The Tribune

• Argue lawsuit 'void' and must be dismissed

• Bahamas court best to hear case if proceeds

• Blast Ray over his 'inflammatory approach'

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX's Bahamian liquidators yesterday accused their US adversaries of employing "underhanded" tactics to seize control of all the crypto exchange's clients and assets - including those that fall under their winding-up process.

Brian Simms KC, the Lennox Paton senior partner, and the PricewaterhouseCoopers (PwC) accounting duo of Kevin Cambridge and Peter Greaves, are demanding that the Delaware Bankruptcy Court dismiss the March 20 lawsuit filed by the exchange's US chief, John Ray, on the grounds that it is "void" and cannot proceed.

And, if it is allowed to move ahead, the provisional liquidation trio are arguing that the action - and the questions that it raises - should be determined before the Bahamian courts and not Delaware as the battle for control of FTX's fate intensifies between themselves and Mr Ray.

Responding to the move by the FTX US chief to totally deny them access to any assets caught in the crypto exchange’s multi-billion dollar collapse, Mr Simms and his PwC colleagues accused Mr Ray and his team of "avoiding any meaningful discussion" on how critical issues facing both sides can be resolved without conflict.

This, they added, was why they had obtained the Supreme Court's authorisation to approach the Delaware Bankruptcy Court for a determination on whether the automatic worldwide asset freeze imposed by the Chapter 11 bankruptcy proceedings applies to FTX Digital Markets' liquidation in The Bahamas and, if it does, for this to be lifted.

The Bahamian trio have consistently argued that key questions yet to be answered are the identities of FTX Digital Markets' customers, and who was migrated to it from the crypto exchange's international platform prior to the November 2022 collapse, and whether - and which - assets belong to the company or investors/clients. However, they allege that Mr Ray, who controls 134 FTX entities in Chapter 11 bankruptcy protection, responded by initiating litigation.

"During a Zoom conference on March 15, counsel for FTX Digital Markets and the joint provisional liquidators indicated that FTX Digital Markets could no longer abide by the US debtors’ delays and would be seeking to lift the stay in the US Chapter 11 cases so that they could at least seek permission to invoke the jurisdiction of The Bahamas' court to get the process rolling," Mr Simms and his colleagues asserted.

"The US debtors’ response to this news was underhanded. Instead of attempting any form of consensus, the US debtors hastily cobbled together the complaint and filed it four days later - on a Sunday - admitting in the first paragraph that their preemptive filing is 'about venue'. As is obvious from its face, the complaint patently attempts to seize venue and control over each and every customer and asset of the FTX group, including those indisputably belonging to FTX Digital."

Noting that the co-operation agreement with Mr Ray and his team, signed on January 6, 2023, appears have ceased functioning, the Bahamian trio added: "Notwithstanding their execution of the co-operation agreement and the plain terms of the order recognising FTX Digital Markets' Bahamian proceeding, the US debtors’ hope is that this court will, to the absolute exclusion of the Bahamas's court, address a host of contractual interpretation issues critical to both proceedings.

"And, in an attempt to ensure that the process would be as extended, expensive and inflammatory as possible, the US debtors added several barebones claims arising under chapter five of the Bankruptcy Code, requesting that this [Delaware] court essentially void every purported 'transaction' in which FTX Digital Markets was ever involved without specifying any of the required elements of a properly pleaded avoidance claim."

Mr Simms and his colleagues argued that Mr Ray's lawsuit "cannot move forward because it constitutes a direct and willful violation of the automatic stay established in the order recognising FTX Digital Markets' Chapter 15 proceeding" in the US. And the declarations sought over the contractual relationships between FTX and its clients "cannot stand" because none of the crypto exchange's international clients have been joined as parties to the action.

"There may be, however, one silver lining to the complaint," Mr Simms and the PwC duo argued. "It has forced the US debtors to finally realise that where, when and how issues relating to whose customers and assets are mapped to which entity in the FTX group must be decided in a court, as opposed to being assumed or dictated by the unsupported statements of their professionals.

"And, to the extent that the US debtors can find a proper procedural mechanism for addressing the rights of creditors under the [client] terms of service, or to the extent that the court determines that they need not do so, this court and The Bahamas court now have the necessary jurisdictional predicate to discuss, at the very least, the contours of a resolution process.

"To that end, the defendants respectfully request that, should this court allow the declaratory judgment claims to proceed, this court abstain from hearing those claims in favour of adjudication in The Bahamas, which is best suited to reaching a rapid, comprehensive and efficient result."

The Bahamian provisional liquidators also pointed out that Sullivan & Cromwell, the US attorneys representing Mr Ray, as well as Peter Maynard & Company, his local counsel, both performed legal work for FTX prior to its collapse on "key transactions".

The FTX US chief's lawsuit made clear that he is engaged in a full-fledged battle for control of the crypto exchange's fate. “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.

“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."

Mr Ray 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,” he 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," they added.

“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.

“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'."