The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX’s Bahamian operation was yesterday branded “a big piece of the puzzle that needs to get resolved” as its provisional liquidators successfully obtained US legal recognition for their ongoing investigations.

Attorneys representing Brian Simms KC, the Lennox Paton senior partner, and PricewaterhouseCoopers (PwC) accounting duo, Kevin Cambridge and Peter Greaves, sought to dispel previous suggestions that FTX Digital Markets was a relatively insignificant and “under sized” part of the collapsed crypto exchange’s empire when they appeared before the Delaware Bankruptcy Court.

Bankruptcy judge, John Dorsey, signed the order granting the Bahamian trio Chapter 15 status, which will enable them to conduct investigations and pursue assets belonging to the local subsidiary with the full backing of the US legal system. He did so after their US legal representative, Chris Shore of the White & Case law firm, provided an update on the Bahamian provisional liquidators’ work to-date.

In doing so, Mr Shore also revealed that the Bahamian Supreme Court has ratified the co-operation agreement thrashed out between the provisional liquidators and John Ray, the Chapter 11-appointed head of 134 FTX-related entities that are currently under the Delaware court’s supervision.

Besides giving the Bahamian trio the go-ahead to consummate the co-operation deal, it also emerged that the Supreme Court on Tuesday recognised one of Mr Ray’s team as the representative of those Chapter 11 entities so that he can act on their behalf in any legal proceedings in this nation. And Tribune Business understands that the Supreme Court has also agreed to extend FTX Digital Markets’ provisional liquidation for a further six months as requested.

Rounding off what was a good outcome for the Bahamian provisional liquidators, Judge Dorsey also backed their arguments and those of Mr Ray in rejecting the US Justice Department’s bid to appoint an independent examiner to probe FTX’s collapse. He agreed that it would result in a duplication of effort and unnecessary costs to the liquidation estates, which were likely to reduce investor/creditor recoveries by more than $100m.

Mr Shore, signalling to the Delaware court that the Bahamian provisional liquidators have been far from idle since their November 10, 2022, appointment, described FTX Digital Markets as “a subsidiary of the international platform, the international silo” for the crypto currency exchange.

Seeking to rebut earlier assertions by Mr Ray and his team that the Bahamian operation was “under-sized” in terms of the role it played within the overall FTX group, he said: “From our perspective, it’s a big piece of the puzzle that needs to get resolved.” Mr Shore justified his description by pointing to the funds that flowed out of FTX Digital Markets’ custody accounts to FTX Trading and Alameda Research, worth $5.6bn and $2.1bn, respectively.

“To get a proper sense of the size here, you’re talking about $7.7bn of cash outflows from The Bahamas estate to US creditors,” he added. And, while he did not refer specifically to the $100m said to have been paid out to 1,500 “Bahamian” clients in breach of asset freezes imposed on FTX in the immediate aftermath of its collapse, Mr Shore said such transactions - potentially representing fraudulent preferences that should be repaid - were receiving significant attention.

“There’s a ton of work being done on the antecedent transactions; not to related parties, but third parties, to determine if persons associated with those transactions need to bring money back into the estate,” Mr Shore continued.

Essentially going over the Bahamian provisional liquidators’ first report to the Supreme Court, he added that FTX Digital Markets’ 83-strong workforce included some 38 expatriates who had relocated to this nation from the crypto exchange’s other operations in Hong Kong and the US.

Pointing to the significance of $255m in Bahamian real estate purchases, which potentially represents one of the best investor/creditor recovery sources, Mr Shore said the 52 properties identified to-date included office suites, residential accommodation for staff and the six-acre site identified for FTX’s headquarters at Bayside Executive Park just off West Bay Street.

“All those properties, we think, are valued north of $250m. They were all financed by FTX Digital Markets and are on FTX Digital Markets’ balance sheet as an inter-company receivable,” he continued. “It was agreed that the joint provisional liquidators will take the lead in liquidating the real estate in The Bahamas. We’re going to sell and market the assets, and have discussions about where those assets go at a later date.”

That means deciding whether the proceeds from liquidating FTX’s Bahamian property portfolio should go to FTX Digital Markets’ estate, and be used to compensate its investors/creditors, or to Mr Ray, the Chapter 11 companies and their separate set of investors/creditors. This is potentially one of many battles that could yet be fought between the Bahamian provisional liquidators and Mr Ray’s team despite their co-operation agreement.

FTX had moved to transfer customers of its international platform to FTX Digital Markets prior to its November 2022 implosion. “One of the questions that is going to come up in this case is what was the status of that movement between the time FTX Digital Markets was constituted, and FTX Digital Markets and FTX Trading filed these proceedings,” Mr Shore said.

He added that the “customer migration issue” was one of several that would have to be resolved “over the next six months”. Other matters include determining whether, and which, assets were being held in trust for clients or belong to FTX itself.

“There are unresolved legal and factual issues over whether customer assets are held in trust or as deposits,” Mr Shore said, identifying the potential restructuring of FTX’s international exchange platform and closing of open trade contracts as further outstanding problems.

Encouraging the Delaware Bankruptcy Court to view the Bahamian provisional liquidation proceedings as similar to a Chapter 11 case, he added that “beginning right from their appointment” the trio had sought to identify and gain control of almost $220m in cash identified as belonging to FTX Digital Markets and its clients. The majority of this sum, some $143m or close to two-thirds, was held at two US-based institutions, Silvergate and Moonstone.

Although the Bahamian provisional liquidators sought to secure that $143m, they did not yet have the full legal weight of Chapter 15 recognition and those assets were instead seized by the US Justice Department. “The joint provisional liquidators are in active discussions with the Department of Justice for the release of those funds, and we hope to have a consensual resolution on that,” Mr Shore said.

He added that the trio had performed “about all the things you’d expect a Chapter 11 trustee to do”, including establishing proper cash controls and management systems, as well as contacting FTX Digital Markets’ potential 2.4m clients and creditors encouraging them to submit contact details.

“The main goal, which was reached very early on in the case, was the co-operation agreement [between the provisional liquidators and Mr Ray] which this court has approved and the Bahamian court has approved. It gives us a framework to figure out how the two proceedings will be done,” Mr Shore added.

John Bromley, the attorney representing Mr Ray and the FTX entities in Chapter 11 protection, confirmed that the Bahamian and Delaware proceedings have both been mutually recognised in each other’s jurisdictions. “We did have a hearing yesterday [Tuesday] in The Bahamas,” Mr Bromley told Judge Dorsey.

“The Supreme Court of The Bahamas agreed to enter an order consistent with the order your honour is entering. They allow the two proceedings to be recognised; the US proceedings in The Bahamas, and the Bahamian proceedings recognised here.... The co-operation agreement required both orders be entered. They are mutually dependent on each other.”

Mr Bromley described this as “coincident” recognition, but this newspaper understands his suggestion that the Supreme Court “recognised the Chapter 11 proceedings” in The Bahamas is inaccurate. Rather than recognise the proceedings, one of Mr Ray’s representatives was recognised by the Supreme Court.

Acknowledging that there are numerous “open issues” to resolve, Mr Bromley added: “The co-operation agreement is a starting point. The issue of whether assets belong in The Bahamas estate or US estate are open issues. The US debtors reserve their rights on that.”

Judge Dorsey also ruled against the bid by the Justice Department’s trustee for an independent examiner to be appointed to probe FTX’s collapse. He found this would be overkill, given the multiple other investigations already underway, and would add an extra cost “in the tens of millions of dollars and likely to exceed $100m”. This would ultimately have to be paid by the crypto exchange’s creditors and investors, thus reducing the amount they will recover.

Mr Simms and Mr Greaves were physically present in the Delaware court for the hearing. The liquidators’ attorney, Sophia Rolle of Lennox Paton, attended via Zoom, as did Dr Peter Maynard, Jason Maynard and Colin Jupp of Peter Maynard & Co, the Bahamian attorneys acting for Mr Ray and FTX Trading.