By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX’s Bahamian provisional liquidators were yesterday urged to “thoroughly investigate” any payouts to local investors that violated the Supreme Court asset freeze as the US Justice Department moved to intervene in Delaware.

Local insolvency practitioners told Tribune Business that the trio appointed to take charge of FTX Digital Markets, the collapsed crypto exchange’s Bahamian subsidiary, have “massive powers” to recover and “claw back” any withdrawals found to represent a so-called fraudulent preference that disadvantages other creditors and investors.

The call came as the US trustee, who represents the US Justice Department in bankruptcy cases, moved for the appointment of an “independent examiner” to investigate the claims of “fraud, dishonesty and mismanagement” surrounding FTX’s spectacular collapse from a worth of $32bn to zero in just over a week.

Andrew Vara, in a filing with the Delaware Bankruptcy Court, argued that such an appointment would allow John Ray, appointed as chief executive for FTX Trading and the 133 other entities covered by the Chapter 11 bankruptcy proceedings, to focus on restructuring, selling-off or liquidating the group while leaving any probe to someone else.

He added that FTX’s failure was “exactly the kind of case that requires the appointment of an independent fiduciary to investigate and to report on the debtors’ extraordinary collapse”. Mr Vara’s filing also drew on assertions by Brian Simms KC, the Lennox Paton senior partner, and one of the three Bahamian joint provisional liquidators, that “serious fraud and mismanagement may have been committed” at FTX Digital Markets.

“Over the course of eight days in November, beginning with reports of significant problems with one debtor’s (Alameda Research) balance sheet, the debtors suffered a virtually unprecedented decline in value - from a market high of $32bn just earlier this year - and a severe liquidity crisis after a proverbial ‘run on the bank’ amid revelations of multiple corporate failures and misuse of customer funds facilitated by ‘software to conceal’ it,” he alleged.

“The result is what is likely the fastest big corporate failure in American history, resulting in these ‘free fall’ bankruptcy cases. Debtors’ approximately one million worldwide creditors, outside investors and regulators are demanding answers to what happened and how......

“The appointment of an independent examiner would be in the interests of the debtors’ creditors and other parties in interest in the debtors’ estates. An examiner could - and should - investigate the substantial and serious allegations of fraud, dishonesty, incompetence, misconduct and mismanagement by the debtors, the circumstances surrounding the debtors’ collapse, the apparent conversion of exchange customers’ property, and whether colorable claims and causes of action exist to remedy losses.”

US federal bankruptcy courts typically appoint such “independent examiners” to probe exactly the kind of claims being made against FTX. One Bahamian attorney, speaking on condition of anonymity, said the US Justice Department’s (effectively the federal government) intervention meant that the prospects of The Bahamas leading the way on the crypto exchange’s restructuring and winding-up have become even dimmer.

“If you think for one solitary moment that the Bankruptcy Court and John Ray are going to allow the provisional liquidators to get in their way, think again,” they added. “There is no possibility of that happening. It’s going to get worse. This [FTX’s collapse] is not going to go away. This is not going to die. I’m afraid we’re on a collision course.”

Meanwhile, John Bain, the HLB Bahamas accountant and partner, who specialises in forensic accounting and receiverships/liquidations, told Tribune Business that if FTX Digital Markets moves to a full winding-up then the liquidators could “claw back” payments made to investors and creditors going back up to six months to a year before the collapse actually occurred.

Explaining that this would require proof that FTX Digital Markets’ directors knew the business was in trouble from then, Mr Bain said: “If they did move funds after the freeze order it would be a violation of the court’s order and the liquidators would have the power to claw back those funds.

“They possibly have the power to claw back funds from six months to one year if the liquidators have evidence the directors knew, or ought to have known, of any solvency or going concern problems or there were any signs the business was in trouble. There’s a provision to claw back funds paid out for any reason. The liquidators have massive powers to claw back.”

Another accountant, who also works in the insolvency field, told this newspaper it was “very important” that any fraudulent preference payouts be recovered to protect The Bahamas’ reputation as well as the interests of other creditors and depositors.

Responding after Sam Bankman-Fried, the embattled FTX chief, admitted to prioritising and making payouts to Bahamas-based clients around the time the freeze order was imposed, they said: “It’s not a good look. It’s totally outside the law to do that. It’s almost akin to insider trading. People in financial services and the liquidation community pretty much know that’s something that should not have been done, and should be investigated thoroughly whether made to Bahamians or not.”

This newspaper previously confirmed that some clients of FTX Digital Markets were able to retrieve their assets - which the crypto exchange was holding for them on trust or in escrow, in a fiduciary capacity - starting around the time that the Supreme Court issued its Order shutting down all local operations.

FTX, in a Twitter tweet sent out at 2.08pm on Thursday, November 10, barely hours before the Securities Commission’s announcement of the asset freeze and provisional liquidator’s appointment, wrote: “Per our Bahamian HQ’s (FTX Digital Markets) regulation and regulators, we have begun to facilitate withdrawals of Bahamian funds. As such, you may have seen some withdrawals processed by FTX recently as we complied with the regulators.

“The amounts withdrawn comprise a small fraction of the assets we currently hold on hand, and we are actively working on additional routes to enable withdrawals for the rest of our user base. We are also actively investigating what we can and should do across the world.”

This assertion, and the subsequent fall-out, eventually prompted the Securities Commission to clarify that it had not given FTX Digital Markets permission to release customer funds or prioritise/give preference to Bahamian clients. In a statement issued more than 48 hours after FTX’s original tweet, it warned that such payments would be treated as “voidable preferences” and likely subject to being “clawed back” by the provisional liquidator.