The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A Delaware judge has warned FTX’s Bahamian liquidators that he is unlikely to sanction their US adversary, or dismiss the legal action he has brought against them, on the basis that the two sides’ co-operation deal was violated.

Judge John Dorsey, in a transcript from an oral ruling given recently at the Delaware Bankruptcy Court, indicated that the greatest punishment he might give John Ray, head of the 134 FTX entities in Chapter 11 protection before his court, is a “slap on the wrist” of he and his team breached the agreement.

Brian Simms KC, the Lennox Paton senior attorney and partner, and PricewaterhouseCoopers (PwC) accounting duo, Kevin Cambridge and Peter Greaves, who are the provisional liquidators for FTX Digital Markets, the failed crypto exchange’s Bahamian subsidiary, have sought to dismiss Mr Ray’s claim against them on multiple grounds - one of which is that he violated the January 6, 2023, co-operation agreement between the two sides.

However, Judge Dorsey requested that the Bahamian trio “reconsider” this argument as FTX’s liquidation - both in the US and The Bahamas - needs to progress more rapidly to the point where recovered assets and returned to former clients and creditors.

“We have an adversary proceeding pending here,” he said. “And I know the joint provisional liquidators have filed a motion to dismiss that, at least partially, on the idea that it was in violation of the agreement between the parties on how to handle the issues between the two courts. But I would ask the joint provisional liquidators to reconsider that, because we can’t. We’ve got to get this case moving and, if we’re going to be arguing over issues like that, it’s not helpful.

“Because, at the end of the day, even if it did violate the agreement between the parties, I’m probably going to allow it to go forward unless there’s some other basis for dismissal. And I admit I haven’t spent a lot of time looking at the motion to dismiss, but if it’s only based on the idea that the debtors here violated the agreement between the parties, I might say: ‘Yeah, I’ll slap you on the wrist for violating the agreement’, but I’m not going to dismiss and have to start all over again.

“Let’s get the case moving. Let’s get those cases moving forward.... In the meantime, we’re going to go forward with the adversary proceeding that I have before me and I want to do it in as expeditious manner as possible, because we’re wasting the customers - or the customers’ assets are wasting away every  day that we spend in bankruptcy. So let’s try to to co-operate and find a way to resolve these issues.”

The two warring factions have since agreed on retired US judge, Judith Fitzgerald, to mediate between them in the hope of resolving their differences and agreeing on a way to co-operate. That mediation is due to begin next month.

The “adversary proceeding” referred to by Judge Dorsey was sparked in March when Mr Ray moved to deny the Bahamian provisional liquidators access to any assets caught in the crypto exchange’s multi-billion dollar collapse via a lawsuit filed in the Delaware Bankruptcy Court.

He made clear his intent to seize control of liquidation proceedings by describing FTX Digital Markets, the Bahamian subsidiary, as an “economic and legal nullity” that served merely as an “offshore front” to enable Sam Bankman-Fried and his closest associates to channel proceeds from their purported fraud away from US regulatory oversight.

Asserting that FTX Digital Markets “never earned a dollar of third party revenue”, the head of the 134 FTX-related companies presently in Chapter 11 bankruptcy protection, is seeking declaratory judgments in the US that the Bahamian subsidiary and its liquidators have “no ownership” interest in or rights to the crypto/digital assets, fiat currency and intellectual property claimed by those entities in his control.

And, in a further attempt to cut the Bahamian liquidation proceedings off from any assets, Mr Ray also wants the Delaware Bankruptcy Court to find that all asset transfers to FTX Digital Markets “are voidable actual or constructive frauds” and that his team be permitted to recover them.

However, the Bahamian provisional liquidation trio subsequently countered through their own legal counterclaim seeking multiple grounds of relief from the Delaware Bankruptcy Court.

Besides seeking an order that he has breached their co-operation agreement, the Bahamian liquidators also want that court to affirm that Mr Ray and his team have breached the Chapter 15 recognition and asset freeze previously granted to FTX Digital Markets and themselves so that their asset recovery efforts in the US had legal standing. They are also demanding an unspecified sum in damages.

The Bahamian liquidators are accusing Mr Ray and his team of “interfering” over the US Justice Department seizure of some $151m of FTX Digital Markets assets that were held in US-based bank accounts. This, they assert, has left them “deprived of crucial assets needed to properly administer the FTX Digital Markets estate in an amount no less than $151m.”

Warning that their inability to access these funds has left them unable to secure, and preserve, “hundreds of millions of dollars” of assets in FTX Digital Markets’ name, Mr Simms and his colleagues are alleging that critical sources of recovery for investors and creditors continue to rapidly lose value.