The Tribune

• Liquidators: Amicable solution ‘more remote’

• Accuse Ray of meddling in DOJ negotiations

• Recovery vital as down to $1.8m cash assets

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX’s Bahamian liquidators say it is increasingly likely they will have to battle the US Justice Department in the courts to recover $143m given that prospects of an amicable resolution have become “more remote”.

Brian Simms KC, the Lennox Paton senior partner, and the PricewaterhouseCoopers (PwC) accounting duo of Kevin Cambridge and Peter Greaves, in their latest report to the Supreme Court revealed they have received legal advice concluding there are “grounds to challenge” the federal government’s seizure of these funds from the FTX Bahamian subsidiary they oversee.

Revealing that they have negotiated “patiently and constructively” with the US Justice Department to secure the return of assets they assert belong in FTX Digital Markets’ liquidation estate, the trio indicated that time to reach a consensual solution is running out and they will have no choice but to initiate litigation to recover a substantial sum held in fiat cash.

And, without providing details, the Bahamian liquidators also accused their nemesis John Ray, head of the 134 FTX entities in Chapter 11 bankruptcy protection in Delaware, of “improper conduct” and interference with their attempts to secure the release of the $143m from the US Justice Department.

The two sides have been locked in a prolonged battle for control of FTX’s winding-up ever since the crypto exchange collapsed in early November 2022, and the Bahamian trio are accusing Mr Ray and his team of breaching both the co-operation agreement between the parties and the Chapter 15 recognition that they have obtained from the US courts in relation to the assets seized by the US Justice Department.

And, suggesting that relations between Mr Ray and the Bahamian joint provisional liquidators are presently at rock bottom, the latter also warned they may take legal action against the US chief and Chapter 11 debtors by suggesting their conduct gives rise to “significant post-petition claims”.

If the FTX Bahamas trio end up initiating legal action against the US Justice Department, they will be taking on the federal equivalent of the Attorney General’s Office. Given its power and resources, as well as the might of the US government, most seek to avoid a head-on collision with this agency, but the joint provisional liquidators indicated they may have no choice given the importance of the $143m cash assets to the Bahamian subsidiary’s clients and creditors.

However, the Bahamian joint provisional liquidators’ report to the Supreme Court underscored just how vital the $143m is to their winding-up effort. For it represents 65 percent, or almost two-thirds, of cash assets belonging to FTX Digital Markets to-date. Of the total $219.5m identified thus far, the joint provisional liquidators have recovered some $76.3m to-date.

Of the latter sum, some $26.7m was received from Bahamas-based Equity Bank & Trust; $18.1m from BCB Bank; $31.2m from Fidelity Bank (Bahamas); and $300,000 from Deltec Bank & Trust. However, not all these assets belong to FTX Digital Markets and/or can be used to finance the winding-up, as a significant portion are likely to be client assets held on trust for their benefit.

“At the time of the first report, the joint provisional liquidators had in their control $31.5m of estate cash and were in the process of securing $44.8m in bank accounts marked as funds held for the benefit of customers (FBO) cash,” the Bahamian liquidators told the Supreme Court.

“Although it is unclear yet whether fiat funds marked as FBO are assets of customers held on trust, out of an abundance of caution the joint provisional liquidators have not thus far used FBO cash to meet estate costs to-date.” As a result, and with the $143m held by the US Justice Department, the Bahamian trio have limited funds with which to finance their activities.

Having held $21.5m of cash at November 14, 2022, they subsequently received Supreme Court approval to settle $17.9m of costs and professional fees. This, together with $900,000 in payroll costs and $900,00 in “other commitments”, means the Bahamian liquidators’ cash resources had shrunk to $1.8m at end-April 2023, highlighting the importance of recovering the $143m.

“The joint provisional liquidators remain open to continuing a constructive dialogue with the US Justice Department in relation to funds in the name of FTX Digital Markets subject to criminal forfeiture by the US Justice Department. At the time of this report, however, it appears that the likelihood of an agreed resolution is becoming more remote, and as such the joint provisional liquidators will consider the other remedies available,” they told the Supreme Court.

The US Justice Department swooped in to seize and secure the funds, held at two US banks, from accounts in the name of FTX Digital Markets, the Bahamian subsidiary, over Christmas and just before the 2023 New Year. It was able to do this because the Bahamian provisional liquidators had, at that point, yet to obtain Chapter 15 recognition from the US courts as a “foreign main proceeding”, which meant they had little standing or authority in the US at that time.

The Bahamian liquidator trio are thought to be suspicious that Mr Ray and his team, and their attorneys at the US law firm at Sullivan & Cromwell, tipped off the US Justice Department to the accounts containing $143m. The funds were held at two institutions, Silvergate and Farmington/Moonstone Bank, with the latter’s chairman being Jean Chalopin, who holds the same position with Bahamas-based Deltec Bank & Trust.

“Approximately $143m of fiat funds were seized from bank accounts in the name of FTX Digital Markets held at Farmington State Bank, doing business as Moonstone Bank (Moonstone), and Silvergate Bank,” the Bahamian joint provisional liquidators said. “In relation to Sam Bankman-Fried’s pending criminal case, the US Justice Department obtained a seizure warrant for... the accounts under the criminal and civil forfeiture statutes.”

With no civil proceedings underway involving the FTX Digital Markets bank accounts, the trio added that the US Justice Department was only moving forward on the criminal side in a bid to “forfeit Mr Bankman-Fried’s personal interest in the accounts”. However, the Bahamian provisional liquidators are arguing that the embattled FTX founder has no interest in the accounts or $143m, and that these assets instead belong to FTX Digital Markets’ customers and creditors.

“The joint provisional liquidators have met with the US Justice Department twice and in-person, and have had several teleconferences with the US Justice Department to discuss the issue,” their Supreme Court report added. “The joint provisional liquidators are advised that they have grounds to challenge the Government’s seizures of the accounts.

“For several months the joint provisional liquidators have engaged patiently and constructively with the US Justice Department to discuss a protocol for the release of the seized funds. In accordance with their statutory powers, the joint provisional liquidators continue to take advice from legal counsel in respect of the options available to them to recover FTX Digital Markets’ funds, including filing a potential motion for a hearing to challenge the seizure and release the funds on the basis that they belong in the estate of FTX Digital Markets for the benefit of creditors of FTX Digital Markets rather than in the hands of the Department of Justice.”

The Bahamian provisional liquidators then asserted that, under the terms of the January 6, 2023, co-operation deal with Mr Ray and his team they have the right to secure and recover all assets in the name of FTX Digital Markets, the crypto exchange’s Bahamian subsidiary.

However, the trio blasted: “The joint provisional liquidators have reason to believe that the Chapter 11 debtors have, and continue to, actively interfere with the joint provisional liquidators’ negotiations with the US Justice Department regarding the Moonstone and Silvergate accounts in violation of the co-operation agreement and the automatic stay pursuant to the recognition under Chapter 15.

“Despite the Chapter 11 debtors’ commitments in the co-operation agreement, the joint provisional liquidators have evidence that the Chapter 11 debtors have actively sought to frustrate the joint provisional liquidators’ efforts to receiver the seized funds and have reason to believe they were instrumental in the funds being seized in the first place.

“The joint provisional liquidators believe that the Chapter 11 debtors’ improper conduct gives rise to significant post-petition claims against them for violation of the Bankruptcy Code and the co-operation agreement, and potential violations of the moratorium established in the provisional liquidation proceeding of FTX Digital Markets. The joint provisional liquidators are taking legal advice and will pursue recoveries as appropriate.”

The Bahamian liquidators also reiterated their desire to reach a “consensual conclusion” with the US Justice Department in the hope that a full head-on collision can be avoided.