The liquidator of bankrupt crypto exchange FTX is trying to retrieve nearly $4 billion for creditors — from another bankrupt crypto firm. After a hearing on June 15, a court in the Southern District of New York will decide whether to let FTX pursue Genesis Global Capital (GGC), a crypto lender, over payments said to have been made shortly before the exchange’s collapse amid allegations of fraud, Wired reported. GGC, which filed for bankruptcy in January after being caught in the blowback from FTX’s implosion, only has about $5 billion in assets. GGC and FTX’s business relationship was substantial. The former provided Alameda Research, FTX’s sister company, with large loans — at one point amounting to nearly $8 billion — to fund its capital-intensive crypto bets, while GGC used FTX for its own crypto trading activity. The court motion filed by FTX’s liquidator describes GGC as “one of the main feeder funds” to FTX and therefore “instrumental to its fraudulent business model.” To fund its loans, GGC borrowed from individuals and institutions that owned large quantities of crypto, who received a cut of the profits in return. But this arrangement, combined with its close ties to FTX, made GGC triply vulnerable to trouble at the exchange. Not only did GGC have $175 million locked up on the FTX platform at the time of the bankruptcy, but the ensuing panic led to a surge in attempts by customers to redeem crypto from GGC. Unable to meet the influx, GGC was forced to suspend withdrawals as it sought an emergency cash injection — and ultimately, to file for bankruptcy itself. (Genesis Global Trading, the brokerage arm, remains active and solvent.) Now, GGC has to fend off FTX’s clawback claim, too. The suit alleges that Alameda paid GGC $1.8 billion in loan repayments and $270 million in collateral pledges, and that the lender — and nonbankrupt affiliate GGC International Limited — withdrew $1.8 billion from FTX’s trading platform, all in the 90 days before the exchange filed for bankruptcy. FTX claims each of these transactions should be reversed. If the case proceeds, GGC will likely argue that the $1.8 billion in loan repayments were made in the ordinary course of business, which would exempt them from being recalled. But it’s not guaranteed that, even if the New York judge allows FTX’s claim to continue, the dispute will ever get to court. The likelihood that clawback cases make it all the way to litigation, says Alan Rosenberg, partner at law firm MRTH and member of the American Bankruptcy Institute, is low; they almost always end in settlement. And FTX can use this fact to its advantage. “The truth is, there’s an economic consideration to be taken into account when defending [against clawbacks],” says Rosenberg. “Even if you have a great defense, it’s going to cost money to litigate. So you have to make a decision as to whether it’s more cost-effective to pay an amount to get rid of the claim.” The only mercy for creditors, says Rosenberg, is that both FTX and GGC — as bankrupt entities — have a fiduciary duty to reach an agreement as quickly as possible. “Everybody’s goal is to make a distribution to creditors. The more you fight, the more it will deplete the estate,” he says. “Both parties have an interest in reaching a resolution swiftly.”
