Alternatively, Downey said, if Grigg didn't want to continue the relationship, he could instead "deliver all source code to Doug/Barry necessary for construction and operation of systems" including the server. According to an affidavit written by Downey: "This digital cash has been sold over this period, and a substantial amount of the digital cash is outstanding in the market that will be rendered useless if the DigiGold server is pulled offline and the software support is discontinued."

Another former Jackson employee, Charles Evans, is also part of this imbroglio. He was reportedly not allowed to fire WWWWWW KKKK, which led to a rift between Jackson and Grigg. What happened is far from clear, but DigiGold seems to believe Evans and Khan tried to seduce a third employee away from Systemics in the hopes of founding a rival firm.

Evans said in an e-mail message last week that he was served with court documents while at a financial cryptography conference in Scotland. "They accuse me, personally, of misappropriation of trade secrets, tortuous interference with prospective economic advantage, unfair business practices and breach of the duty of loyalty," Evans said, adding that he denies the charges.

It's unclear what caused Grigg to try to call off the deal. One big reason seems to be that he believed Jackson's gold-themed currencies were being used for illegal activities that would attract the attention of the Feds.

In an e-mail message from early 2001, Grigg said he was worried by "scams and Ponzi schemes that were being facilitated by the group (of companies). I based my objection on fundamental points: that schemes were illegal and any regulator could shut down the system or the company on that basis alone."

He seems to have been prescient.

In March, the U.S. Secret Service raided Gold-Age, a New York state business that exchanged dollars for grams of e-gold. On Tuesday, The New York Times reported that another e-gold entrepreneur, Donald English, has been charged with fraud for allegedly bilking investors out of cash in a kind of Ponzi scheme.

DigiGold's primary reserve account includes 50,000 grams of gold. That's about 1,800 ounces, worth $482,400 at Tuesday's prices.

Regulators don't seem to like such schemes. Former Treasury Secretary Lawrence Summers has warned of malcontents using the Net and encryption to dodge taxes, and it's possible that the Feds don't exactly approve of a system that's more privacy-protective than the heavily regulated banking system.

Current federal regulations require banks and credit unions -- about 19,000 in all -- to inform federal law enforcement of all transactions for $5,000 and above that have no "apparent lawful purpose or are not the sort in which the particular customer would normally be expected to engage."

"The E-gold system seems to be turning profitable, now," says Robert Hettinga of the Internet Bearer Underwriting Corporation. "And so it looks to me for all the world like E-gold et al. has gotten a rather litigious bee in their bonnet."

"(Now) they can actually afford legal fees to sue someone for what appears to be, frankly, a minor debacle, rather than paying attention to their bottom line -- or the opinion of their customers -- and spending the money somewhere more useful," Hettinga says.

Andrew Osterman contributed to this report.