The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX's Bahamas liquidators face a three-way battle to regain control of some $143m seized by the US Justice Department after their US counterpart asserted he "stands first in line" to recover this asset from the federal authorities.

Brian Simms KC, the Lennox Paton senior partner, and PricewaterhouseCoopers (PwC) accounting duo, Kevin Cambridge and Peter Greaves, are understood to have been locked in negotiations with the US Justice Department for several months to secure the return of cash that was seized from US bank accounts in the name of FTX Digital Markets, the Bahamian subsidiary they are responsible for liquidating under the Supreme Court's supervision.

But John Ray, who has oversight of the 134 FTX entities currently in Chapter 11 bankruptcy protection in Delaware, is now alleging that he - and not the Bahamian provisional liquidators - should be first in the queue to recover this $143m if it is ever released by the federal authorities.

Detailing the latest move in the jurisdictional battle between The Bahamas and Delaware for control of the collapsed crypto exchange's fate, Mr Ray and his team said: "The US attorney for the Southern District of New York has already seized more than $143 million in cash from FTX Digital Markets' various bank accounts in the US over which the joint provisional liquidators no longer have any control.

"The debtors also have asserted avoidance claims in the adversary proceeding to confirm that the debtors stand first in line to recover this cash asset to the extent it is ever released by the [US] government, and those claims must be adjudicated in this court."

Tribune Business previously reported how the Bahamian provisional liquidators had sought to take control of the $143m just two days before Christmas 2022, but the US banking institutions holding the funds declined to co-operate because the trio at that time had no legal authority or status in that country because their Chapter 15 recognition application had not been approved.

This gave the US Justice Department a window in which to swoop in one week later and, on December 30, 2022, seize assets that the Bahamian provisional liquidators are alleging belong to FTX Digital Markets and/or its clients and creditors.

More than $93m of the $143m was 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, although the Bahamian institution has denied any links between itself and Moonstone.

Mr Ray's bid to leapfrog the Bahamian liquidators and secure the $143m, which would be a valuable addition to FTX Digital Markets' estate, was unveiled in legal arguments seeking to dissuade the Delaware Bankruptcy Court from giving the trio relief from the worldwide asset freezing order automatically imposed on all FTX businesses by the Chapter 11 proceedings.

Mr Simms and his colleagues are arguing this is necessary to enable them to progress FTX Digital Markets' liquidation in The Bahamas, but their US counterparts - determined to block such a decision - are alleging the move does not benefit the "millions" of creditors who are part of the Chapter 11 recovery process and estate.

Pointing to the $7.3bn in digital and fiat assets recovered on behalf of FTX creditors/investors in the Chapter 11 proceedings, Mr Ray and his team again effectively argued that the Bahamian provisional liquidators should step aside and take a backseat - not least because they allegedly only possess $30m or "less than half of one percent" of what they control.

"The joint provisional liquidators seek relief from the automatic stay to pursue a declaration from a Bahamas court that billions of dollars in assets controlled by the debtors, and which they intend to distribute through their plan of reorganisation confirmed by this court, belong to FTX Digital Markets," Mr Ray and his team asserted.

"The joint provisional liquidators offer no evidence as to why seeking such a declaration from a Bahamas court - rather than this court - would be in the interests of the millions of FTX creditors. Accordingly, the joint provisional liquidators' motion must be denied..... Virtually all property distributable to FTX creditors (other than property seized by the US government) is currently in the custody of the debtors.

"There is no material property in the custody of the joint provisional liquidators. The debtors believe, consistent with the joint provisional liquidators' prior disclosures, that the aggregate amount of assets in the joint provisional liquidators’ custody today includes less than $30m of liquid assets and copies of customer data and information legally owned and provided by the debtors as to which the joint provisional liquidators now seek to exploit.

"These assets comprise less than one-half of one percent of the $7.3bn of liquid assets held by the debtors today." Mr Ray and his team also asserted that their initial assumption, that 6 percent of FTX's international customers had migrated to FTX Digital Markets, the Bahamian subsidiary, was incorrect. As a result, they argued that all investors creditors should participate in the Chapter 11 reorganisation where they will "receive fair and equal treatment".

The FTX US chief also admitted that the primary reason he entered into the January 6, 2023, co-operation agreement with the joint provisional liquidators was to protect the value tied up in the $236m worth of high-end Bahamian real estate acquired by the crypto exchange's founder, Sam Bankman-Fried, and his close associates.

"The debtors' primary commercial purpose for entering into the co-operation agreement was to protect the value of real estate in The Bahamas held by FTX Property Holdings Ltd, a debtor, and to ensure that these properties could be sold in a consensual process," Mr Ray and his team conceded.

Properties at Albany, GoldWynn, One Cable Beach and elsewhere were held by FTX Property Holdings, an entity that was included among those placed into Chapter 11 bankruptcy protection in Delaware. However, the Bahamian provisional liquidators had filed a motion with the Delaware Bankruptcy Court that FTX Property Holdings should be removed from the Chapter 11 proceedings and wound-up in The Bahamas.

Mr Ray's admission is a tacit concession that Mr Simms and the PwC accountants would likely have won on this issue, given that it is established international legal principal that entities be liquidated and wound-up in territories where most of their assets are domiciled.

However, he and team quickly reverted to their hardline stance. "The joint provisional liquidators' motion is about the estate of FTX Digital Markets only to the extent that the estate of FTX Digital Markets is virtually empty and the joint provisional liquidators would like to fill it with property taken from the debtors," they argued.

"The motion, indeed, begs the question of why the joint provisional liquidatiors would go to such efforts to re-route billions of dollars of claims to FTX Digital Markets with its paucity of assets. The joint provisional liquidators’ motion is, at heart, a request for a change of venue on some of the most core matters for these Chapter 11 cases....

"With all material property controlled by the debtors and protected by the automatic stay, there is nothing for the joint provisional liquidators to do in the Bahamas court unless and until this court determines that some of the assets of the debtors actually do belong to FTX Digital Markets and that the best interests of creditors is served by turning over such assets to FTX Digital Markets."