The Tribune

• Retired US judge to referee first talks next month

• US chief cuts Bahamas out of FTX sales process

• Chapter 11 cases cost $330m in just eight months

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX’s Bahamian liquidators will aim to resolve multiple disputes with their US counterparts when mediation begins next month following the appointment of a retired US judge to act as referee.

The selection of Judge Judith Fitzgerald, who is said to possess more than 25 years’ experience as a bankruptcy judge in Pennsylvania’s western federal district, was disclosed in court filings by FTX US chief, John Ray, and two different committees of unsecured creditors representing customers owed multi-billion dollar sums in the aftermath of the crypto exchange’s collapse.

The revelation came as the “official committee” of unsecured FTX creditors requested that Judge Fitzgerald’s expertise also be employed in mediating differences between themselves and Mr Ray’s team over the latter’s initial Chapter 11 reorganisation plan for restructuring the failed crypto exchange and taking it out of bankruptcy protection in the Delaware courts.

“For their part, the debtors [Mr Ray] agreed that mediation would be helpful, was something they had contemplated and raised conceptually with the Committee in prior discussions, and yesterday proposed using Judith Fitzgerald, who was appointed to mediate the issues between the debtors, the Committee and the joint provisional liquidators of FTX Digital Markets, to also mediate plan issues,” the “official committee” asserted in papers filed on August 18.

FTX Digital Markets is the Bahamian subsidiary currently under Supreme Court supervision, with Brian Simms KC, the senior Lennox Paton partner, and PricewaterhouseCoopers (PwC) accounting duo, Kevin Cambridge and Peter Greaves, acting as joint provisional liquidators. Mr Ray and his team, in their own filings with the Delaware Bankruptcy Court yesterday, confirmed that mediation of the disputes with their Bahamian counterparts will begin next month.

“The ‘phase one’ mediation with FTX Digital Markets’ joint provisional liquidators is likely to occur in September,” they affirmed. Judge Fitzgerald’s appointment comes in response to Judge John Dorsey’s order, delivered on June 9, 2023, that a mediator be appointed to act as arbiter in the jurisdictional battle for control of FTX’s liquidation and restructuring between The Bahamas (joint provisional liquidators) and Delaware (Mr Ray).

He ordered that both sides “retain a good mediator” with experience of digital assets and crypto currency to try and resolve their disputes and come up with co-operation protocols and agreements that the case is “begging for”. While Judge Fitzgerald’s appointment could help bring the parties together, given the depth and breadth of their disputes and differences this will likely be a major ask.

For Mr Ray, in late March, moved to deny the Bahamian provisional liquidators access to any assets caught in the crypto exchange’s multi-billion dollar collapse via a lawsuit filed in the Delaware Bankruptcy Court.

He made clear his intent to seize control of liquidation proceedings by describing FTX Digital Markets, the Bahamian subsidiary, as an “economic and legal nullity” that served merely as an “offshore front” to enable Sam Bankman-Fried and his closest associates to channel proceeds from their purported fraud away from US regulatory oversight.

Asserting that FTX Digital Markets “never earned a dollar of third party revenue”, the head of the 134 FTX-related companies presently in Chapter 11 bankruptcy protection, is seeking declaratory judgments in the US that the Bahamian subsidiary and its liquidators have “no ownership” interest in or rights to the crypto/digital assets, fiat currency and intellectual property claimed by those entities in his control.

And, in a further attempt to cut the Bahamian liquidation proceedings off from any assets, Mr Ray also wants the Delaware Bankruptcy Court to find that all asset transfers to FTX Digital Markets “are voidable actual or constructive frauds” and that his team be permitted to recover them.

However, the Bahamian provisional liquidation trio subsequently countered through their own legal counterclaim seeking multiple grounds of relief from the Delaware Bankruptcy Court.

Besides seeking an order that he has breached their co-operation agreement, the Bahamian liquidators also want that court to affirm that Mr Ray and his team have breached the Chapter 15 recognition and asset freeze previously granted to FTX Digital Markets and themselves so that their asset recovery efforts in the US had legal standing. They are also demanding an unspecified sum in damages.

The Bahamian liquidators are accusing Mr Ray and his team of “interfering” over the US Justice Department seizure of some $151m of FTX Digital Markets assets that were held in US-based bank accounts. This, they assert, has left them “deprived of crucial assets needed to properly administer the FTX Digital Markets estate in an amount no less than $151m.”

Warning that their inability to access these funds has left them unable to secure, and preserve, “hundreds of millions of dollars” of assets in FTX Digital Markets’ name, Mr Simms and his colleagues are alleging that critical sources of recovery for investors and creditors continue to rapidly lose value.

And yet another breach of the January 6, 2023, “settlement and co-operation” agreement that the two sides worked out over the Christmas holidays appears to have been committed by Mr Ray and his team. That deal committed him and the Bahamian provisional liquidators to “work together in good faith during the next six months in co-ordination with appropriate stakeholders in their respective proceedings to develop alternatives for the potential sale, reorganisation or other monetisation of the international FTX.com platform”.

However, the “official committee” of unsecured FTX creditors revealed in last Friday’s legal filings that Mr Ray’s team have already “launched a process” to seek bids for both the crypto exchange’s international and US platforms without seemingly any involvement from the Bahamian provisional liquidators and in apparent breach of the January 6, 2023, agreement.

“Following urging by the Committee, on May 18, 2023, the debtors launched a process to solicit proposals for the potential sale, restart or reorganisation of the debtors’ exchanges,” the official committee disclosed. “The responses thus far have been encouraging, and on June 27, 2023, the debtors began receiving letters of interest from third parties.

“Regrettably, however, the committee’s members have yet to be granted access by the debtors to the bids (beyond a two-page non-substantive summary of these bids) or even the names of the bidders.” The respective FTX exchanges, especially their technology platforms and intellectual property rights bound up with these, are thought to be among the best sources of recovery for the crypto exchange’s stricken clients and creditors.

Mr Ray and his team are also forging ahead despite Judge Dorsey’s previous warning that there are serious legal issues to be determined before assets can be distributed and returned to FTX creditors. These include who are customers of FTX Trading and the other entities under Mr Ray’s control, and who are the customers of FTX Digital Markets in The Bahamas.

Other questions, he noted, are whether assets are held by the Chapter 11 entities or FTX Digital Markets, the latter of which was supposed to take over as operator of FTX’s international platform, and if these assets ‘“are held on trust for the benefit of creditors” or if they belong to the respective companies and liquidation estates.

Meanwhile, the “official committee” of unsecured FTX creditors has also voiced concern over the amount of money being claimed in fees by Mr Ray and his multiple legal and financial advisers as this is threatening to reduce the potential recovery and payout for victims.

“The Chapter 11 Cases are, however, on track to be among the most expensive in history, with more than $330m spent on professional fees through the first eight months of these cases. With a monthly professional fee burn rate of over $50m, these cases cannot afford a unilateral plan approach,” the “official committee” asserted in a July 31 document. And, in a subsequent August 18 filing, it said Mr Ray and his team are incurring costs of $45m per month or $1.5m per day.

FTX creditors and former clients also face the prospects of further costs, and time expended, if Mr Ray and the Bahamian provisional liquidators are unable to resolve their differences. This also threatens to deplete recoveries.