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FTX’s Bahamas liquidators slam ‘inflammatory’ claims



Tribune Business Editor

FTX’s Bahamian liquidators yesterday slammed their US counterparts for “bizarre” and “inflammatory” claims while they themselves were accused of seeking to “torpedo” the Chapter 11 proceedings for the failed crypto exchange.

Brian Simms KC, the Lennox Paton senior partner and attorney, and the PricewaterhouseCoopers (PwC) accounting duo of Kevin Cambridge and Peter Greaves, hit back at John Ray and his team as they applied to the Delaware Bankruptcy Court for confirmation they will not violate the worldwide freeze imposed by the Chapter 11 bankruptcy proceedings in seeking to move the Bahamian winding-up forward.

Detailing their efforts to resolve the issue without having to engage in another legal battle with Mr Ray, who oversees the 134 FTX entities currently in Chapter 11, the FTX Digital Markets liquidators described how negotiations with their US counterparts “soon turned unproductive”.

This occurred when both sides, and their respective attorneys, held a March 15, 2023, virtual call over the Bahamian trio’s plan to seek confirmation from Judge John Dorsey that their efforts to resolve key questions critical to advancing FTX Digital Markets’ liquidation would not breach the Chapter 11 freeze. And, if they did, they planned to seek relief from this stay.

“The call began constructively, and the joint provisional liquidators explained what it was that they were seeking to do and why it was important to proceed with filing the application – to fulfill their duty to make a recommendation to the Bahamas [Supreme] Court on whether liquidation or reorganisation of FTX Digital Markets will serve the best outcome for FTX Digital Markets’ estate, its customers and its creditors,” the Bahamian trio said in legal papers filed yesterday.

“The joint provisional liquidators explained that they could not progress towards this goal without an understanding of who FTX Digital Markets’ customers and creditors are, and the scope of FTX Digital Markets’ rights to its and its customers’ assets.

“Despite the joint provisional liquidators’ efforts to keep the discussion productive, it soon turned unproductive. The US debtors noted that FTX Digital Markets was the only FTX entity that was not falling in line with their agenda, that the mere filing of the application would send a ‘torpedo’ into the Chapter 11 cases, and that the US debtors would never consent to any jurisdiction other than the US to resolve any non-US law customer issues.”

The Bahamian liquidators argued in vain that “the best path forward would be to work together and come up with a consensual protocol to resolve all issues as to whose customers were whose”, but Mr Ray and his team insisted that all Bahamian and non-US legal issue should either not be resolved or, alternatively, dealt with by the Delaware court as their temporary two-and-a-half month truce broke down through another battle over who has control.

Exactly who FTX Digital Markets’ clients are is among the key questions that the chief justice, Sir Ian Winder, will be asked to determine. This will involve analysing multiple “terms of service”, which governed the relationship between FTX’s international platform and its customers, and determining which one applies and on what date.

This is critical to working out when, and if, clients were migrated to FTX Digital Markets and became its customers prior to the crypto exchange’s early November 2022 collapse, or if they are clients of FTX Trading and any of the other entities in Chapter 11 protection in the US.

Another vital issue that Sir Ian will be asked to decide is whether FTX Digital Markets was holding assets, either digital, fiat or both, on trust for investors/clients in a fiduciary or escrow capacity. If it was, then assets treated in such a manner will belong to the client, but if they were not then such properties belong to the liquidation estate.

Meanwhile, four days after their “unproductive” meeting, Mr Ray and his team initiated legal proceedings against their Bahamian counterparts and FTX Digital Markets in Delaware after giving “one hour’s notice to one of the joint provisional liquidators’ attorneys”. The Bahamian trio argued that it seeks to resolve the issues they had “been identifying for months” and sought to reach a consensus on for months.

And they also slammed Mr Ray and his team for asserting that FTX and its indicted co-founder, Sam Bankman-Fried, enjoyed a cosy relationship with the Prime Minister, Ryan Pinder KC, the attorney general, and the Securities Commission. The US Chapter 11 team, in their latest lawsuit, also alleged that Mr Bankman-Fried and FTX relocated to The Bahamas as a way to continue their fraud away from the prying eyes of US regulation.

“Most inflammatory, the complaint alleges, in contradiction of the US debtors’ prior statements to this court, that Sam Bankman-Fried moved the FTX enterprise to The Bahamas for the sole purpose of funneling customer deposits and valuable property to The Bahamas ‘out of the reach of American regulators and courts,” the Bahamian trio asserted.

“Bizarrely, the US debtors also allege, for the first time, that FTX Digital’s ‘formation and existence’ was in furtherance of FTX’s criminal conspiracy despite the fact that Bankman-Fried was the same individual who hired the US debtors’ counsel (Sullivan & Cromwell) and turned his enterprise over to Mr Ray.

“Finally, despite the fact that the Securities Commission of The Bahamas was the first regulator to take action against any FTX entity, the US debtors allege that Mr Bankman-Fried and those he directed ‘maintained a close accommodating relationship with Bahamian law enforcement agencies’, that FTX Digital Markets was only ‘ostensibly regulated by The Bahamas’, and that when operating in The Bahamas, Mr Bankman-Fried and his cohorts were ‘outside of the reach of any independent and effective regulatory authority’.”

Mr Greaves, in an affidavit accompanying the Bahamian liquidators’ legal filings, revealed that some $13.4bn moved through FTX Digital Markets’ accounts in the almost ten months prior to the crypto exchange’s implosion in early November 2022.

“Between November 2021 and June 2022, FTX Digital Markets opened certain bank accounts in FTX Digital Markets name, which were used to receive and send fiat currency from and to international customers,” Mr Greaves revealed. “Starting in January 2022, it was clear that international customers were using the FTX Digital Markets accounts to on-ramp (deposit) and off-ramp (withdraw) fiat to and from their accounts on the international platform.

“Based on our investigations to date, during the period January 20, 2022, through November 12, 2022, the FTX Digital Markets accounts maintained in FTX Digital Markets name had receipts of $13.4bn and outflows of the same amount. From January 20, 2022 through October 31, 2022, the institutional international customer account in FTX Digital Markets name had receipts of $9.2bn and withdrawals of $8.9bn.

“Since the FTX Group conspicuously relocated its headquarters to The Bahamas in 2021, The Bahamas remained the nerve centre of FTX’s business operations. It is understood that FTX Trading operated out of The Bahamas before portions of the international customers were migrated to FTX Digital Markets.”