The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX’s Bahamas liquidators are slamming “a brazen attempt” by a failed crypto lender “to circumvent” this nation’s Supreme Court in pursuing $370m worth of claims.

Brian Simms KC, the Lennox Paton senior partner, and the PricewaterhouseCoopers (PWC) accountant duo, Kevin Cambridge and Peter Greaves, are asserting that efforts by Celsius Network’s administrator to lift US legal protections for the crypto exchange’s Bahamian subsidiary will cause “extraordinary hardship” at an especially sensitive time in its liquidation.

The trio, who are overseeing FTX Digital Markets’ winding-up on the Supreme Court’s behalf, argue in recently-filed court documents that Celsius’ late intervention and threat of new litigation will cause a massive “distraction” -  and cost both money and time - just as they need to pay “full attention” to receiving and settling claims from the crypto exchange’s creditors.

They slammed the move by Celsius and its litigation administrator, Mohsin Meghji, to persuade the Delaware Bankruptcy Court to lift the US Chapter 15 stay - which protects FTX Digital Markets and its US-based assets from lawsuits filed by creditors - as “futile, wasteful and premature”.

Celsius, which effectively functioned as a digital assets bank, allowed customers to deposit crypto currencies such as Bitcoin and Ethereum with it. They were then able to pledge these assets as security for loans but Celsius, which in May 2022 had lent a collective $8bn to clients and had $12bn in assets under management, collapsed just two months later and filed for Chapter 11 bankruptcy protection that July.

After emerging from Chapter 11 in January 2024, Mr Meghji is now pursuing former Celsius customers who enjoyed a ‘voidable’ or fraudulent preference through being able to withdraw their assets 90 days or less before the bankruptcy filing. He is asserting that some 538 of these withdrawals were made to accounts in the name of FTX Digital Markets.

However, Mr Simms and the PwC duo urged the Delaware court to deny Celsius’ bid to lift the Chapter 15 stay so that it can initiate legal action against FTX’s Bahamian subsidiary in the southern New York federal bankruptcy court. They are arguing that it should instead bring claims, and any litigation, before the Bahamian Supreme Court which has oversight of FTX Digital Markets’ winding-up.

Noting that this would prevent any jurisdictional conflict between the US and Bahamian legal systems, the trio asserted that Celsius has made no effort to appear before the Supreme Court. And they warned that the late emergence of its demands threatens to disrupt their ability to process creditor claims with August 16, 2024, now set as the deadline for ex-customers to submit proof they are owed money by FTX.

“At its core, the motion seeks to subvert the jurisdiction of the Bahamas Supreme Court by asking this court - and not the Bahamas Supreme Court -  for permission to commence and prosecute an adversary proceeding against FTX Digital Markets in Celsius’ Chapter 11 cases in the US Bankruptcy Court for the southern district of New York,” the Bahamian liquidators said in July 8, 2024, legal filings.

Arguing that the New York court has no authority to order that Celsius’ litigation administrator receive distributions from FTX’s Bahamas liquidation, as only the Supreme Court has the power to do this, Mr Simms and his PwC colleagues added that lifting their Chapter 15 protection would significantly disrupt the liquidation’s progress.

“It is inappropriate to proceed with the proposed FTX Digital Markets preference adversary and pursue approximately $370m worth of avoidance actions at this juncture,” they argued. “Instead, the Celsius litigation administrator first should seek permission from the Bahamas Supreme Court, the sole arbiter of whether the Celsius litigation administrator may pursue the causes of action in the proposed complaint....

“As of the date hereof, the Celsius litigation administrator has not sought leave from the Bahamas Supreme Court to prosecute either this motion or the causes of action asserted in the proposed complaint. The motion is a brazen attempt to use FTX Digital Markets’ chapter 15 case to circumvent the Bahamas official liquidation and to shortcut any procedural hurdles that might be inconvenient for the Celsius litigation administrator.”

Mr Simms and the PwC duo added that, even if Celsius were to succeed, FTX Digital Markets has no US assets to claim against because its $150m in cash was seized in late 2022 by the US Justice Department. They argued that, “at worst”, lifting the Chapter 15 protection would “risk giving rise to competing orders from this Court and the Bahamas Supreme Court”. 

“This is precisely the type of harmful conflict that Chapter 15 was designed to prevent,” the trio said. They also questioned the Celsius’ administrator’s need to target FTX Digital Markets, as opposed to those responsible for the transfers, given that Mr Meghji has in recent days filed thousands of lawsuits seeking to recover what he alleges to be voidable preferences.

“The Celsius litigation administrator has not alleged that FTX Digital Markets had any involvement in the underlying 538 customer transfers that are the subject of these complaints,” the Bahamas liquidators said. “In sum, the motion, if granted, would impose an extraordinary hardship on FTX Digital Markets and the [liquidators] with no discernible benefit to the Celsius litigation administrator.”

Mr Greaves, in an affidavit, sought to highlight the disruptive impact that Celsius’ litigation will have on the FTX claims process if the Chapter 15 stay is lifted. Should it succeed, the Bahamian liquidation would be forced to further investigate the 538 accounts allegedly involved, and “divert necessary resources away” from verifying creditor complaints at “a critical juncture in the process”.

The PwC partner explained that the Bahamas liquidators have been working closely with their US counterpart, John Ray, who heads the FTX entities currently in Chapter 11 protection in Delaware, to develop a joint plan for returning assets and funds to their rightful owners.

“Time is of the essence in both the Bahamas official liquidation and Chapter 11 cases,” Mr Greaves warned. “The co-ordinated distribution arrangement between FTX Digital Markets and the debtors will ensure that FTX.com exchange customers receive substantially identical relative distributions at substantially identical times in the Bahamas official liquidation and the Chapter 11 cases.

“FTX Digital Markets anticipates this process will require significant resources and attention in the coming months. Thus futile, wasteful and premature litigation sought to be commenced by the Celsius litigation administrator is an unnecessary distraction on the eve of the commencement of solicitation in the Bahamas official liquidation and the Chapter 11 cases.

“Lifting the Chapter 15 stay at this critical stage in the Bahamas official liquidation would result in wasteful, premature and duplicative litigation at a time when FTX Digital Markets is focused on the solicitation and confirmation process, the implementation and facilitation of the Bahamas opt-in election, and the finalising of the dual-venue joint distribution and claims process with the Chapter 11 debtors,” he added.

“Upon mailing of the solicitation packages on or about July 10, 2024, and continuing for the next several months, the [liquidators] anticipate their full attention and resources, and the full attention and resources of FTX Digital Markets and its professionals, will be required to finalise the mechanics of the Bahamas opt-in election and administer the proof of debt reconciliation and distribution process in the Bahamas official liquidation.”

Should the Chapter 15 stay be lifted, Mr Greaves asserted that this “would greatly prejudice FTX Digital Markets’ ability to administer the Bahamas official liquidation in a timely and efficient manner that comports with the Chapter 11 debtors’ confirmation timeline.

“Furthermore, the outcome of the proposed FTX Digital Markets’ preference adversary may affect the FTX Digital Markets estate in the Bahamas official liquidation by purporting to require FTX Digital Markets to make distributions to the Celsius litigation administrator”.  Mr Greaves added that, at present, Celsius cannot receive any payouts in the Bahamian liquidation because it was never an FTX customer itself.