The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX’s US chief yesterday unveiled a $460m settlement with a Bahamas-based fund manager that received hundreds of millions of dollars in the months leading up to the crypto currency exchange’s collapse.

John Ray, who heads the 134 FTX-related entities in Chapter 11 bankruptcy protection, confirmed via legal filings he has struck a deal with the principals of Modulo Capital that will recover more than $404m in cash for the benefit of investors and creditors.

The settlement deal, which awaits the approval of the Delaware Bankruptcy Court, will claw back some $475m that was transferred to Modulo Capital in the seven months immediately prior to FTX’s November 2022 failure. The monies came from Alameda Research, the private trading vehicle owned by FTX co-founder Sam Bankman-Fried, whose investments were heavily financed by funds misappropriated from the crypto exchange’s clients without their knowledge.

“The debtors have the opportunity to promptly recover approximately $460m in value for stakeholders - including more than $404m in cash - without needing to commence litigation following constructive negotiations with the Modulo entities and their principals,” Mr Ray and his team asserted in their legal filings.

“This settlement relates to the transfer of $475m by the Alameda debtors, as directed by Samuel Bankman-Fried, to the Modulo entities between May 2022 and the petition date for investments, and to support the Modulo Entities’ operations. Modulo is an investment advisor to, and general partner of, the Modulo Fund.”

Modulo Capital, which was based in Albany, where Mr Bankman-Fried and numerous other top-level FTX executive also resided, was only formed in March 2022 yet received hundreds of millions of dollars in financing from Alameda Research beginning just two months later.

Its principals are Duncan Rheingans-Yoo, said to be only two to three years out of college, and his business partner, Xiaoyun Zhang. Both worked at Jane Street, the Wall Street firm where Mr Bankman-Fried began his financial career, and Ms Zhang was said be previous media reports to have dated the FTX chief at one point.

Modulo Capital’s name also came up during the bail and extradition hearings for Mr Bankman-Fried in the Nassau Magistrate’s Court, with concern voiced over the rationale and motivations for why such a fledgling, boutique investment house and hedge fund manager would receive such huge sums just as FTX and Alameda Research were heading for failure.

Justifying the settlement deal, Mr Ray and his team said: “The debtors’ entry into the agreement is in the best interests of their estates, creditors and stakeholders, and should be swiftly consummated. The agreement’s terms will provide the debtors’ estates significant value representing 99 percent of the Modulo entities’ remaining assets and 97 percent of the original transfers from the Alameda Debtors to the Modulo entities, after considering expenses and trading losses.

“Approval of the agreement will resolve the debtors’ claims against the Modulo entities and deliver this significant recovery, while avoiding the expense and burden of litigation.” It is unclear, though, whether Mr Ray and his team will have discussed the settlement with the Bahamian provisional liquidators of FTX Digital Markets as required under the terms of the co-operation deal struck between the two parties on January 6, 2023.

Given that renewed hostilities have broken out, with litigation launched this week sparking a new battle for control of FTX’s winding-up between The Bahamas and Delaware, consultation seems unlikely. And there remains the possibility that at least some of the monies invested with Modulo Capital by Alameda Research belong to the clients of the Bahamian subsidiary, FTX Digital Markets, rather than Mr Ray and FTX Trading.

Such issues have yet to be determined by forensic accounting investigations, legal opinions and the Supreme Court. However, Mr Ray’s filings reveal the relationship between Modulo Capital and Alameda began before the former was set up, when the two sides executed a term sheet pledging that the latter would invest $25m in one or more general partnerships that were being created.

“Modulo is an International Business Company (IBC) organised under the laws of The Bahamas. Alameda Research transferred $25m to Modulo on May 19, 2022, as contemplated by the term sheet,” the documents state. Ultimately, Alameda became a limited partner in one of Modulo’s funds and held 20 percent of the investment manager’s non-voting Class A shares.

“Following the execution of the limited partnership agreement, Alameda Research and certain other Alameda debtors made several transfers to the Modulo Fund totalling $450m. As a result, debtor Alameda Research Investments owns 20 percent of the Class A shares of Modulo, and debtor Alameda Research Ltd is a limited partner of the Modulo Fund,” Mr Ray’s term asserted in their legal filings.

“Resolution of the claims against the Modulo entities through the settlement embodied in the agreement is in the best interests of the debtors and their estates because it will promptly return nearly all of the assets transferred to the Modulo entities while avoiding the time, delay and significant expense of litigation.

“The agreement will provide the debtors’ estates with more than $404m in cash plus the release of $56m in claims against the debtors’ exchanges, which constitutes 99 percent of the Modulo entities’ remaining assets. This level of recovery may not be achieved even if the debtors prevail in litigation because of the associated legal costs that would be incurred in obtaining a favourable final judgment. Settlement on these terms is plainly a reasonable exercise of the debtors’ business judgment.”