The Tribune

• Claims can't 'protect our rights' here

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX's US chief yesterday blasted The Bahamas' "closed legal system" and argued his team will "find it difficult to protect our rights" due to challenges in gaining approval for their chosen UK KC to act before this nation's courts.

John Ray, who oversees 134 FTX entities currently in Chapter 11 protection in Delaware, asserted that "meaningful participation" in Bahamas-based litigation involving the collapsed crypto currency exchange "may not even be possible" as the Bahamas Bar Council was presently "not minded" to permit David William Allison KC to act as lead counsel in representing his team's interests.

The move to sully the Bahamian legal system came as the battle for jurisdictional control of FTX's liquidation, which has been raging ever since its early November collapse apart from a temporary two-month truce, heats up yet again as Mr Ray and his team move to prevent the local joint provisional liquidators gaining any relief from the worldwide Chapter 11 freeze imposed on the crypto exchange's assets.

Brian Simms KC, the Lennox Paton senior partner and attorney, and the PricewaterhouseCoopers (PwC) accounting duo of Kevin Cambridge and Peter Greaves, who have responsibility for winding-up FTX Digital Markets, the Bahamian subsidiary, are seeking the Delaware Bankruptcy Court's confirmation that they will not violate the Chapter 11 stay if they seek to progress their own liquidation proceedings.

However, Mr Ray and his team further highlighted the territorial contest by alleging that the provisional liquidators and Bahamian court proceedings are only causing "confusion" for millions of FTX creditors and investors at a "critical juncture" in proceedings.

Their message is that The Bahamas should stand back, and let the Delaware Bankruptcy Court proceedings take the lead, especially since some $7.3bn in recovered assets are already in their possession compared to just $30m held by FTX Digital Markets' provisional liquidators.

Seeking to strengthen their case for determining all key legal issues in the Chapter 11 process, and avoiding the Bahamian judicial process almost entirely, Mr Ray and his team alleged in documents filed with the Delaware Bankruptcy Court: "Only if this court determines there is property held by the debtors that belongs to FTX Digital Markets, and the transaction providing that property is not voidable, would the Bahamas court need to become involved with respect to these issues.

"As a practical matter, meaningful participation in The Bahamas to determine ownership issues may not even be possible for the debtors, never mind their millions of stakeholders. The Bahamas has a closed legal system that makes it difficult to secure appropriate representation.

"On March 23, 2023, the debtors filed an application to have a King’s Counsel (KC) specially admitted for the purpose of being available to the debtors for any proceedings in The Bahamas. After more than a month's delay, on April 27, 2023, the debtors received a letter from the Bahamas Bar Association indicating it is 'not minded' to approve the application and requiring further proceedings."

However, that letter, which was included in yesterday's legal filings, does not represent an outright rejection of their KC application. Tara Knowles, the Bar Association's honorary secretary, merely informed Jason Maynard, an attorney with Mr Ray's Bahamian lawyers, Peter D. Maynard & Company, that the correct process needs to be followed before the application for Mr Allison would be considered.

Referring to her April 21, 2023, conversation with Mr Maynard "about your firm's request for David William Allison to be specially admitted to the Bahamas Bar to act" in FTX-related litigation, Ms Knowles said: "At that juncture, I advised that a usual requirement for 'special calls' is canvassing all other local King's Counsel to ascertain their expertise and availability to be retained for the necessary application.

"To that end, I also advised you that Ianthia Forbes, office administrator at the Bahamas Bar Association, could provide you with the necessary document to fulfill the canvassing requirement as early as Monday, April 24. Additionally, we also discussed that Council is not minded at this juncture to approve your firm's application for a special call for Mr Allison but we invite you to provide dates of availability to appear to make oral representations as to why he should be admitted."

Thus the door has not been completely closed on admitting Mr Allison. Bahamian legal sources, speaking on condition of anonymity, yesterday said it appeared as if Mr Ray and Peter Maynard & Company had failed to comply with what is the routine process of consulting all other KCs on the application process - especially given the large number of Bahamian KCs capable of acting in liquidation and insolvency-related matters such as FTX's.

However, Edgar Mosley, managing director at Alvarez & Marsal, a restructuring advisory services firm working as part of Mr Ray's team, alleged yesterday in an affidavit that the delay in obtaining approval for Mr Allison means they will be unable to safeguard the interests of FTX creditors in Bahamian court proceedings.

"The debtors will also have a difficult time fully and adequately protecting their rights in The Bahamas," he claimed. "On March 23, 2023, the debtors submitted an application for the special admission of David William Allison KC to the Bahamas Bar Council, which I understand to be similar to a pro hac vice motion in the US, and allows a foreign citizen to represent a client in particular proceedings in The Bahamas, which to date has not been granted."

Mr Mosley also alleged that the Bahamian joint provisional liquidators' efforts to secure assets on behalf of FTX Digital Markets creditors are disrupting the work of Mr Ray and his team. "In my opinion, the debtors will be prejudiced by the confusion created from proceedings in the Bahamas court concerning customer entitlements and the debtors’ assets at this critical juncture in the Chapter 11 cases," he claimed.

"The debtors’ reorganisation efforts have already been impacted by the joint provisional liquidators’ actions. For example, the joint provisional liquidators have attempted to cloud title to assets that have been marshalled by the debtors and are available to be distributed to customers and other creditors in a plan of reorganisation."

To back his allegation, Mr Mosley cited the joint provisional liquidators' first interim report to the Supreme Court that detailed $7.7bn in transfers “from FTX Digital Markets” to FTX Trading, Alameda or other entities in the Chapter 11 proceedings.

He also claimed the trio have "interfered with the debtors’ efforts to negotiate settlements with targets of avoidance actions by filing a position statement in response to a stipulation entered into between Alameda and Voyager Digital, asserting FTX Digital Markets may hold the claims and seeking a veto over settlements".

And Mr Mosley also objected to the Bahamian provisional liquidators announcing "publicly a claims 'portal', and claims resolution procedure, that gets ahead of the forthcoming claims bar date and resolution process of the debtors, creating confusion among stakeholders".

However, the trio's position is that they cannot progress the FTX Digital Markets liquidation without an understanding of who its customers and creditors are, and the scope of the Bahamian subsidiary’s rights to its and its customers’ assets.

These are 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.