The Tribune

• Some $7.7bn, or 84%, funds ‘misappropriated’

• Exchange’s US chief says claim ‘fiction’ based

• Also seeking $1.17bn from ‘indemnification’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX’s Bahamian liquidators are seeking to recover a total $9.15bn from the crypto exchange’s US entities with some 84 percent of this sum involving assets that were “misappropriated” prior to its late 2022 collapse.

The extent of the Bahamian provisional liquidators’ claims were revealed in late-night court filings by John Ray, head of the 134 FTX US entities in Chapter 11 bankruptcy protection in Delaware. Besides seeking to “clawback” more than $7.7bn in transfers made from FTX Digital Markets, the crypto exchange’s local subsidiary, the trio are also asserting a further $1.4bn is due to the Bahamian liquidation estate.

Brian Simms KC, the Lennox Paton senior partner, and PricewaterhouseCoopers (PwC) accounting duo Kevin Cambridge and Peter Greaves, are also demanding $1.117bn in “indemnification” based on the articles of incorporation for FTX Trading, the Chapter 11 parent, which purportedly require it to compensate “agents” such as the Bahamian subsidiary for any loss and damages.

Recovery of the $256m-plus that financed FTX’s high-end residential real estate and office purchases is also included in the $9.15bn total, along with $47.628m worth of “inter-company” claims against other FTX entities and $16.226m to cover “corporate expenses”. Most of FTX Digital Markets’ “inter-company” claim, some $45.948m, is against Alameda Research, the private trading vehicle of embattled FTX founder Sam Bankman-Fried, which played a central role in the collapse.

Mr Ray, in responding to the Bahamian provisional liquidators’ recovery bid, asserted that the claims are “far-fetched” and based on a “fiction” because the international exchange platform, together with its millions of customers and billions in assets, was never transferred to FTX Digital Markets, and this nation’s jurisdiction, before the crypto exchange imploded in early November 2022.

The Bahamian provisional liquidation trio holds the exact opposite position, and this is at the centre of their jurisdictional battle for control of FTX’s fate - which customers and assets belong to which estate, FTX Digital Markets and The Bahamas, or Mr Ray’s Chapter 11 entities. Once that is worked out, both will then have to determine which assets belonged to the crypto exchange, and which are client assets, so that the process of returning funds to the latter can begin.

Mr Ray, in legal papers filed with the Delaware Bankruptcy Court just before midnight on Wednesday morning, confirmed: “The joint provisional liquidators have also filed 101 proofs of claim - one in each of the debtors’ jointly administered cases - asserting more than $9bn in total claims.

“The joint provisional liquidators’ claims include a claim for almost $8bn for the alleged ‘misappropriation of FTX Digital Markets funds’ as well as an unliquidated claim for ‘international customer deposits’ on the FTX international platform. The joint provisional liquidators base these claims on the same assertions they are making in this proceeding - that ‘all the international customers using the FTX international platform migrated or were otherwise legally novated to FTX Digital Markets’.

“The joint provisional liquidators allege that FTX Digital Markets held digital assets and fiat currency in accounts opened by FTX Digital Markets, and that these assets were then transferred to various debtors. The joint provisional liquidators also assert that, because the new terms of service effected a transfer of FTX Trading’s business to FTX Digital Markets, FTX Digital Markets has a ‘claim for the total deposits held on the FTX international platform in an unliquidated amount of no less than $7.871bn.”

Mr Ray and his team continue to vehemently reject the Bahamian provisional liquidators’ position (see other articles on Page 1B). However, the Bahamian liquidator trio, in outlining the basis for their claim, alleged that FTX Digital Markets directors - Mr Bankman-Fried and Ryan Salame - “never considered” whether the $7.7bn allegedly transferred from the Bahamian subsidiary was in the best interests of the company, its clients or potential creditors.

Describing the purported “misappropriation”, Mr Simms and the PwC duo alleged: “Between November 2021 and November 2022, certain of the funds in the FTX Digital Markets accounts were transferred to various US debtors [FTX US entities] without notation on FTX Digital Markets’ trial balance or other internal accounts.

“The documents in the joint provisional liquidators’ possession indicate that FTX Digital Markets directors gave no consideration as to whether such transfers were in the interests of FTX Digital Markets, its creditors or, to the extent it was a trustee, to its trust beneficiaries. There is also no evidence that FTX Digital Markets received any consideration in return for the transfers.

“Indeed, the records available to the joint provisional liquidators, including bank statements, reveal no less than approximately $7.7bn of such unauthorised deposit transfers, with approximately $2.1bn to Alameda Research LLC, Alameda Research Ltd and North Dimensions Inc, collectively, and $5.6bn sent to FTX Trading. The US debtors do not dispute the occurrence of the transfers.”

The provisional liquidators asserted that there are numerous means by which the $7.7bn transfers could be declared void or “subject to clawback” under Bahamian law. As a start, they argued that because FTX Digital Markets’ directors failed to consider whether these actions were in the Bahamian subsidiary’s best interests, they could be found “in breach of their fiduciary duties” and therefore the US entities under Mr Ray’s control are acting as a ‘constructive trustee’ of the assets.

This, Mr Simms and his colleagues argued, would then give FTX Digital Markets a secured claim against the Chapter 11 entities. They also argued that the transfers could be void as a “preferential” payment, given that they may have occurred when FTX Digital Markets was insolvent or during the six months immediately prior to the liquidation. If they happened during the latter period, they would be subject to recovery and clawback.

“Upon information and belief, the transfers were made without the receipt of reasonably equivalent value, and were made with the intent to harm the creditors of FTX Digital Markets, including customers of the FTX international platform,” the Bahamian trio added, citing several other breaches of this nation’s laws that would make the $7.7bn recoverable.

Most of the $91.5bn total claim’s balance, some $1.117bn, was made on the basis that - even if a court concludes no international customers were migrated to FTX Digital Markets - the Bahamian subsidiary was acting as an “agent” for FTX Trading, and therefore covered by the indemnification or compensation pledge contained in the latter’s articles of incorporation.

“The claimant asserts, in the alternative, an indemnification claim against FTX Trading for any amounts that might arise in the provisional liquidation - by customers or creditors - the overhead costs of running the FTX international platform, potential customer claims asserted against FTX Digital Markets, and FTX Digital Markets’ counsel fees,” the Bahamian provisional liquidators asserted.

“Such claim is in an amount of no less than $1.117bn against FTX Trading for all expenses and liabilities related to FTX Digital Markets’ services as agent to FTX Trading, including (but not limited to) all expenses and liabilities related to FTX Digital Markets performance as service provider for the FTX international platform.”

Elsewhere, the Bahamian provisional liquidators also claimed $256m-plus to recover the funds that FTX Digital Markets allegedly advanced to FTX Property Holdings, an entity still in Chapter 11 bankruptcy protection under Mr Ray, to finance the acquisition of high-end real estate at developments such as Albany, Goldwynn, One Cable Beach and elsewhere.

“Amounts paid for each of the Bahamian properties, including the purchase price, the fees and maintenance costs for each of the Bahamian properties, were paid by FTX Digital Markets but title was transferred to or remained in the name of FTX Property Holdings,” the Bahamian provisional liquidators alleged.

“The payments made by FTX Digital Markets for FTX Property Holdings’ properties were either directly paid to the seller or accounted for as debts owed by FTX Property Holdings to FTX Digital Markets on FTX Digital Markets’ books and records. As of October 5, 2022, the total amount recorded as owed by FTX Property Holdings to FTX Digital Markets was $256.291m.”