent. Sam’s dropped to 40 percent.
What Sam didn’t know: Robert Chen had already begun negotiations with Jump Trading about selling OtterSec.
Court documents reveal Robert met with Kanav Kariya, president of Jump Crypto, on April 18, 2022. The discussion focused on an “acquihire” where Jump would buy OtterSec primarily for its employees, not its products or services.
On April 21, 2022, Robert negotiated terms directly with Jump Trading. He told them he would welcome an offer for OtterSec and three full-time staff: himself and two employees. The proposal excluded David Chen entirely and made no mention of Sam Chen’s ownership stake.
David found out by accident. When he spoke with Kariya on April 22, 2022, he was shocked to learn the proposed acquihire included neither him nor his father’s interest in the company.
Robert never disclosed these negotiations to Sam Chen. The estate’s lawsuit argues this omission matters because Sam gave up 10 percent of his stake without knowing the company might soon be sold, potentially at a value far higher than the ongoing operations suggested.
By late April, David concluded he could no longer work with Robert. He stopped contributing to OtterSec projects.
“Dissolve and Remake”
Robert responded by demanding Sam sell his remaining 40 percent stake. Sam and David refused.
On May 10, 2022, Robert sent David a message stating that if Sam wouldn’t sell, Robert would “probably dissolve the company and remake it,” according to court filings.
Sam said he might consider selling but only if Robert disclosed financial information about the Jump Trading deal. Robert refused.
In June 2022, Robert Chen dissolved OtterSec over the objections of both Sam and David Chen.
Then tragedy struck. On July 13, 2022, Sam Chen died in a car accident. His widow, Li Fen Yao, became administrator of his estate.
New Companies, Same Business
Two months after Sam’s death, Robert Chen formed two new LLCs in South Dakota: Otter Audits and RC Security. He served as the sole member of both entities.
On September 24, 2022, OtterSec’s assets went to public auction. Robert purchased everything himself at a cost he described in court records as “hundreds of thousands of dollars.” The acquisition included intellectual property rights, logos, the osec.io domain name, website, social media accounts, proprietary code, computers, and rights to a cryptocurrency wallet containing company funds.
According to court documents, Robert never provided the Chen family information about how OtterSec’s assets were handled. The estate received no distribution of funds from the company.
Otter Audits now performs security audits for blockchain software, cryptocurrency exchanges, and digital wallets. RC Security operates as a consulting firm handling security advisory work and licensing intellectual property.
Estate Files Federal Lawsuit
On March 31, 2023, Li Fen Yao filed a complaint in the United States District Court for the District of Maryland against Robert Chen, Otter Audits, and RC Security.
The lawsuit made several allegations:
Breach of fiduciary duty: Robert failed to act in Sam’s best interest and hid material information about Jump Trading negotiations when Sam transferred 10 percent of his ownership stake.
Breach of contract: Robert improperly dissolved OtterSec without following the operating agreement’s requirements.
Fraud: Robert misrepresented the company’s situation and prospects to Sam.
Lanham Act violation: Defendants misused OtterSec’s trademarks and brand identity.
Misappropriation: Robert improperly seized company assets that should have been distributed to Sam’s estate.
The estate sought compensatory and punitive damages, an injunction blocking use of the OtterSec name, a declaratory judgment that the dissolution was invalid, and a full accounting of all financial transactions.
Court Narrows Claims but Allows Case to Proceed
Robert Chen and his companies filed motions to dismiss. First, they argued the Maryland court lacked jurisdiction over them as out-of-state defendants.
On March 11, 2024, Judge Chuang rejected that argument. The court found sufficient connections to Maryland through the operating agreement signed there, Maryland-based employees, and ongoing business activities tied to the state.
Defendants then filed a Motion for Judgment on the Pleadings, arguing the claims should be dismissed because they belonged to OtterSec LLC, not to Sam Chen’s estate individually.
Judge Chuang issued a split decision on January 27, 2025.
Claims dismissed:
- Lanham Act trademark claim (OtterSec never federally registered its trademark)
- Breach of fiduciary duty claims related to injuries to OtterSec itself
- Misappropriation and conversion claims
- Tortious interference claim
The court ruled these claims stemmed from injuries to the company and would require a derivative action filed on behalf of OtterSec, not the estate.
Claims proceeding:
- Breach of fiduciary duty directly related to Sam Chen and his estate
- Breach of contract regarding the company dissolution
- Request for accounting of OtterSec’s financial transactions
The court found Robert Chen owed fiduciary duties to Sam Chen as his fellow LLC member. Judge Chuang wrote there were sufficient allegations to support claims based on Robert’s failure to disclose the Jump Trading negotiations when Sam agreed to transfer 10 percent of his stake.
While acknowledging OtterSec was required to dissolve after Sam’s death under the operating agreement, the court noted that Robert’s actions during the company’s “winding up” raised questions about potential self-dealing and breaches of good faith.
The ruling means the core dispute over Robert’s alleged secrecy and improper asset handling will move toward trial or settlement.
Two More Legal Battles
The Maryland case isn’t Robert Chen’s only lawsuit.
In September 2024, Chen filed his own complaint in Wyoming against David Chen. The lawsuit alleges David removed proprietary OtterSec code from company systems and stole approximately $24,000 in cryptocurrency from a company wallet.
David filed a motion to dismiss or transfer the case, arguing Wyoming lacks proper jurisdiction and the claims lack sufficient evidence. That case remains pending.
A separate dispute erupted over the domain name ottersec.io. Someone registered the domain on September 21, 2022, just three days before the asset auction. The registrant hid their identity behind an Icelandic privacy service.
The website using the domain went live in August 2024. It posted selected court documents from the Maryland lawsuit, claiming to operate as a “non-profit site dedicated to sharing publicly available court records.”
Robert Chen’s companies filed a complaint with the World Intellectual Property Organization in March 2025. On July 14, 2025, a WIPO arbitration panel ruled the domain was registered in bad faith. The panel found the timing suspicious: registered during the dissolution and auction period, then used nearly two years later to post disparaging content.
WIPO ordered the domain transferred to RC Security LLC.
What Comes Next for Blockchain Partnerships
The OtterSec lawsuit highlights vulnerabilities in startup partnerships, particularly in the cryptocurrency and blockchain sector where companies form quickly with minimal legal structure.
Several questions remain unresolved as the Maryland case moves forward:
Do business partners have a duty to disclose merger negotiations before asking co-owners to adjust their stakes? How should company assets be distributed when an owner dies during dissolution? Can informal operating agreements between young founders survive disputes over company direction?
For blockchain security firms specifically, the case demonstrates that companies focused on auditing others’ vulnerabilities need robust legal protections for themselves.
The lawsuit also raises concerns about trust in the crypto auditing industry. OtterSec built its reputation on thorough security reviews. Now its own internal disputes play out in federal court, with allegations of hidden deals and improper asset transfers.
The remaining claims center on whether Robert Chen violated his fiduciary duties to Sam Chen and whether the company dissolution followed proper procedures. If the estate prevails, Robert could face financial damages and potentially an accounting that reveals how much OtterSec was truly worth when Sam transferred his stake and when the company dissolved.
As of February 2026, settlement talks have not been publicly reported. The case remains on the Maryland District Court’s active docket. Both sides continue litigating discovery and preparing for potential trial.
For Sam Chen’s family, the legal battle represents an attempt to recover what they believe was rightfully his. For Robert Chen, the lawsuits threaten his control over the business he helped create and now operates under new names.
The outcome will likely influence how blockchain startups structure partnerships, handle dissolution procedures, and navigate the complex intersection of cryptocurrency assets, intellectual property rights, and traditional business law.
