The Tribune

• Financial starvation fear drove Ray settlement

• Creditor recoveries hit if ‘no end in sight’ to fight

• Local liquidators: ‘Highly unlikely’ get better terms

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX’s Bahamian liquidators are asserting the settlement with their US adversary “represents the best deal” possible given that lengthy legal battles would slash creditor recoveries “possibly to extinction”.

Brian Simms KC, the Lennox Paton senior partner, in a January 12, 2024, affidavit filed with the Supreme Court alleged it is “extremely unlikely that more favourable terms could be achieved” with John Ray given that the Bahamian liquidation is in a “much weaker financial position” than their Chapter 11 counterpart.

While he and his fellow FTX Digital Markets liquidators, the PricewaterhouseCoopers (PwC) accounting duo of Kevin Cambridge and Peter Greaves, have “repeatedly pushed back” against “unacceptable” offers by the FTX US chief, Mr Simms signalled that “limited assets” presently available to the trio would be exhausted by continuing their courtroom fight “with no end in sight”.

With the Bahamian trio controlling just 30 percent of the local subsidiary’s cash assets, due in large measure to the US Justice Department’s seizure of $143.2m from its US accounts in late 2022, the Lennox Paton senior partner conceded that assets available to pay creditors would ultimately be exhausted by the legal sparring and they would have to seek litigation financing that comes with its own risks.

And customer and FTX group assets and liabilities are “so commingled” and “inextricably intertwined that it would be practically impossible”, in addition to creating enormous delays and costs, to try and “unravel” what belongs to which liquidation estate - The Bahamas or Delaware.

Detailing the commercial rationale that drove the FTX Digital Markets liquidators to settle with Mr Ray, who heads the 134 FTX entities currently in Chapter 11 bankruptcy protection in Delaware, Mr Simms nevertheless hailed what he described as a “landmark deal” that will speed up asset recoveries for the near-61,000 creditors who have filed claims against The Bahamas’ estate.

“In the joint official liquidators’ considered view, the global settlement agreement is a landmark deal which will pave the way for the return to customers of the proceeds from assets recovered for the insolvent estates much earlier than otherwise would have been the case,” Mr Simms alleged in his affidavit, filed in support of the liquidators’ bid for Supreme Court approval of their deal with Mr Ray.

“Absent the global settlement agreement, it is unlikely that recoveries after the costs of necessary legal actions would have been sufficient to make any distribution of any significance to customers and creditors of FTX Digital Markets.

“The global settlement agreement addresses many of the complex cross-border legal issues and other issues raised following the collapse of the FTX group. It provides for assets across the estates of FTX Digital Markets and the debtors to be pooled for distribution to FTX.com customers in a way that ensures customers” gain “substantially identical recoveries” whether they claim in The Bahamas or Delaware.

Mr Simms’ affidavit confirms that the Bahamian liquidators, as well as Mr Ray, faced equal forces driving them to settlement. While the FTX Digital Markets trio feared being financially starved into submission, due to the relatively meagre resources in their possession in comparison to Mr Ray, the latter was worried The Bahamas “could be awarded” a material sum on its $9bn-plus Chapter 11 claim.

The FTX US chief also hinted that his plan to bring the crypto exchange out of Chapter 11 bankruptcy protection could be blocked without a deal with the Bahamian liquidators, meaning both sides had sufficient leverage over the other to make a settlement the common sense solution “in the best interests” of all former customers and creditors.

“The most significant factors are the delay, legal and other professional costs, and potential risks to creditors and customers of FTX Digital Markets,” Mr Simms said of the factors that influenced his and the PwC duo’s approach.

While there were “strong arguments in FTX Digital Markets’ favour”, the Lennox Paton senior partner added that this was no guarantee of success in their multiple legal battles with Mr Ray and his Chapter 11 team in the Delaware Bankruptcy Court.

“Due to the complexity and novelty of the issues in dispute, in addition to the various interlocutory applications which will likely be required, there will not be a final determination, inclusive of appeals, relative to the issues in dispute between the parties for many years,” Mr Simms added.

“It is also of note that the vast majority of the costs in the liquidation of FTX Digital Markets to-date have been incurred in relation to disputes with the debtors and their Chapter 11 cases. The joint official liquidators have always had in the forefront of their deliberations the fact that spending very large sums of creditors and customers’ monies on litigation with the debtors which, however strong the arguments, FTX Digital Markets might ultimately lose carries with it considerable risks”.

These “risks”, Mr Simms added, will be eliminated if both the Supreme Court and Delaware Bankruptcy Court approve the two sides’ deal and it is executed as stipulated. He said the Bahamian liquidation’s future costs, fees and expenses will be “significantly reduced” once the legal battles are ended.

“Further, the two estates and their creditors and customers will have the prospect of a distribution much earlier than if the joint official liquidators had to prosecute claims and counter-claims against the debtors,” Mr Simms continued.

“If the global settlement is not sanctioned by this honourable court, FTX Digital Markets and the debtors are very likely to continues in highly acrimonious and protracted litigation until the Bankruptcy Court [in Delaware] determines whether the migration of customers occurred and determines the ownership of the assets.

“As a necessary consequence of continuing to litigate, FTX Digital Markets will incur major expenses on litigation for the foreseeable future which, unless FTX Digital Markets is successful in the litigation, will reduce the available assets for distribution to creditors and customers,” he added.

“As this court is aware, there are limited funds available to FTX Digital Markets and the joint official liquidators in part due to the seizure of the funds frozen by the Department of Justice in the amount of $143.2m.”

This was divided between $50m held at Moonstone Bank, and $93.2m in Silvergate Bank, with the federal authorities grabbing these monies to compensate Sam Bankman-Fried’s victims. Part of the settlement will see Mr Ray and his team assist in securing the release of this $143.2m from the US Justice Department.

“It is, therefore, conceivable that if the litigation with the debtors were to continue the funds available to FTX Digital Markets would be diminished possibly extinction on legal and professional expenses in the US with no end in sight of the litigation with the debtors,” Mr Simms warned.

“The joint official liquidators are live to the point that legal fees are expensive in the US and there is rarely, if ever, recovery of legal costs by the successful party. Further, even if there were funds available to make distributions to customers and creditors at the end of the litigation, any prospect of an early distribution would have long since evaporated.

“In the joint official liquidators’ commercial view, given that there is a mutually-bargained settlement alternative, expending the necessary resources to advance the litigation would lead to a regrettable state of affairs and wholly detrimental to FTX Digital Markets, its creditors and customers.”

Concluding his analysis, Mr Simms asserted: “The terms of the global settlement agreement represent the best deal that the joint official liquidators have been able to achieve after protracted and difficult negotiations with the debtors.

“Given the limited assets presently under the joint official liquidators’ control, any future litigation would likely require the assistance of litigation funding, which raises concerns as to costs and the legality of any funding arrangement in The Bahamas.

“The joint official liquidators have negotiated strongly with the debtors for months and repeatedly pushed back in relation to various proposals that were unacceptable. At this stage, the joint official liquidators do not consider that we can achieve any further improvement in the terms that we have managed to negotiate in circumstances where the financial position of FTX Digital Markets is much weaker than the debtors.

“It is, therefore, extremely unlikely that more favourable terms could be achieved beyond those as set out in the global settlement agreement.” Both sides, as part of their deal, have agreed to use best efforts to employ similar asset valuations and settlement offers when assessing/granting creditor claims in their respective liquidation proceedings.

And the Bahamian trio will “take the operational lead in managing the value-maximising disposition of real estate and other assets in The Bahamas”. Mr Ray and his team will lead all asset recovery elsewhere, including the possible sale of FTX’s exchange platform, technology and related intellectual property rights.

The Bahamas will also spearhead “pursuing specific litigation and avoidance actions identified in the global settlement agreement as part of the ongoing efforts to maximise recoveries for customers and creditors”, which seems to imply Mr Simms and the PwC duo will be in charge of efforts to recover the $100m obtained by 1,500 “Bahamian” customers in violation of the asset freeze when FTX imploded.