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Investigators at a key US regulator have concluded that the co-founder of Voyager Digital Ltd. broke derivatives regulations before the failed crypto lender plunged into bankruptcy last year, Bloomberg News reported. Staff in the Commodity Futures Trading Commission’s enforcement division recommended internally that the agency accuse Stephen Ehrlich of breaking its rules by misleading customers about the safety of their assets following a probe into Voyager’s conduct. CFTC commissioners are now voting on whether to approve an enforcement action against him within days, said the people, who asked not to be identified discussing the confidential deliberations. The CFTC can seek fines and impose other non-criminal penalties on those it accuses of wrongdoing. The agency, whose investigations don’t always result in enforcement actions, declined to comment. Voyager disclosed in August 2022 as part of its bankruptcy case that the CFTC had sought information related to its business, customers and lending activities. Ehrlich, who was also chief executive officer when Voyager filed for bankruptcy in July 2022, has not been formally accused of any wrongdoing. In an emailed statement, he said he was “angered and perplexed” by the government’s anticipated civil claims and called them unfounded.

Sam Bankman-Fried authorized the illegal use of FTX customers' funds and assets to plug financial gaps at an affiliated hedge fund from the exchange's earliest days, FTX's co-founder Gary Wang told a New York jury on Friday, as prosecutors pressed their case that Bankman-Fried was the mastermind behind one of the biggest frauds in U.S. history, the Associated Press reported. Eventually, the losses at the hedge fund, Alameda Research, became so large that there was no way to hide them any longer, Wang said in his second day of testimony. “FTX was not fine,” Wang said, referring to the now-infamous tweet that Bankman-Fried wrote only a few days before the exchange filed for bankruptcy in November 2022. Prosecutors allege that Bankman-Fried stole billions of dollars from investors and customers in order to fund a lavish lifestyle in The Bahamas and buy the influence of politicians, celebrities and the public. Wang was FTX's chief technology officer and is part of what has been referred to as the “inner circle” of FTX executives who have agreed to testify against Bankman-Fried in exchange for leniency in their own criminal cases. He is expected to finish his testimony Tuesday. Wang has pleaded guilty to wire fraud, securities and commodities fraud as part of his agreement with prosecutors.

Sam Bankman-Fried’s two multimillion-dollar luxury jets are now subject to forfeiture, according to a filing from the United States Department of Justice (DOJ) on Oct. 4, CoinTelegraph.com reported. The document states the possibility of forfeiture comes as a result of the “offenses described in Counts One through Four and Seven of Indictment 22 Cr. 673 (LAK),” which were brought against Bankman-Fried. The aircraft listed are a Bombardier Global and an Embraer Legacy. These two aircraft are currently at the heart of an ownership debacle between the government, FTX and the aviation company operating the jets, Island Air Capital, according to documents filed on Sept. 21 with the U.S. Bankruptcy Court for the District of Delaware. In the arguments, the government said both aircraft are subject to forfeiture due to being purchased with fraudulent funds, while FTX says the loans used to purchase the jets were not documented.

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.

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.

A New Jersey appeals court on Tuesday threw out a $223.8 million verdict against Johnson & Johnson that a jury had awarded to four plaintiffs who claimed they developed cancer from being exposed to asbestos in the company's talc powder products, Reuters reported. The Superior Court of New Jersey, Appellate Division found that a lower court judge should not have allowed some of the scientific expert testimony the plaintiffs presented to jurors at trial. J&J Worldwide Vice President of Litigation Erik Haas said in a statement that the decision "resoundingly rejects ... the 'junk science' advanced by purported 'experts' paid by the mass tort asbestos bar." The company again said that its talc products are safe and do not contain asbestos. The jury in the case had ordered the company to pay $37.2 million in compensatory damages and $750 million in punitive damages, though that amount was automatically reduced to $186.5 million under state law. In reversing the verdict and ordering a new trial, a three-judge panel of the appeals court found that the trial court failed to fulfill its "gatekeeping role" of assessing whether the plaintiffs' experts based their testimony on sound science. In their opinion, the judges found that three experts had not explained the facts or methods they used to support their opinions that the plaintiffs got cancer from being exposed to asbestos in talc products.