Last Monday, November 27, private security from Whinstone Inc. entered the facilities of Rockdale, TX-based Rhodium Enterprises to remove employees and cease operation of its 125 MW bitcoin mining facility.
The legal battle that culminated in this seizure began on May 2, 2023 when Whinstone US, Inc., a subsidiary of Riot Platforms, filed a lawsuit against certain Rhodium entities. The dispute centered on lodging and power agreements between the two parties, and Whinstone sought damages for alleged unpaid lodging fees and a declaratory judgment affirming his right to terminate these agreements.
Rhodium, not taking the allegations lightly, hired outside counsel and responded with its own claims. He sought damages for Whinstone's alleged breaches of certain hosting agreements and filed a motion to compel arbitration. The court, siding with Rhodium, granted the motion and ordered that the case be resolved through arbitration. In a document filed on June 12, 2023 titled “Rhodium's Motion to Compel Arbitration and Counterclaims,” Rhodium took note of these energy agreements signed in July 2020, especially before energy price inflation took hold. will look at the following two years after supply chain issues and lockdowns prompted monetary stimulus, increasing the cost of energy at the Rockdale site:
“In July 2020, Whinstone and Rhodium JV entered into fourteen identical energy agreements, each of which provided for Rhodium JV to receive 5 MW of electricity from Whinstone (the “5 MW Agreements”). The central objective of each agreement was to provide electricity (70 MW in total) at a fixed price for at least 10 years. Each of the fourteen 5 MW agreements provides that it supersedes all prior or contemporaneous agreements between the parties relating to the “subject matter” thereof… Whinstone and Rhodium JV executed 20 5 MW agreements in total, but Rhodium has only obtained energy under 14 of them. Therefore, only those 14 are relevant for current purposes.”
Riot Platforms, then known as Riot Blockchain, eventually purchased Whinstone Inc. on bitcoin-mining-company/”>May 26, 2021acquiring the rights to these power agreements signed in 2020. In Riot itself Q3 2023 Quarterly UpdateThey referred to these contracts as “legacy contracts” on page 8, and also noted that “energy credits drove the reduction in losses in the hosting business during the quarter.”
“For the nine months ended September 30, 2023 and 2022, data center hosting revenue was $21.8 million and $27.9 million, respectively. The decrease of $6.1 million was primarily due to a lower share of customer revenue due to lower bitcoin values in the 2023 period, as noted above, combined with fewer customers taking in during 2023 as “We continue to address legacy contracts.”
This implies a net reduction in revenue from its data center hosting business, notably stating in the page title that these “legacy contracts continue to be addressed.”
In the June 12, 2023 motion, Rhodium claims that not only is Whinstone not owed money, but in fact, Rhodium is owed money due to unshared profits from the sale of its power to the ERCOT market.
“Public records show that Whinstone has sold more than $100 million in electricity in the ERCOT market over the past several years. In 2022 alone, Whinstone's sales approached $30 million… Depending on the proportion of Whinstone's total electricity allocated to Rhodium, Rhodium should have received approximately 25% to 30% of the profits from Whinstone's sales. Whinstone in the ERCOT market… But Whinstone has not paid Rhodium a single dollar of its profits from the sale of energy. In fact, Whinstone's former CEO flatly told Rhodium staff that Whinstone would not meet its obligation to share profits from the sale of energy. Since August 2022, Rhodium has repeatedly requested payment of profits owed on Whinstone's energy sales… In total, Whinstone owes Rhodium at least $7 million to $10 million in unpaid profits on energy sales . In fact, the amount is likely tens of millions higher.”
This same page 8 of Riot's Q3 2023 quarterly update makes note of an important precedent: the 2022 removal of “GMO-hosted miners from Building A at the Rockdale facility.” In a presentation By Japan's GMO on July 12, 2022, Whinstone is accused of making similar seizures of energy and mining equipment:
“On or about March 29, 2022, Whinstone improperly disposed of some of GMO's mining machines in breach of its obligations under Section 3.1.3 of the Texas Agreement (which allows the relocation of equipment only with the prior written consent of GMO, which Whinstone neither requested nor obtained) and Section 14 of the Texas Agreement (which allows Whinstone to suspend services only under certain circumstances, none of which apply). Due to Whinstone/Riot's withdrawal of GMO machines, GMO suffered a decrease of approximately 20 petahashes in its mining capacity, which is equivalent to at least $16,000 a day in profits. Although GMO demanded the return/replacement of the equipment and sent a formal notice regarding the same on April 12, 2022, it did not receive any response. And upon visiting the Rockdale data center on May 7, 2022, GMO staff discovered that their machines had not been returned to service, but rather replaced by Whinstone machines that were operated for Whinstone's own benefit. Despite multiple demands to have the GMO machines put back in place, Whinstone refused.”
It is implied that this GMO action by Whinstone was made to offset increases in energy costs at the Rockdale site, with further references in their complaint noting:
“Whinstone also recently billed GMO for a power price increase from $0.0285/kWh to $0.03/kWh (resulting in a cost increase of approximately $50,000.00 per month), apparently because the power price The energy that Whinstone will pay to its supplier, TXU Energy, is expected to increase. However, the 2019 Texas Agreement states that the energy price of $0.0285/kWh “shall not increase for 10 years” and that “the Parties shall consult with each other in good faith regarding the price” beginning so. Whinstone's right to pass on increases is strictly limited to regulatory changes and similarly imposed costs. Although GMO formally disputes the charges and seeks an explanation, Whinstone has not presented any explanation or evidence that this energy price increase meets that standard. Therefore, the recent charges constitute a further violation of the 2019 Texas Agreement.”
On page 20 of Riot's 10-Q, GMO's fourth amended complaint against Whinstone is noted, bringing the total damages sought to just under $650 million.
“On June 13, 2022, GMO Gamecenter USA, Inc. and its parent, GMO Internet, Inc., (collectively “GMO”) filed a lawsuit in the United States District Court for the Southern District of New York ( Case No. 1 :22-cv-05974-JPC) against Whinstone alleging breach of contract under the placement services agreement between GMO and Whinstone, seeking damages in excess of $150 million. Whinstone responded to GMO’s claims and filed its own counterclaims, alleging that GMO itself breached the placement services agreement, seeking a declaratory judgment and damages in excess of $25 million.”
On October 19, 2023, GMO filed its fourth amended complaint seeking an additional $496 million in damages, for lost profits and profit sharing, based on Whinstone's alleged wrongful termination of the placement services agreement effective October 29. June 2023. At this preliminary stage, the Company (Riot Platforms) believes that GMO's claims are unfounded; however, because this litigation is still in this early stage, the Company cannot reasonably estimate the likelihood of an unfavorable outcome or the magnitude of such an outcome, if any.”
While GMO's lawsuit against Whinstone is still in litigation, the legal dispute between Rhodium and Whinstone continues. Whinstone and Riot, dissatisfied with the arbitration decision, filed a motion for reconsideration, which was ultimately unsuccessful. Unwilling to give in, they sought relief at the appeals court, but their request was denied on November 22.
This led to the shocking move, at 10pm on Monday 27 November, in which Whinstone sent a notice to Rhodium intending to immediately terminate certain hosting arrangements. This action escalated quickly, as Whinstone proceeded to cut power to Rhodium's Rockdale facility, remove personnel from it using private security (especially without altercations), and revoke his access.
Responding quickly to what appeared to be a unilateral and drastic measure, Rhodium, working with outside counsel, filed a motion for a temporary restraining order the following day, November 28. The motion sought to restore full access and use of Rhodium. facilities.
The judge presiding over the case granted Rhodium's motion for a temporary restraining order on the morning of Wednesday, November 29. According to an email sent to Rhodium investors that same day, “A further hearing on this matter has been scheduled for Tuesday. , December 5,” ultimately deciding the fate of this temporary restraining order.
At the time of publication, neither Rhodium nor Riot Platforms have commented on the ongoing litigation.
