Readers of this newsletter will note our regular interest in the chapter 11 proceedings of Cred Inc. and its affiliates. In March 2021, we reported on the confirmation of a liquidating plan in the Cred bankruptcy cases — a milestone that represented “the first instance where a major U.S.-based cryptocurrency operation sought relief and eventually confirmed a plan under chapter 11.”[1] At the time, we noted that notwithstanding confirmation of the liquidating plan, many matters in the Cred bankruptcy cases remained unresolved, including potential criminal and civil claims against the company’s former management.
On June 21, 2021, one of the unresolved issues took an interesting turn when the U.S. District Court for the District of Delaware entered an order finding former Cred executive James Alexander to be in contempt of a prior order of the bankruptcy court. The district court’s order was entered at the request of Cred’s unsecured creditors’ committee (now succeeded by Cred’s Liquidating Trust), which was introduced in sensational fashion:
Escaping from prison, using multiple identities, misappropriating assets, violating injunctions, withdrawing $170,000 in cash and checks..., committing perjury, and refusing to comply with this Court’s Emergency Order. These are just a few examples of Alexander’s transgressions prior to and during these Chapter 11 Cases.
Docket No. 2 (Emergency Motion), Case No. 21-417 (MN) (D. Del. Mar. 23, 2021).
Alexander served as Cred’s chief capital officer from August 2018 until June 2020. Cred terminated Alexander’s employment after the company discovered Alexander had misappropriated the control of a newly formed subsidiary. Two days before he was terminated, Alexander transferred significant cryptocurrency assets from Cred accounts to his personal accounts. Cred obtained an injunction and asset-freezing order in California state court barring Alexander from transferring the Cred cryptocurrency. Cred filed for chapter 11 protection in Delaware shortly thereafter, in November 2020.
During the course of Cred’s bankruptcy proceedings, Alexander violated the California injunction and freezing order by transferring a significant portion of the Cred cryptocurrency (at least 100 bitcoins). As a result, in February 2021, the committee filed an emergency motion with the bankruptcy court for a temporary restraining order barring Alexander from executing further transfers of the Cred cryptocurrency, directing him to immediately transfer the subject assets into escrow, and compelling Alexander to participate in discovery to trace the Cred cryptocurrency assets. The bankruptcy court granted this request on Feb. 5, 2021 (the “Emergency Order”).
Notwithstanding the bankruptcy court’s Emergency Order, Alexander failed to meaningfully participate in discovery or timely turnover the Cred cryptocurrency. Instead, he provided a vague, nine-paragraph declaration that purported to account for the Cred assets and admittedly incomplete document-production. Moreover, while he eventually delivered some funds into escrow, those funds were at least $600,000 short of the as-yet-identified assets Alexander allegedly misappropriated from Cred.
In addition to his incomplete document-production and asset-turnover, Alexander refused to cooperate during his court-ordered deposition. Perhaps unsurprisingly, he provided incomplete and evasive responses to direct questions, often claiming that he couldn’t remember or couldn’t determine how various crypto- and traditional assets had been obtained or to where they had been transferred. He even claimed not to remember whether he had traveled abroad within the last six months, despite financial records showing recent trips to Switzerland and Turkey. Worse still — and this time, maybe surprisingly — the deposition was abruptly concluded when, following a five-minute deposition break, Alexander reported that he had just filed for personal bankruptcy in California.
The Cred debtors and the committee quickly obtained relief from the California bankruptcy court lifting the automatic stay of actions against Alexander. To avoid any doubt, the California bankruptcy court stated on the record mid-hearing that the Delaware Bankruptcy Court’s Emergency Order directing Alexander’s cooperation with discovery and the tender of assets was “back on.” Despite the committee’s successes in overcoming Alexander’s procedural machinations, he continued to defy the Emergency Order and refused to cooperate with discovery or fully account for the misappropriated Cred assets.
The committee’s patience ran out in mid-March 2021, at which time it filed its motion requesting that Alexander be found in contempt and that a warrant for Alexander’s detention and arrest be issued. According to the committee, it was “clear that swift and harsh justice is the only remedy that will compel Alexander to comply with the Emergency Order.”
The district court largely agreed and, on June 21, 2021, found Alexander in contempt for failure to comply with the Emergency Order. As a sanction, the district court barred Alexander from ever challenging the conclusions that (1) Alexander’s various asset-transfers were made for an improper purpose or (2) Alexander did not have the right to execute such transfers. The district court also ordered Alexander to immediately cooperate with discovery and imposed deadlines by which such efforts were to be completed.
Notably, the district court denied the committee’s request for a bench warrant and Alexander’s arrest. The order does not provide an explanation as to why the district court denied this part of the committee’s request, but presumably the district court viewed Alexander’s arrest as a sanction of last resort. To that end, the district court did not foreclose the committee (or any party) from seeking Alexander’s arrest at a later time in the event of his continued contempt.
As we have said before, the story of Cred does not end on confirmation of the liquidating plan but will endure so long as creditors and regulators continue to investigate the company’s mismanagement. In the meantime, the collapse of Cred and its affiliates remains a cautionary tale for cryptocurrency companies — and their investors, creditors and own management — that traditional corporate controls are still necessary, even in this new and emerging industry.
[1] See First Major U.S.-Based Cryptocurrency Operation Confirms Liquidating Chapter 11 Plan, ABI Emerging Industries and Technology Newsletter, March 2021.