FTX Chief Executive John J. Ray III released a report that alleged an unnamed senior lawyer assisted the crypto exchange’s founder, Sam Bankman-Fried, in misusing customer deposits, the Wall Street Journal reported. Based on the actions that the report alleges, the unnamed lawyer in the document appears to be FTX’s former chief regulatory officer, Daniel Friedberg, people familiar with the matter said. Friedberg has been cooperating with the investigation and didn’t know about the misuse of FTX customer funds, said one of the people, who is close to Friedberg. The report alleged that the lawyer and Bankman-Fried lied to banks and auditors, executed false documents, and moved between jurisdictions to avoid detection of wrongdoing. The exchange owed customers $8.7 billion at the time of its collapse, the report said.
Wintermute Trading Ltd., one of the biggest cryptocurrency market makers, was accused in a proposed class-action lawsuit of helping former Celsius Network Ltd. Chief Executive Officer Alex Mashinsky dupe investors in his now-bankrupt crypto lending firm, Bloomberg News reported. Plaintiffs who sued Mashinsky and other Celsius executives in July 2022 amended their federal lawsuit in New Jersey this week to add London-based Wintermute as a defendant, entangling another major industry player in the fallout from Celsius’s collapse. According to the lawsuit, Wintermute engaged in “wash trading” — which creates the illusion that an asset is trading far more often than it actually is — and other improper activities starting in March 2021 to inflate the value of Celsius’s native CEL token and loan products. Wintermute also played a key role in Mashinsky’s futile effort to prop up CEL in May 2022 after the collapse of the Terra and Luna tokens, the investors alleged. “This wash trading activity corrupted the CEL Token prices, as well as the reported trading volume, all in a strategic pattern to deceive investors,” lawyers for the investors said in the suit. Celsius froze all accounts on June 13, 2022, and filed for bankruptcy the next month amid a $2 trillion market crash that wiped out some of the industry’s biggest names and exposed hundreds of thousands of investors to steep losses.
Bankrupt FTX Trading Ltd. is suing to recover $700 million that the failed crypto exchange paid venture capital firm K5 Global and its principals after they provided access to celebrities and politicians, Bloomberg News reported. K5 Global founder Michael Kives and managing member Bryan Baum allegedly profited by ingratiating themselves with former FTX Chief Executive Officer Sam Bankman-Fried, who transferred vast sums from FTX to K5 and related ventures without meaningful due diligence, according to FTX’s lawsuit, filed Thursday in Delaware bankruptcy court. Bankman-Fried “was captivated” by Kives after attending a February 2022 dinner party at his house alongside guests including former politicians and a “centibillionaire CEO.” Days later, Bankman-Fried attended a Super Bowl party that included well-known celebrities, the lawsuit said. In an internal note Bankman-Fried drafted shortly after the events, he said Kives and Baum were “something of a one-stop shop for relationships that we should utilize” and that in exchange, the pair wanted him and FTX to consider celebrity endorsements with their friends and “maybe us to invest in them or some stuff, idk.” Read more.
In related news, a group of media organizations on Friday appealed a court decision that allows collapsed crypto exchange FTX to keep customer names secret during its bankruptcy case, Reuters reported. U.S. Bankruptcy Judge John Dorsey in Wilmington, Delaware, ruled earlier this month that FTX did not have to reveal its customers' names because doing so could expose them to identity theft and other scams. Bankrupt companies are typically required to reveal the names of their creditors and the amounts of debt they hold, including those of individual customers, but U.S. bankruptcy law contains an exception for information that would create undue risk of identity theft or other injury. Bloomberg, Dow Jones & Company, the New York Times Company and the Financial Times appealed Dorsey's ruling. Their attorneys have argued that FTX is not entitled to a "novel and sweeping exception" to bankruptcy's typical disclosure requirements simply because its customers used cryptocurrency. Read more.
The U.S. Securities and Exchange Commission has agreed to postpone the payment of a $30-million fine from bankrupt crypto lender BlockFi until creditors are paid back. The amount represents the balance of a $50-million settlement with the regulator from February 2022, CoinTelegraph.com reported. According to June 22 court filings, the SEC will forgo the amount owed by BlockFi to “maximize” and avoid delays in funds’ distribution to investors “until payment in full of all other Allowed Claims.” The document stated, “The Commission has agreed to forego participating in any distributions under the Plan or requiring any cash reserve in connection with such distributions.” In February 2022, the SEC announced actions against the crypto lending company over its failure to register its high-yield interest accounts as securities. BlockFi agreed to pay $50 million to the regulator as part of the settlement and another $50 million to 32 U.S. states filing similar complaints. According to court documents, the SEC was at the top of BlockFi creditor’s list, along with West Realm Shires Services Inc. (doing business as FTX US). BlockFi filed for chapter 11 bankruptcy protection in late November after the FTX crisis raised questions about its financial health. According to its bankruptcy filing, BlockFi had $256.9 million in liquidity at that time.
Silicon Valley Bank customers whose deposits were seized by U.S. authorities after the lender’s collapse are fighting back, the Wall Street Journal reported. Customers who held money in the bank’s Cayman Islands branch found their accounts wiped down to zero after SVB collapsed in March, because a U.S. move to guarantee deposits didn’t apply to them. Their pain was compounded when they found out First Citizens BancShares had acquired their loans from SVB — meaning they had lost their money, but kept their debts. Several firms including venture-capital funds in Hong Kong and mainland China have pushed back, filing a petition in a Cayman Islands court last week to initiate a windup procedure of the former U.S. bank’s branch there. The depositors held around $38 million in their Caymans SVB accounts, according to the petition. The depositors hope the move will increase their chances of getting their money back from the Federal Deposit Insurance Corp., which seized their funds. The petition, filed by law firm Campbells to the Cayman court on June 13, argues that it is “just and equitable” for SVB’s Cayman Islands branch to be wound up, since the branch was unable to pay debt. The petition also asks the court to approve the appointment of official liquidators to help find ways to retrieve the funds. The liquidators will be able to investigate and keep depositors informed and to ensure they are treated fairly, said Paul Kennedy, a partner at Campbells.
A bankruptcy judge has ruled to allow a Berkshire Hathaway–affiliated defunct talcum powder supplier to remain in bankruptcy to address thousands of personal injury cases, rejecting a request from a state court-appointed receiver to throw the case out of chapter 11, WSJ Pro Bankruptcy reported. Judge Michael Kaplan of the U.S. Bankruptcy Court in New Jersey said in his ruling Tuesday that the board of directors of former talc supplier Whittaker, Clark & Daniels had the authority to place the company under chapter 11 protection in April. The judge declined to dismiss the case requested by the receiver appointed by a South Carolina trial judge in March. The receiver, Peter Protopapas, was appointed after Whittaker Clark was hit by a $29 million verdict and found to be on the verge of insolvency. He argued in bankruptcy court that the appointment of the receiver by the state court stripped the company board’s authority to file for bankruptcy. Judge Kaplan said in his ruling that he can’t give weight to that argument, which he said was based on the receiver’s “mistaken understanding” of the receivership order. “This court will not, and cannot, give force to any subjective belief that the receivership order achieved something beyond the powers outlined therein — especially when that expansive interpretation would contravene case law and the Bankruptcy Code,” Judge Kaplan wrote in Tuesday’s ruling.
Koch Industries’ Georgia-Pacific can use a corporate affiliate’s bankruptcy case to shield itself against asbestos-related litigation, a federal appeals court said yesterday, WSJ Pro Bankruptcy reported. The U.S. Court of Appeals for the Fourth Circuit upheld an injunction in the chapter 11 case of Georgia-Pacific affiliate Bestwall that has prevented some 64,000 asbestos-related injury claims from proceeding against the pulp and paper manufacturer. Yesterday’s ruling backed the use of chapter 11 to resolve mass lawsuits through an emerging corporate restructuring strategy that has offered solvent corporations including Georgia-Pacific, Johnson & Johnson and France’s Compagnie de Saint-Gobain some of the protections of bankruptcy. They shifted legal liabilities to new subsidiaries before filing them for chapter 11, shifting more than a quarter-million injury lawsuits to bankruptcy court for resolution without the parent companies needing to enter chapter 11 themselves. Courts have taken varying views of the bankruptcy strategy, known in legal circles as the Texas Two-Step. Plaintiffs’ attorneys and other critics have argued the companies are misusing the chapter 11 system to sidestep jury trials and pressure injury victims into a favorable settlement for the firms.
The wind-up of crypto exchange FTX is set to be “very expensive by any measure” with professional fees already amounting to over $200 million, a court-appointed examiner said in a filing made on yesterday, CoinDesk.com reported. Katherine Stadler, a bankruptcy attorney appointed in March to check fees, said lawyers and other professionals had already racked up nearly 35,000 billable hours, equivalent to four solid person-years of work, by the end of January. “These proceedings appear on track to be very expensive by any measure,” said Stadler, citing costs that already amount to 2% of estate assets and 10% of reported cash, with 46 of the 242 attorneys assigned to the case charged over $2,000 an hour. "What makes these cases extraordinary… is the largely unregulated financial system in which the Debtors (and other similar financial technology companies) operate,” she said, citing the “nonexistence of even the most basic corporate governance” at Sam Bankman-Fried’s exchange, a description which echoes criticism leveled by new CEO John J Ray III.
The Rokit Group of Companies, the conflict-prone business conglomerate founded by billionaire John Paul DeJoria and his British partner, Jonathan Kendrick, may be reaching its legal event horizon in a series of court cases across the U.S., Sportico reported. Last week, the bankruptcy trustee managing the chapter 7 case of a Rokit subsidiary received court approval to retain an outside law firm to “investigate potential litigation claims.” The move by trustee Peter Mastan comes as the creditors’ meeting in the bankruptcy of Able Events, previously known as Rokit Marketing Inc., was continued last week for the 10th consecutive time since last summer. It has now been rescheduled for mid-September. Five years ago, Rokit put itself on the American sports map by entering into a series of high-profile, multimillion-dollar sponsorship deals with professional teams, including the NBA’s Houston Rockets, Formula 1’s Williams Racing, and the NFL’s Las Vegas Raiders and Los Angeles Chargers. However, each of these agreements prematurely collapsed after Rokit ceased making good on its payments. This pattern of delinquency extended to other of its business dealings as well: Last month, for example, a Los Angeles Superior Court jury ruled against a different Rokit subsidiary in a case brought by a former employee who had sued for breach of contract. That verdict represented just the latest legal setback for Rokit. After the company defaulted on its agreements with Williams Racing and the Houston Rockets, those teams separately took Rokit to arbitration and each prevailed with eight-figure rulings that were later reaffirmed in court. Rokit responded by putting six of its subsidiaries into voluntary bankruptcy, including the entities that were parties to the team sponsorships. Rokit has also since filed separate lawsuits against Team Williams Racing and the Houston Rockets parent company Fertitta Entertainment, in an effort to invalidate the arbitral rulings.
