The Tribune

• Ray aims to deny assets to local liquidators

• Bahamas entity ‘economic and legal nullity’

• Lawsuit attacks PM, AG and Commission

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX’s US chief yesterday shattered the temporary ceasefire with the Bahamian provisional liquidators by launching a legal bid to deny them access to any assets caught in the crypto exchange’s multi-billion dollar collapse.

John Ray, in a lawsuit filed in the Delaware Bankruptcy Court, 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 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.

He also repeated previous attempts to tarnish The Bahamas’ integrity and reputation, asserting that Mr Bankman-Fried sought to “leverage” what was described as a “close, accommodating relationship” with Prime Minister Philip Davis KC, Ryan Pinder KC, the attorney general, and the Securities Commission to help “minimise his exposure” should FTX’s alleged fraud be uncovered. All three have vehemently refuted such allegations in the past.

The legal action, which names FTX Digital Markets as well as the three Bahamian joint provisional liquidators - Brian Simms KC, the Lennox Paton senior partner, and the PricewaterhouseCoopers (PwC) accounting duo of Kevin Cambridge and Peter Greaves - as defendants was seemingly filed in an attempt to head-off an imminent application by the trio to the Delaware Bankruptcy Court’s Judge John Dorsey.

For the Bahamian liquidators, who had submitted their legal filings to the Supreme Court some five days ahead of Mr Ray’s lawsuit on March 15, yesterday obtained an Order from chief justice Sir Ian Winder granting them permission “to seek confirmation and/or approval” from Judge Dorsey that the “directions” they are seeking will not violate the worldwide freeze imposed on all FTX assets when the Chapter 11 proceedings started in the US.

And, should Judge Dorsey find that the Bahamian liquidators’ actions would breach the Chapter 11 freeze, Sir Ian’s Order allows them to initiate legal action in Delaware to seek relief from it. Mr Simms, in a March 15, 2023, affidavit filed with the Supreme Court, warned it was critical that the liquidators obtain much-needed “directions” from the Supreme Court otherwise efforts to wind-up FTX Digital Markets will “stall” (see other article on Page 1B).

He added that it was especially vital the Supreme Court determine exactly who FTX Digital Markets’ customers are to enable the Bahamian provisional liquidators to “claw back” assets that were withdrawn from the crypto exchange both immediately prior to its collapse and after the imposition of asset freezes. Previous filings have alleged that some 1,500 “Bahamian” clients were able to recover a collective $100m in potential “fraudulent preferences” via this route.

However, before the Bahamian liquidation trio could approach the Delaware court, Mr Ray ended the two sides’ two-and-a-half month truce by firing his legal salvo first. Acknowledging it is “a jurisdictional battle” for control between himself and this nation, he alleged that the lawsuit came “in response to serial threats by the joint provisional liquidators to attempt to relocate these global bankruptcy cases (the Chapter 11 cases) to The Bahamas.

“Lacking any basis to dismiss these Chapter 11 Cases or transfer venue, the joint provisional liquidators instead claim that FTX Digital Markets - a non-debtor—is the constructive owner of FTX.com’s property (including fiat and crypto currency, intellectual property and customer relationships) as a matter of non-bankruptcy law,” the FTX US chief and his attorneys alleged.

“Since FTX Digital Markets is the subject of proceedings in The Bahamas, the joint provisional liquidators insist that the question of ownership be resolved in The Bahamas. Indeed, they have claimed to the FTX debtors that it is their fiduciary duty under the laws of The Bahamas to do so. FTX Digital Markets did not succeed to any property owned by FTX.com.

“Yet the joint provisional liquidators’ assertions continue to balloon in size and volume (though never attaining substance), with the joint provisional liquidators making public statements, statements to third parties outside of The Bahamas, statements to government officials outside of The Bahamas, and filings in this court all asserting that FTX Digital Markets is somehow the owner of the entire FTX.com exchange.”

Tribune Business understands that the Bahamian joint provisional liquidators view Mr Ray’s lawsuit as a knee-jerk over-reaction, especially given that he was informed on March 9, 2023, of their plans to approach the local and Delaware courts. They feel he and his team, including the Sullivan & Cromwell law firm, are determined to control everything related to FTX, and their attitude to The Bahamas and others is “just sit back, do nothing and wait for us” to do it all.

Mr Ray, though, alleged that the Bahamian liquidation trio have also “threatened avoidance actions against even direct recipients of preferential payments” from Alameda Research, Mr Bankman-Fried’s former trading vehicle that played a central role in FTX’s collapse.

“Without this court’s prompt intervention, the joint provisional liquidators - fiduciaries with no constituency but themselves - will continue to assert baseless claims that will harm FTX.com customers and all other creditors of the FTX debtors,” the lawsuit claimed, asserting that “enough is enough”.

“In this adversary proceeding, the debtors seek a declaratory judgment that FTX Digital Markets has no ownership interest in any of the debtors’ property and that the transactions (and all documents and structures supporting such transactions) that Sam Bankman-Fried and his co-conspirators used in an attempt to hide assets behind the veil of FTX Digital Markets are avoidable as fraudulent transfers.

“If the FTX debtors succeed in this adversary proceeding, there will be no property of FTX Digital Markets for local proceedings in The Bahamas to resolve,” Mr Ray warned ominously, then seeking to downplay and diminish the Bahamian subsidiary’s role in the crypto exchange’s corporate structure.

He argued that “nothing could be further from the truth” when it came to the Bahamian liquidators’ argument that FTX Digital Markets “was the centre” of the group. “FTX Digital Markets was no more than a short-lived provider of limited ‘match-making’ services for customer-to-customer transactions on the crypto currency exchange built, owned and operated by debtor FTX Trading, its immediate corporate parent,” Mr Ray and his team alleged.

“Over 90 percent of customers who used the FTX.com exchange were customers before FTX Digital Markets even became operational in May 2022 and, once operational, FTX Digital Markets never earned a dollar of third-party revenue. FTX Digital Markets was an economic nullity within the FTX group.

“FTX Digital Markets was a legal nullity as well. The peculiar history of FTX Digital Markets is a classic example of abuse of the corporate form. It was created as a front to facilitate a conspiracy to defraud the debtors’ customers - a conspiracy to which three individuals have already pled guilty and for which a fourth, Mr Bankman-Fried, is under indictment - rendering any and all transactions related to FTX Digital Markets avoidable.

“FTX Digital Markets was part of the mature phase of that conspiracy. It was formed and functioned as an offshore haven for a continuous fraudulent scheme, as well as a conduit through which the fruits of that fraudulent scheme could be channelled to insiders and third parties outside of the reach of any independent and effective regulatory authority,” Mr Ray continued.

“Fortunately, Mr Bankman-Fried and his cohorts were unable to spirit away all of the debtors’ property, both practically and as a matter of law, because these Chapter 11 cases were commenced and Mr. Bankman-Fried and his Bahamian supporters lost the first stage of what Mr Bankman-Fried described as the “jurisdictional battle versus Delaware”.

Mr Ray alleged that the Bahamian liquidation trio had merely “inherited the corporate shell that Mr Bankman-Fried and his co-conspirators built to harbor their fraudulent enterprise in The Bahamas, and now use it to continue the jurisdictional battle. In doing so, they continue to cast confusion over the true ownership of the debtors’ property and waste the debtors’ assets in the process”.

He argued that the former FTX co-founder and is inner circle created the Bahamian subsidiary to “funnel FTX Trading customer deposits and other valuable property and rights to The Bahamas, out of the reach of American regulators and courts”.

“Mr Bankman-Fried, and others at his direction, maintained a close, accommodating relationship with Bahamian law enforcement agencies, including, among others, the Commission, and with the attorney general and Prime Minister of The Bahamas,” Mr Ray asserted. “Indeed, Mr Bankman-Fried aimed to leverage that relationship to minimise his criminal and civil exposure should the massive fraud be discovered.

“To accomplish the fraudulent scheme, Mr Bankman-Fried (and/or others acting at his direction) planned to transfer property and rights from FTX Trading to FTX Digital Markets, ostensibly regulated by The Bahamas. At no time were the co-conspirators authorised to do so by the law of any jurisdiction or the corporate charters of either FTX Trading or FTX Digital Markets.”

The lawsuit gave examples of such transfers, including $143m in fiat currency that was placed in US bank accounts in FTX Digital Markets’ name, which has presently been seized by the US Justice Department. Seeking to show the minimal importance of the Bahamian subsidiary to a multi-billion dollar crypto exchange, the action said it generated just $604,000 in net income for 2021 and some $5.17m for the first three quarters in 2022 prior to the collapse.

Mr Ray and his team also alleged that more than half of FTX Digital Markets’ operating expenses for the first three quarters in 2022, some $40m out of $73m, related to “other expenses”. And, of that $40m, some 37.5 percent or $15m covered “accommodation” costs paid to Albany ($5.8m); the Grand Hyatt ($3.6m); and Rosewood ($807,000).