The Tribune

• Liquidators' operating cash dwindles under $1m

• FTX US chief trying to 'starve' and 'strangle' them

• Delaware judge to rule on Chapter 11 stay today

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX Bahamas' liquidators yesterday warned they will be placed in "an impossible situation" if they are forced into a "never-ending" legal battle with their US counterparts as operating cash has dwindled to less than $1m.

Peter Greaves, the Hong Kong-based accountant who is one of the three joint provisional liquidators for the failed crypto exchange's Bahamian subsidiary, told the Delaware Bankruptcy Court the trio have "already committed expenditure beyond the funds we have" due to an inability to access assets amid the ongoing courtroom battle with John Ray, head of the 134 FTX entities under US Chapter 11 bankruptcy protection.

Christopher Shore, an attorney with White & Case, the US attorney for Mr Greaves and his fellow provisional liquidators, accused Mr Ray and his team of using the worldwide automatic freeze imposed by the Chapter 11 proceedings to "starve" FTX Digital Markets into submission through lack of funds and "strangle" its winding-up before the Supreme Court.

Mr Greaves and his fellow PricewaterhouseCoopers (PwC) partner, Kevin Cambridge, together with Brian Simms KC, the senior Lennox Paton partner, have previously alleged that interference by Mr Ray and his team dissuaded Tether from releasing $45m worth of stablecoins - digital assets backed one:one by fiat currency - to the FTX Digital Markets liquidation despite the two sides agreeing earlier this year that these assets belonged to the Bahamian proceedings.

The joint provisional liquidators have also been negotiating with the US Justice Department for the return of $143m in cash that the latter seized in late 2022 from US bank accounts in FTX Digital Markets' name, but these efforts which - if successful - would give the Bahamian proceedings a funding source with which to pursue assets and claims have yet to bear fruit.

The consequences were exposed during yesterday's Delaware proceedings, during which it was revealed that the Bahamian provisional liquidators have "less than $1m" in cash left and are down to a "few hundred thousand dollars". Asked about the fall-out if litigation with Mr Ray and the Chapter 11 debtors proved "never ending", Mr Greaves replied: "We have already committed to expenditure beyond the funds we have, so we would be in an impossible situation."

These financial obstacles, while difficult, are not insurmountable. FTX Bahamas' liquidators could seek the Supreme Court's permission to raise or borrow funds from sources such as litigation financiers, while it has become an established principle that clients contribute to winding-up costs incurred on their behalf via a portion of their assets being held in a trust or fiduciary capacity.

The Bahamian provisional liquidators are asking the Delaware court to confirm that the "directions" they are seeking from Sir Ian Winder, the chief justice, over FTX Digital Markets' winding-up do not violate the automatic worldwide stay or freeze imposed by the Chapter 11 proceedings. Or, alternatively, if they do that the "stay" be lifted to enable them to progress the Bahamian liquidation, but Mr Ray and his team are opposing this at every turn.

Judge John Dorsey, after hearing arguments from both sides, urged them to go away and talk last night to see if the dispute can be resolved by negotiation. However, in disclosing that he will give his ruling on the matter this morning, he warned that he will not cede his jurisdiction or that of the Delaware Bankruptcy Court to the Bahamian Supreme Court especially given that the vast majority of FTX-related assets are under his control.

Speaking after evidence was given by both sides' witnesses, Judge Dorsey said: "Here's my thinking at this point. From a practical standpoint, if I allow the joint provisional liquidators to go to The Bahamas and proceed there, what could possibly happen? Regardless of what The Bahamas court does, I have to make the same determination and do it on my own, and the assets we are talking about are all in the interim jurisdiction of this court.

"Regardless of what the Bahamian court decides, and it could decide all the assets go to FTX Digital Markets, they cannot go to FTX Digital Markets unless I so decide. What do we gain by allowing this to go forward between two different courts?"

Mr Shore, on the Bahamian joint provisional liquidators' behalf, argued that the "directions" hearing that his clients wish to pursue before Sir Ian "tees it up" in terms of securing either a consensual or court-to-court co-operation between Chapter 11/Delaware and this nation moving forward.

Noting that his clients and Mr Ray's team "can't seem to get out of their own way", he warned that the alternative is "a jurisdictional war" between the two sides that threatens to suck time and money away from efforts to maximise asset/cash recoveries for FTX creditors and investors in both The Bahamas and the Chapter 11 proceedings.

"At the end of the day, if we're going to disagree that will lead to a jurisdictional squabble which is the thing we should work hard to avoid," Mr Shore argued. To which Judge Dorsey retorted: "That's what I'm trying to avoid as well." Indicating he had not been much moved by the Bahamian provisional liquidators' arguments, the judge reiterated his previously expressed position at the hearing's end.

"I will tell you now that under no circumstances would I defer on a jurisdictional issue to a foreign court," Judge Dorsey said, "and the jurisdictional issues here are whose assets are they? I have in rem jurisdiction, and it has to be decided here..... As a practical matter, they [the provisional liquidators and Supreme Court] don't have access to the assets. Only I have access to the assets. I'm going to ask the parties to talk this evening and see if there is any way to resolve this issue."

Mr Shore, meanwhile, argued that Mr Ray and his team are using their opposition to waiving the Chapter 11 stay as a means to halt FTX Digital Markets' winding-up and deprive it of assets. "The debtors can use the stay to strangle the joint provisional liquidators' case," he argued. "If it's enforced, they're not going to be able to fight....."

He suggested that the FTX US chief was aiming to place the Bahamian trio in a "trap", and use the Delaware court to trigger that. "What I don't want is what they're actually doing; starve my estate, which they will do through you, with the stay and do what they're not able to do through the normal process, which is wish it [the Bahamian provisional liquidation] away," Mr Shore argued.

Andrew G. Dietderich, an attorney with Sullivan & Cromwell, appearing for Mr Ray, asserted that what the Bahamian liquidators are really seeking to do is "gut" the Chapter 11 proceedings by having central jurisdiction over FTX's winding-up transferred to the Supreme Court.

"This may be one of the most complex insolvencies ever filed," he argued. "It may be the most complex insolvency ever. We have one saving grace. We know who is calling the balls and strikes. If you take central jurisdiction away from us, we may not be here for years; we may be here for decades."

The Bahamian provisional liquidators believe it is “crucially important” to the progress of FTX Digital Markets' winding-up that Sir Ian be able to give “directions” on several “core fundamental issues”. However, their application to the Delaware court is driven by the need to ensure this does not violate the freezing order imposed by the Chapter 11 bankruptcy protection, as any breach could result in sanctions and penalties being imposed on FTX Digital Markets' US-based assets

Among the key issues that Sir Ian will be asked to determine is which “terms of service”, the document that governed the relationship between FTX’s international platform and its customers, applies and on what date - as 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 2022 implosion.

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.