An estimated 1 million customers are potentially facing losses after FTX, one of the largest crypto exchanges at the time, suddenly collapsed and filed for bankruptcy in November, Reuters reported. It soon emerged that customer funds had gone missing. FTX founder and former-CEO Sam Bankman-Fried is accused of embezzling $10 billion from unsuspecting customers to prop up his hedge fund Alameda Research, buy luxury properties and fund political donations. His trial began in New York this week. On Wednesday, Bankman-Fried's attorney told the court that his client had overlooked risk management but did not steal customer money. Bankman-Fried has pleaded not guilty to the charges. Prosecutors are calling some FTX customers to testify that they were told their assets were safe, and to share how FTX's collapse affected them. Customers Reuters spoke with said they have created support groups to help each another navigate the complex bankruptcy claims process, while others said they have been targeted by scammers promising to retrieve their cash.
Texas Capital Bank said it was convinced by the U.S. government to loan $28 million in December to help a bankrupt reverse-mortgage company fund payments to elderly homeowners and avert a crisis in the reverse-mortgage industry, WSJ Pro Bankruptcy reported. But the Dallas lender was left empty-handed after the government said it extinguished the bank’s collateral rights, according to a lawsuit filed Wednesday against the Government National Mortgage Association, known as Ginnie Mae, and its parent agency, the Department of Housing and Urban Development. Texas Capital Bank said that it was induced by Ginnie Mae to extend a bankruptcy loan to Reverse Mortgage Investment Trust, one of the largest lenders participating in the government-backed reverse-mortgage program. HUD and Ginnie Mae declined to comment, citing pending litigation. Starwood Capital Group-backed RMIT filed for chapter 11 in November with the U.S. Bankruptcy Court in Wilmington, Del., facing a liquidity crunch because of rising interest rates. After the bankruptcy filing, RMIT failed to fund payments to thousands of elderly homeowners, according to the bank’s complaint. Ginnie Mae allegedly told Texas Capital Bank that its loan was needed to fund those draws while avoiding a catastrophic disruption to the reverse-mortgage program, the bank said in its lawsuit, filed in the U.S. District Court in Amarillo, Texas.
Bankrupt regional sports network operator Diamond Sports Group is walking away from the NHL’s Arizona Coyotes and shuttering yet another channel, Bally Sports Arizona, YahooFinance.com reported. The move comes after the network’s other tenants, the NBA’s Phoenix Suns, WNBA’s Phoenix Mercury and Major League Baseball’s Arizona Diamondbacks, all broke loose from Bally Sports and set up their own local TV arrangements. Broadcaster E.W. Scripps announced yesterday that the Coyotes would broadcast 81 of their 82 regular season games via its new Scripps Sports operation on Scripps-owned ABC affilate Channel 15.2 (KNXV.2). The Stanley Cup Champion Vegas Golden Knights also entered a similar arrangement with Scripps Sports in May after fleeing now-defunct AT&T SportsNet Rocky Mountain. “The Debtors have been conducting an ongoing analysis of their rights agreement portfolio to identify those rights agreements that are burdensome and/or otherwise unnecessary for the Debtors’ go-forward business operations,” Diamond said in a motion filed on Wednesday in the Houston federal court overseeing its restructuring.
Long Beach officials are resigned to never getting back millions of dollars that were supposed to go toward fixing up the Queen Mary, the Long Beach Post reported. As of last week, the city has essentially bowed out of the ongoing bankruptcy case of Los Angeles-based real estate firm Urban Commons, which took over the ship’s lease in 2016 and left a wake of unmet promises and financial disasters. The city remains on a list of creditors and is seeking a mere $200,000, “but we don’t really expect to receive anything,” Deputy City Attorney Rich Anthony said on Wednesday. Long Beach was left in control of the historic ocean liner in 2021 but was still suing Urban Commons to try to determine whether the company defrauded the city of any of the $23 million in bonds issued to cover critical repairs on the ship—some of which never got done. Through the legal proceedings, the city was able to subpoena accounting ledgers and other financial documents to help trace the bond money. That information showed most of the money the city paid out indeed matched Urban Commons’ invoices for work it subcontracted, but that doesn’t necessarily absolve the company or its principals of wrongdoing, City Attorney Dawn McIntosh wrote in a Tuesday memo to the City Council.
Drug maker Mallinckrodt Plc made its final push Wednesday for a new debt-reduction plan that gives victims of America’s opioid epidemic about $1 billion less than they were promised the last time the company tried to use the bankruptcy process to revive itself, Bloomberg News reported. The company asked Bankruptcy Judge John Dorsey to dismiss objections from shareholders who argue that Mallinckrodt should have tried harder to resolve its debt woes without filing a chapter 11 case. Under the plan, shareholders will be wiped out, which happens in nearly all big bankruptcies unless creditors are paid in full. Judge Dorsey said he would announce his ruling next week. During the court hearing yesterday in Wilmington, Del., Judge Dorsey aimed skeptical questions at attorneys for shareholders, who argued the company had enough cash to survive until early 2024. Dorsey said current law only requires Mallinckrodt, or any other struggling company, to be in financial distress, not completely insolvent. “The only evidence I have,” Judge Dorsey told a shareholder attorney, “is that if they didn’t file this bankruptcy, they would have been in trouble.”
Months before the collapse of FTX, some of its U.S.-based employees discovered the so-called backdoor that Alameda Research allegedly used to withdraw billions of dollars of customer funds from the cryptocurrency exchange, the Wall Street Journal reported. The employees who made the discovery reported it to the boss of their division, who discussed it with one of FTX founder Sam Bankman-Fried’s lieutenants. But the problem never got fixed. In the summer of 2022, the leader of the team that raised concerns about Alameda’s special privileges was fired. The backdoor figures prominently in the case against Bankman-Fried, whose trial on criminal charges of fraud began in a New York federal court this week. The former head of FTX has pleaded not guilty to all charges. Prosecutors say Bankman-Fried stole funds from FTX customers, in part, by secretly ordering the programming of “special features” that gave Alameda — his crypto trading firm — the ability to treat FTX as a giant slush fund. Court filings have revealed a line buried deep in FTX’s code that allowed Alameda to have a negative balance of as much as $65 billion on the exchange. Read more. (Subscription required.)
In related news, splashy advertisements featuring football star Tom Brady and comedian Larry David were among the first evidence seen by jurors Wednesday as prosecutors launched a historic fraud case against cryptocurrency maven Sam Bankman-Fried, depicting him as a villain who portrayed himself as the Robin Hood of the crypto world, the Associated Press reported. Assistant U.S. Attorney Nathan Rehn said in his opening statement in Manhattan federal court that it was only a year ago that Bankman-Fried seemed to be “on top of the world,” operating the multibillion dollar company he founded, FTX, a seemingly pioneering cryptocurrency trading platform. Rehn said the 31-year-old lived in a $30 million apartment in the Bahamas, jetted around the world on private planes, socialized with celebrities and spent billions of dollars as he flaunted power and made big political donations to gain influence in Washington over cryptocurrency regulation. The prosecutor, though, said that the son of two Stanford law professors was not as he seemed. “Sam Bankman-Fried was committing a massive fraud by taking billions of dollars from thousands of victims,” Rehn said. When his businesses were collapsing, he backdated documents and tried to cover up his crimes by deleting messages and ordering employees to automatically delete all messages every month, the prosecutor said. Read more.
Wine drinkers who bought from online marketplace Underground Cellar before its collapse are squaring off with its top lender for the rights to more than 500,000 bottles of red, white and rosé in storage, WSJ Pro Bankruptcy reported. Underground Cellar gained popularity among wine lovers because of its gamelike platform offering customers occasional upgrades to more expensive bottles than they had paid for. The company then stored bottles of wine purchased by customers in its “CloudCellar” — a climate-controlled warehouse in southern Napa County, Calif. — until they requested to ship them to their addresses. “I thought they really were good at what they did,” said Michael Klein of Glendale, Calif., a former customer. “It was almost like a lottery or gambling when you bought wine from them, because they promised you these upgrades.” But earlier this year, customers started having trouble accessing the wine they had ordered. Underground Cellar filed for a chapter 7 liquidation in the U.S. Bankruptcy Court in Wilmington, Del., in May, indicating the company would shut down its business. The bankruptcy filing included up to an estimated $11.6 million worth of wine, mostly ordered by roughly 25,000 customers, that has been stuck in limbo at the Napa warehouse. A court-appointed trustee has proposed selling the company’s remaining assets, including the wine, to Liquid Lotus, an entity owned by the company’s founder, Jeffrey Shaw, for $600,000.
A federal judge rejected pleas by opponents of the Boy Scouts of America’s bankruptcy reorganization to block distributions from the $2.4 billion settlement fund for sex-abuse victims created in the youth group’s chapter 11 case, WSJ Pro Bankruptcy reported. Insurance companies and a small group of sex-abuse plaintiffs who had opposed the Boy Scouts’ reorganization plan recently renewed their efforts to block it, seizing on the Supreme Court’s decision to examine a similar plan drawn up by closely held drugmaker Purdue Pharma. U.S. District Judge Richard Andrews in Wilmington, Del., said on Tuesday that, unlike Purdue’s bankruptcy plan, which hasn’t been put into motion, the youth group’s reorganization went into effect five months ago and many of the transactions it contemplates have already happened. Judge Andrews said the Boy Scouts and tens of thousands of sex-abuse victims have relied on the court-approved chapter 11 plan. A pause on the reorganization plan would throw into limbo the overwhelming majority of abuse claimants who support it, he said. The Supreme Court is set to examine on an expedited basis a central feature of both the Purdue and Boy Scouts reorganization plans: whether bankruptcy courts can extinguish legal claims against third parties that aren’t in chapter 11 without the consent of all claimants. Purdue’s plan would release its Sackler family owners from opioid-related liabilities in return for up to $6 billion in settlement payments over time from the family members, who have denied wrongdoing. Similarly, the Boys Scouts’ affiliated councils and partner organizations are being shielded from sex-abuse lawsuits under its chapter 11 plan. The youth group’s plan took effect in April after winning approval from a bankruptcy court last year and surviving an appeal before Judge Andrews in March. The plan is now being appealed to the Court of Appeals for the Third Circuit in Philadelphia.
Prison healthcare provider YesCare and its backers reached a $37 million settlement of legal and financial liability it moved into bankruptcy court through an emerging corporate restructuring tactic, WSJ Pro Bankruptcy reported. YesCare, among the nation’s largest providers of healthcare in prisons and jails, agreed to the proposed deal with a committee of creditors whose claims it shifted to chapter 11 through a legal tactic known as the Texas Two-Step. The settlement payment from YesCare and its investors would cover only a fraction of the claims asserted by inmates who filed malpractice lawsuits against the business or vendors it failed to pay. If approved in bankruptcy court, the proposed deal would also resolve the bankruptcy case filed earlier this year by Tehum Care Services, the shell entity used to ferry the company’s debts and liabilities to chapter 11. YesCare put a new spin on the Texas Two-Step by using it earlier this year to address not just tort lawsuits, but ordinary commercial debts to hospitals, physicians and other vendors. YesCare began the chapter 11 process by separating assets from liabilities last year through a corporate reorganization in Texas. The Tehum affiliate was made responsible for the company’s liabilities before it filed for protection in February in the U.S. Bankruptcy Court in Houston.
