The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX’s Bahamian liquidators are opposing the US Justice Department’s bid for an investigator to probe the crypto exchange’s collapse on the grounds it is overkill and will cost creditors “tens of millions of dollars”.

Brian Simms KC, the Lennox Paton senior partner, and PricewaterhouseCoopers (PwC) accountants, Kevin Cambridge and Peter Greaves, in a little-noticed court filing last week voiced concern that the appointment of a so-called “examiner” could unnecessarily deplete recoveries for creditors and former clients of FTX Digital Markets, the Bahamian subsidiary.

Given that multiple US government entities, criminal prosecutors and FTX’s US chief, John Ray, as well as themselves are investigating FTX’s collapse, the Bahamian trio argued that sufficient probes were already underway such that another one is not warranted. They cited the Lehman Brothers and Caesar’s Entertainment cases, where the appointment of such an examiner cost creditors $59m and $34m, respectively, as examples of what they wish to avoid.

Meanwhile, Tribune Business understands that the Bahamian liquidators may be poised for another potential clash with the US Justice Department - this time over the $143m seized by the latter from bank accounts in FTX Digital Markets’ name. The trio are thought to be asserting that these assets belong to the Bahamian subsidiary and its creditors/clients, and thus should be under their custody and control given the mandate handed to them by the Supreme Court.

However, the US Justice Department, in legal filings seen by this newspaper is arguing that it was entitled to seize the monies because they - and FTX Digital Markets - were not covered by any freeze or stay as they were outside the Chapter 11 bankruptcy protection proceedings.

“The United States has seized..... approximately $56m in US currency and 87 million euros from accounts at Moonstone Bank and Silvergate pursuant to judicially authorised seizure warrants issued in the southern district of New York,” the Justice Department said.

“The debtor [FTX Digital Markets] has asserted an interest in some or all of the seized assets. The automatic stay does not apply to the US actions, however, because the seized assets are not property of any bankruptcy estate as this is a Chapter 15 case. Even if there is an automatic stay in place, the seizures were permissible because they would be governed by the criminal and/or police or regulatory power exceptions to the automatic stay.”

The Bahamian liquidators are still in the process of applying for Chapter 15 recognition from the Delaware Bankruptcy Court - a move made easier by their co-operation agreement with Mr Ray. It is understood they will first seek to negotiate with the US Justice Department to regain control of the $143m before taking any other steps that could involve legal action in the US court system.

Tribune Business previously reported that FTX Digital Markets had more than $93m on deposit with Silvergate Bank, an institution well-known for providing services to the crypto and digital assets industries, with the remaining near-$50m balance held at the 26th smallest bank in the US, Moonstone Bank.

The latter is headed by Jean Chalopin, also chairman of Lyford Cay-based Deltec Bank & Trust. The Bahamian bank has repeatedly denied any ties to Moonstone, asserting that the only connection is the common shareholdings of Mr Chalopin.

Meanwhile, the Bahamian liquidators argued that even if the Delaware bankruptcy court approves the Justice Department-appointed trustee’s bid for an FTX examiner, their remit should be narrowed to restrict costs and prevent duplication of work with the multiple other ongoing investigations.

“While the joint provisional liquidators share the US trustee’s specific concerns articulated in the motion regarding the Chapter 11 debtors’ pre-petition conversions of customer funds, the US trustee has instead proposed an examiner with nearly unlimited investigatory powers that could cost the Chapter 11 debtors’ estates tens of millions of dollars for little or no benefit to the estates and their parties-in-interest,” the Bahamian trio asserted.

“Even were the motion more narrowly tailored to specific issues concerning admitted conversions of customer funds by the Chapter 11 debtors’ management, it is unclear whether the appointment of an examiner is even needed at this time. Numerous governmental entities and criminal prosecutors, Mr Ray and his team, and the official committee of unsecured creditors are all already investigating the very same conduct and will all, in one way or another, make their conclusions known.”

The Bahamian liquidators, seeking to protect FTX Digital Markets and its estate from unnecessary expense, added that if an examiner was appointed their probe should be limited to several months with a set budget, and the focus be restricted to identifying persons who knew of the crypto exchange’s misuse of customer funds.

They asserted it was “implausible” that only Sam Bankman-Fried, FTX’s principal, and his close circle of Caroline Ellison, Gary Wang and Nishad Singh, knew what was happening.

With the US Justice Department, Securities & Exchange Commission (SEC) and Commodities Futures Trading Commission (CFTC) all having brought separate lawsuits and charges against Mr Bankman-Fried, the trio added: “Mr Ray and his team, the [creditors] committee, the DOJ, the SEC and the CFTC should be given the opportunity to conduct their investigations and report to the court, as they have been doing without the presence of an examiner..

“Second, any benefit that the appointment of an examiner might yield will be far outweighed by the incurrence of disproportionately high costs and expenses that could be imposed on the Chapter 11 debtors’ estates. Indeed, the very cases the US trustee seeks to draw a parallel to (for example, Lehman Brothers) illustrate why adding another team of professionals to be paid by the estate – particularly at such an early point in the Chapter 11 cases – could be imprudent.

“For example, the total examiner costs in the Lehman Brothers and Caesar’s Entertainment bankruptcies exceeded $59m and $34m, respectively. Given that the Chapter 11 debtors’ liquidity profile here remains uncertain by their own admission, it seems inappropriate to impose increased costs on the estates by appointing an examiner with unlimited scope and duration.”

The Bahamian liquidators, warning that the examiner’s appointment could “stall” progress in the Chapter 11 cases, added: “The joint provisional liquidators submit that the most prudent approach would be to allow the Chapter 11 debtors’ new management, the committee, the DOJ, the SEC, the CFTC and all other parties in interest to coordinate and conduct their own investigations of the Chapter 11 debtors’ prepetition conduct before any examination is commenced.”