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As the cryptocurrency mania raged, Congress took a hands-off approach, keeping the fast-growing industry in legal limbo as it spawned startups and drew billions of dollars from investors. That’s left it to the courts to deal with the wreckage, Bloomberg News reported. The bankruptcies of FTX Group, Celsius Network and Genesis Global are promising to turn judges into after-the-fact rulemakers for an anarchic industry whose pioneers saw it as a way to keep money beyond government reach. With little guidance to go on, the judges will need to decide fundamental questions with high stakes for creditors who bankrolled the companies and the customers who trusted them with their funds. Among them: Is a token more like money or a security like a stock or a bond? What’s owed to those who deposited cryptocurrencies on platforms that are now broke? Who has the right to be repaid first? And how does the court even properly value debts denominated in tokens — just privately concocted bits of digital code — instead of the U.S. dollar? None of that is clear. “Bankruptcy courts are doing things that the normal regulatory system is not able to provide, like guidance,” said Yesha Yadav, a law professor at Vanderbilt Law School and former World Bank lawyer who specialized in financial regulation and insolvency. “It’s essentially becoming like a proxy regulator.” The precedents that emerge from the bankruptcies will have the ability to shape an industry that for years avoided direct oversight as Congress failed to enact legislation to put it under the sway of Washington regulators. In the absence of a cryto-specific law, the Securities and Exchange Commission and the Commodity Futures Trading Commission have been left to decide for themselves how to use their current powers over the securities and derivative industries to crack down on alleged wrongdoing in cryptocurrencies. But the bankruptcy decisions have the potential to affect the business more quickly because regulators typically have to ask a court to enforce their rulings.

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Brazilian hedge fund manager SPX Capital is among asset management firms taking the lead in a group of local bondholders of troubled retailer Americanas SA organizing for restructuring negotiations, Bloomberg News reported. SPX, XP Asset Management, Riza, Icatu Vanguarda, Prada, Moneda and Exes were appointed as members of the committee that will represent a group of holders of the firm’s domestic debt, according to a document reviewed by Bloomberg. The group also approved hiring law firm E.Munhoz Advogados as its legal adviser, according to minutes from a Feb. 6 meeting. Americanas filed for bankruptcy protection last month, just days after finding 20 billion reais ($3.9 billion) of “accounting inconsistencies” that artificially boosted its profits and reduced reported liabilities. SPX, one of Brazil’s largest independent hedge fund managers with over 76 billion reais in assets, hired Albano Franco from Banco BTG Pactual’s asset-management unit in 2019 to build out its credit venture. Earlier this week, another Brazilian hedge-fund power house — Verde Asset Management — said it was stung by the rout in Americanas’ local notes. The firm said exposure to local bonds brought a 14 basis-point loss to its flagship fund last month, trimming January gains to 2.7%. 

A federal judge yesterday rejected a proposal to modify Sam Bankman-Fried's bail conditions, despite an agreement between the FTX cryptocurrency exchange founder and prosecutors to address potential witness tampering concerns, Reuters reported. U.S. District Judge Lewis Kaplan in Manhattan did not provide reasons for the denial, and said a hearing on bail remains scheduled for Feb. 9. A spokesman for Bankman-Fried declined to comment. The office of U.S. Attorney Damian Williams in Manhattan also declined to comment. Bankman-Fried, 30, has been free on $250 million bond and living in Palo Alto, Calif., with his parents, who guaranteed the bond, since pleading not guilty to looting billions of dollars from the now-bankrupt FTX. On Tuesday afternoon, he formally appealed Kaplan's Jan. 30 ruling granting a request by 11 media outlets including Reuters to reveal the names of two other people guaranteeing his bail. Bankman-Fried has said his parents, both Stanford Law School professors, had been harassed and received physical threats since FTX's collapse, and there was "serious cause for concern" the additional guarantors might suffer similar treatment. Prosecutors had asked last month to tighten bail, citing Bankman-Fried's efforts to contact both the general counsel of the FTX U.S. affiliate and new FTX Chief Executive John Ray, ostensibly to provide assistance.

Hudson Bay Capital Management is the anchor investor of the share sale launched Tuesday by Bed Bath & Beyond to stave off bankruptcy, Bloomberg News reported. The embattled retailer lined up investors for an eleventh-hour cash infusion that would allow it to keep operating outside of chapter 11 protection, Bloomberg previously reported. Hudson Bay, a New York-based multi-strategy hedge fund, comprised the largest order among several institutional investors that helped Bed Bath & Beyond enter into the transaction Tuesday, said the people, who asked not to be named discussing private company information. B. Riley Securities Inc. arranged the deal. The company gathered orders from institutional investors to cover the full offering, which will ultimately raise more than $1 billion. Bed Bath and Beyond also worked with advisers from Kirkland & Ellis, Lazard and AlixPartners.

Pet-care retailer Independent Pet Partners Holdings LLC filed for bankruptcy, seeking to sell some of its stores to its top lenders, WSJ Pro Bankruptcy reported. The Woodbury, Minn.-based company filed for chapter 11 in the U.S. Bankruptcy Court in Wilmington, Del., on Sunday, blaming a sudden change in consumers’ pet food preference and the COVID-19 pandemic for lost revenue. Founded in 2017, the company has expanded its footprint by acquiring regional pet-store chains. The portfolio spans about 160 stores in a dozen states across the nation, under the banners Chuck & Don’s, Kriser’s Natural Pet, Natural Pawz and Loyal Companion, according to court papers. The company generated about $220 million in net sales in 2022. As of the petition date, it had about $182 million in assets and about $215 million in liabilities, according to the filing. It recorded about $111.4 million in secured debt. The company said its focus on grain-free, high-protein dog food caused it to lose about $10 million in sales in the second half of 2019 because pet owners stopped buying that type of product after reading reports that the food could cause dilated cardiomyopathy, a potentially fatal heart disease in dogs, according to the declaration filing by Stephen Coulombe, co-chief restructuring officer of the company. The filing said the U.S. Food and Drug Administration hasn’t established a causal relationship between grain-free diets and the disease.

Bed Bath & Beyond Inc. said on Monday it was planning to raise some $1 billion through an offering of preferred stock and warrants in a last-ditch effort to stave off bankruptcy, Reuters reported. The home goods retailer said in securities filings that if it can't complete the complex transaction, it would "likely file for bankruptcy protection." The chain has said in recent weeks that it had defaulted on a loan and may not be able to remain in business, raising concerns about its future. Bed, Bath & Beyond held talks in recent days with an investment firm to underwrite a significant portion of the proposed offering. Bed Bath said it was planning to raise just over $1 billion through sales of preferred stock and warrants and from securities when the warrants are exercised. Bed Bath will receive a waiver on its recent bank default should the proposed offering succeed, the company said. The embattled retailer said it would use the proceeds of the offering to repay outstanding revolving loans which it would then use to make an interest payment on bonds it missed on February 1. It also plans to draw an additional $100 million from a first-in-last-out loan from investment firm Sixth Street, that takes priority for repayment in a possible bankruptcy.

FTX's lawyers on Monday strongly urged a U.S. bankruptcy judge in Delaware not to greenlight a court-supervised investigation into its collapse, saying it would waste time and money and could pose a security risk, Reuters reported. FTX attorney James Bromley at Monday's hearing told Bankruptcy Judge John Dorsey, who is overseeing the crypto exchange's chapter 11 case, that the proposed review the U.S. Department of Justice's bankruptcy watchdog is seeking is so vague that it is essentially asking for an examiner to look at "everything, everywhere, all at once." The U.S. Trustee has asked Dorsey, to appoint an independent examiner to investigate allegations of fraud, misconduct, and mismanagement that are "too important to be left to an internal investigation." Juliet Sarkessian, an attorney for the U.S. Trustee, argued such an investigation is mandatory under federal law in large bankruptcy cases where DOJ or a creditor requests one. Judge Dorsey, who said he believed an examiner was not required, but should be appointed if "appropriate," did not rule on Monday. He asked FTX, its creditors and the U.S. Trustee to try to reach an agreement on the scope of a potential examiner review. FTX said that an examiner would merely duplicate work already being done by FTX, its creditors, and law enforcement agencies, adding cost and delay to its effort to repay customers in bankruptcy.

Potential buyers are inquiring about purchasing the struggling crypto lender Hodlnaut and its claims against bankrupt digital-asset exchange FTX, Bloomberg News reported. “Various parties who are interested in acquiring” Singapore-based Hodlnaut’s crypto platform and FTX claims have contacted the interim judicial managers overseeing the company after it sought protection from creditors, according to an affidavit seen by Bloomberg News. The judicial managers are in the process of signing non-disclosure agreements with the potential investors, the document shows. The affidavit indicates that as of Dec. 9 Hodlnaut Group owed a combined $160.3 million, or 62% of outstanding debt, to Algorand Foundation, Samtrade Custodian, S.A.M. Fintech and Jean-Marc Tremeaux. Hodlnaut, which also has operations in Hong Kong, halted withdrawals in August amid last year’s crypto rout — one of many lenders to hit the buffers. FTX accounted for about 72% of the digital assets the platform deployed on centralized exchanges, with an estimated market value of S$18.5 million ($14 million), according to a November filing. Last month, key Hodlnaut creditors rejected a proposed restructuring plan and said they preferred to liquidate the company.

Genesis, its parent company Digital Currency Group (DCG), and crypto exchange Gemini have reached an agreement on an initial term sheet to settle issues that have left progress on Genesis' bankruptcy repayment plan at a standstill for the past two weeks, YahooFinance.com reported. According to a source familiar with the matter, the term sheet includes "a compromise and settlement of inter-company claims between Genesis and DCG, as well as issues revolving around Gemini." Cryptocurrency broker Genesis filed for bankruptcy on January 20 with hopes of delivering a speedy, prearranged plan. Genesis owes creditors a total of $3.5 billion, a sum includes claims of at least $795.5 million owed to 340,00 Gemini Earn customers, many of which are retail investors. DCG, Genesis' parent company, owes the bankrupt firm approximately $1.65 billion, including a $1.1 billion promissory note and $575 million due in May of this year, per a court filing.

Lawyers for veterans suing 3M Co. over its earplugs have asked a federal judge to dismiss the bankruptcy filing of a 3M subsidiary that would shield the industrial conglomerate from court trials, WSJ Pro Bankruptcy reported. The motion for dismissal filed late Thursday in U.S. Bankruptcy Court for the Southern District of Indiana followed a federal appeals court ruling last week that tossed out a chapter 11 filing by LTL Management LLC, a company created by Johnson & Johnson in 2021. J&J had transferred its talcum-powder-related liabilities to LTL, which then filed for bankruptcy, blocking plaintiffs from bringing additional lawsuits. 3M, the St. Paul, Minn.-based manufacturer of thousands of consumer and industrial products, followed a similar strategy in 2022. Its Aearo Technologies LLC subsidiary filed for bankruptcy after accepting the responsibility for about 230,000 claims from veterans alleging that 3M’s foam earplugs failed to protect them from service-related hearing loss. 3M has said that its military earplugs are safe if service members receive proper training on using them. Aearo was the original manufacturer of the earplugs, but 3M acquired the company in 2008 and absorbed its operations into 3M. 3M pledged last summer to pay for the settlement of the claims negotiated by Aearo in bankruptcy court.