The Tribune

• Local liquidators could have got ‘material’ sum on claim

• And ‘potentially prevent’ Chapter 11 bankruptcy escape

• Ray to give FTX Digital Markets trio $45m bridge loan

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX’s US chief has admitted he feared a “risk” that the crypto exchange’s Bahamian liquidators “could be awarded material” sums on their $9bn-plus claim if he failed to settle their dispute.

John Ray, who heads the 134 FTX entities currently in Chapter 11 protection in Delaware, also conceded in legal documents filed late last week that his plan to bring the group out of bankruptcy could be blocked if the battle with Brian Simms KC, the Lennox Paton senior partner, and PricewaterhouseCoopers (PwC) accounting duo, Kevin Cambridge and Peter Greaves, was not resolved.

The filings, which represent Mr Ray’s bid to obtain Delaware Bankruptcy Court approval of his settlement with the Bahamian liquidation trio, reveal there were multiple factors driving him to seek peace besides the threat posed to creditors by “costly, time-consuming and uncertain litigation” that could delay and reduce the value of asset recoveries.

Apart from the possibility that FTX Digital Markets’ liquidators might succeed with their claim, and the potential thwarting of his Chapter 11 restructuring plan, the FTX chief was also troubled by the likelihood that the Supreme Court would not enforce any Delaware judgments covering Bahamas-based assets such as the crypto exchange’s $256m worth of property purchases.

Explaining the rationale for the deal with his Bahamian counterparts, Mr Ray said: “My view is that the global settlement avoids costly, time-consuming and uncertain litigation and eliminates the risk that the Bahamas court will render decisions before this court on matters that are core to the debtors’ Chapter 11 cases or that could harm the debtors’ claims, arguments and defences in other litigation and their reorganisation efforts.

“I believe that, absent final resolution of the disputed property issues between the debtors and FTX Digital Markets, [it] could delay and potentially prevent the confirmation and effectiveness of the debtors’ proposed chapter 11 plan.

“Further, FTX Digital Markets is subject to its own insolvency proceeding in The Bahamas, and there is no assurance that any judgment by this court in favour of the debtors with respect to assets located in The Bahamas will be enforced by the Bahamas court,” Mr Ray added.

“The debtors have defences to the claims and counterclaims asserted by FTX Digital Markets. However, absent approval of the global settlement agreement and the releases contained therein, there is risk that FTX Digital Markets could be awarded material claims in the debtors’ Chapter 11 cases.”

Mr Simms and the PwC duo submitted a $9bn-plus claim in the Chapter 11 proceedings on June 30, 2023, claiming these sums were owed to FTX’s Bahamian subsidiary by the entities Mr Ray controls.

“FTX Digital Markets has asserted significant claims against various debtors, including an approximately $7.7bn fraudulent transfer claim, an approximately $1.1bn indemnification claim, an approximately $47.6m inter-company transactions claim, an approximately $256m property expenses claim, an approximately $16.2m corporate expenses claim, plus additional contingent and unliquidated amounts,” it was confirmed.

“The global settlement agreement also releases all claims asserted by FTX Digital Markets against the debtors, which include more than $9bn in asserted claims plus all unliquidated amounts asserted by FTX Digital Markets against the debtors.... The global settlement agreement brings finality on favourable terms.”

The size of these claims, and the possibility that the Bahamian liquidation might be awarded a significant portion of its demands, were thus a key factor in prompting Mr Ray and his team to announce the settlement agreed by both parties on December 19 last year. His legal filings affirm that the FTX Digital Markets trio were not without leverage during their negotiations.

The deal will also see Mr Ray provide the Bahamian liquidators with a $45m bridging loan, carrying a 7 percent per annum interest rate, “no later than January 29, 2024” so long as both the Delaware Bankruptcy Court and the Supreme Court approve the two sides’ settlement.

The proceeds are to be used “solely to pay administrative expenses” incurred in the FTX Digital Markets liquidation, with this sum to be repaid on June 19, 2025, or earlier if milestones such as approval of the Chapter 11 reorganisation plan occur beforehand. Proceeds from “recovery of certain assets” will also be set aside by the Bahamian liquidators to repay the bridging loan.

This financing will give FTX Digital Markets trio much-needed cash with which to finance their work after being starved of funds by the US Justice Department’s seizure of some $143m from the Bahamian subsidiary’s US bank accounts.

Both sides, as part of their deal, have agreed to use best efforts to employ similar asset valuations and settlement offers when assessing/granting creditor claims in their respective liquidation proceedings. And the Bahamian trio will “take the operational lead in managing the value-maximising disposition of real estate and other assets in The Bahamas”.

They will also spearhead “pursuing specific litigation and avoidance actions identified in the global settlement agreement as part of the ongoing efforts to maximise recoveries for customers and creditors”, which seems to imply Mr Simms and the PwC duo will be in charge of efforts to recover the $100m obtained by 1,500 “Bahamian” customers in violation of the asset freeze when FTX imploded.

Asserting that both sides “engaged in good faith, arm’s length discussions over a period of many months” to resolve their differences, Mr Ray added: “Those negotiations consisted of numerous virtual and in-person meetings, correspondence and multiple rounds of settlement offers and counter-offers involving both principals and advisors.....

“It is my view that the settlement documents are the result of good faith, arm’s length negotiations between the parties and that such negotiations were vigorous and free of any collusion.” Without a deal, he warned there was the likelihood that both sides would be locked in legal battles for years to come to the detriment of FTX’s clients, creditors and investors and the recovery of their assets.

“The parties have already engaged in extensive discovery in the adversary proceeding and continued litigation of the debtors’ and FTX Digital Markets’ claims would spawn additional extensive discovery,” Mr Ray warned.

“For the adversary proceeding, the parties anticipated the litigation would involve document and testimonial discovery, expert reports and briefing on numerous issues including property ownership issues, transaction avoidance issues and various issues of foreign law.”

FTX Trading, the main entity under Mr Ray’s charge, branded the settlement as “a practical solution that is in the best interests of all shareholders”. It added: “The global settlement agreement ensures that the combined value of the debtors and FTX Digital Markets is available to pay allowed creditor claims, and that a streamlined process is put in place to facilitate those creditor recoveries pursuant to distribution rules substantially similar in both proceedings.

“The global settlement agreement also recognises the fact that material assets that the debtors and FTX Digital Markets dispute are located in The Bahamas, including real estate property and avoidance actions against persons in The Bahamas or arising out of the commencement of FTX Digital Markets’ liquidation proceeding.

“The global settlement agreement unlocks this value for the debtors and their creditors efficiently and without such uncertainties.... Given the number, scope and complexity of the disputes between the debtors and FTX Digital Markets, the risk of litigating each to decision in multiple fora, and the associated cost of resolving each and every one of these disputes, the debtors have determined that, in its totality, entry into the global settlement agreement is in the best interests of the debtors, their estates and all stakeholders.”