• Yet to gain full control of local subsidiary’s assets

• Legal filings hint at control battle with Chapter 11

• SBF probed for US law breaches before collapse

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX’s Bahamian provisional liquidators have yet to gain control of all its assets amid signs that “serious fraud and mismanagement” may have caused the group’s collapse, it has been revealed.

Brian Simms KC disclosed in a November 15, 2022, affidavit filed with the southern New York federal bankruptcy court that the provisional liquidators presently cannot determine the financial position of FTX Digital Markets, the group’s Bahamian subsidiary, because they lack access to the necessary documents and other information.

The Lennox Paton senior partner, who is working with PricewaterhouseCoopers (PwC) duo, Kevin Cambridge and Peter Greaves, on FTX Digital Markets’ provisional liquidation made the disclosures in legal filings requesting that the US court recognise them and the Bahamian liquidation as “a foreign main proceeding” under American federal bankruptcy laws.

This will affirm the trio as FTX Digital Markets’ foreign representatives in the US, and thus enable them to secure bank accounts and other assets; trace money flows; issue any subpoenas that are necessary; and obtain all relevant documents that will aid with the Bahamian subsidiary’s likely full liquidation and winding-up.

And the Bahamian provisional liquidators’ filings also hint at a potential battle for control of FTX’s insolvency proceedings, and the group’s remaining assets, with the Chapter 11 bankruptcy protection proceedings initiated by the failed crypto exchange last Friday.

Those proceedings are before the Delaware federal bankruptcy court, and Mr Simms’ affidavit alleged that only he could have authorised the Chapter 11 filing given his appointment as provisional liquidator by the Bahamian Supreme Court the day prior. Such permission was not granted, and he “rejects the validity” of any efforts to place FTX’s affiliates in Chapter 11 protection.

Mr Simms argued that control of FTX Digital Markets and the crypto exchange’s worldwide operations resided in The Bahamas since Sam Bankman-Fried, its co-founder and chief executive until last Friday, together with senior management all resided here.

As a result, the focal point of efforts to wind-up FTX in an orderly fashion should be The Bahamas rather than the Delaware bankruptcy court, especially since the “vast majority” of the exchange’s international (meaning non-US clients) are likely to be creditors of the Bahamian subsidiary.

“The joint provisional liquidators’ findings to-date indicate that serious fraud and mismanagement may have been committed with respect to FTX Digital and the FTX affiliates,” Mr Simms alleged, although no figures and few details were provided given that the probe is at an early stage.

“At the most basic level, the joint provisional liquidators are presently unable to ascertain FTX Digital’s financial position, its assets and liabilities more generally, and does not have the totality of the information necessary to protect FTX Digital’s assets.”

Tribune Business can also reveal that Mr Bankman-Fried and FTX were already being investigated for potential violations of US securities laws prior to the crypto exchange’s spectacular implosion last week, which has sent shockwaves through the global digital assets industry and wider financial services markets.

A class action lawsuit filed over FTX’s collapse on Tuesday in the south Florida court, naming Mr Bankman-Fried and a host of sporting and other celebrities used to promote the crypto exchange as defendants, disclosed that Texas securities regulators were probing if its interest-bearing crypto currency accounts were an “offering of unregistered securities”.

The revelation was contained in an October 14, 2022, declaration by Joseph Rotunda, the Texas State Securities Board’s director of enforcement, that was filed in connection with Chapter 11 bankruptcy proceedings involving Voyager Digital Holdings - an entity that FTX and Mr Bankman-Fried has been hoping to acquire before their operations came crashing down.

“I am also familiar with FTX Trading, doing business as FTX as described herein,” Mr Rotunda alleged. “As more fully explained throughout this declaration, I am aware that FTX Trading, along with West Realm Shires Services, doing business as FTX US, may be offering unregistered securities in the form of yield-bearing accounts to residents of the US.

“These products appear similar to the yield-bearing depository accounts offered by Voyager Digital Ltd, and the enforcement division is now investigating FTX Trading, FTX US and their principals, including Sam Bankman-Fried.” 

One Bahamian financial services industry source, speaking on condition of anonymity, said of the Texas revelations: “What did the Securities Commission of The Bahamas know and when should they have known it? What does the Securities Commission have to say about this unravelling at the same time.”

Mr Simms, meanwhile, said he had given no permission for FTX Trading and 134 other group affiliates to file for Chapter 11 bankruptcy protection in the Delaware court despite being appointed provisional liquidator of the Bahamian subsidiary the day before.

Noting that FTX Digital Markets was not among the entities covered by the Chapter 11 proceedings, the Lennox Paton partner said: “As of the date of the Delaware petition, no person other than me, as provisional liquidator, was authorised to take any act including, but not limited to, filing the Delaware petition in connection with FTX Digital and FTX Digital’s subsidiaries to the extent the authority of FTX Digital’s directors and management was requisite.

“I did not authorise or approve - in writing or otherwise - any of FTX Digital’s officers, management or employees to file, or cause to be filed, the Delaware petition...... I reject the validity of any purported attempt to place FTX affiliates in bankruptcy insofar as such filing required FTX Digital’s officers, directors or management to approve and authorise such action....

“Despite the seemingly complex structure of the FTX brand companies, the entire FTX brand was ultimately operated from a single location: The Bahamas. All core management personnel likewise were located in The Bahamas,” Mr Simms continued. 

“Sam Bankman-Fried has resided in The Bahamas since 2021 and has confirmed that he operated the entirety of the FTX brand in and from The Bahamas. In addition, the power to transfer the digital assets held by the FTX exchanges is centralised in The Bahamas, and the possessory, custodial, control and-equitable property interests in all FTX brand property is-believed to be maintained in The Bahamas.....

“It is believed the vast majority of international (non-US) account holders with accounts on the FTX crypto currency exchange showing credits of crypto currency are creditors of FTX Digital. In addition, there are other creditors including investors of FTX Digital. FTX Digital is presently cash flow insolvent and is likely to be balance sheet insolvent.”

Confirming that the Bahamian provisional liquidators have gained control of FTX Digital Markets’ corporate office at the Veridian Corporate Centre in west New Providence, and are seeking to secure all its assets and related documents, Mr Simms reiterated: “In the ordinary course of work as the joint provisional liquidators, we have learned that FTX Digital was headquartered in The Bahamas, that Sam Bankman-Fried effectively controlled and owned FTX Digital, that Sam Bankman-Fried resided in The Bahamas, that the power to transfer the digital assets held by the FTX exchanges is centralised in The Bahamas, that the operations of all FTX brand entities operated out of The Bahamas through FTX Digital, and that the possessory, custodial, control and equitable property interests in all FTX Digital property is maintained in The Bahamas.”

Mr Simms’ affidavit highlights the complex cross-border issues that will at times dominate FTX’s winding-up. He indicates that The Bahamas, via the provisional liquidators and Supreme Court, will seek to exercise its authority and lead the insolvency proceedings given that FTX’s controlling mind and management was exercised from this jurisdiction. This potentially sets the stage for a battle for control with the Delaware court’s Chapter 11 process.

Noting that FTX Digital Markets was incorporated in The Bahamas as an International Business Company (IBC) on July 22, 2021, Mr Simms alleged: “FTX Digital operated a digital asset exchange, which offered functionality similar to traditional brokerage accounts. Digital asset exchanges typically generate revenue by collecting a fee for each trade they facilitate, but many also engage in trading (or other commercial use of) cryptocurrency that is transferred to them by customers.

“The FTX platform also appears to have offered customers the ability to take various leveraged or derivative positions, such as margin trading (loans), futures, options and volatility products, as well as the ability for one customer to buy or sell directly from another - serving customers outside of the US, Japan, Bahamas, Australia and Singapore.

“In addition, the owners and operators of FTX Digital created their own digital asset called the FTX token (FTT). This token allowed FTX Digital users to obtain discounts on trading fees, collateralise their futures positions and benefit from other exchange-centric uses.”

Mr Simms said recognition of the Bahamian provisional liquidators in the US was “critical to the orderly and effective liquidation of FTX Digital for the benefit of all creditors and stakeholders”. He warned that crypto assets were especially susceptible to being converted into fiat currency and “dissipated” through wire transfers and other transactions

Besides determining whether FTX Digital Markets has inter-group claims against entities such as Alameda Research, Mr Bankman-Fried’s trading firm, Mr Simms added: “US records of FTX Digital and the FTX brand are likely to be of critical importance to the Bahamian liquidation for multiple reasons.

“For example, these documents could provide a clear picture of the reasons for the insolvency of FTX Digital, and allow the joint provisional liquidators to make an informed judgment as to the potential third-party claims available to FTX Digital, and to determine if FTX Digital holds additional, undisclosed assets.

“The books and records will provide valuable insight into the financial machinations that led to the alleged dissipation of FTX Digital assets at the expense of creditors. The discovery of these agreements and other financial documents will likely provide further insight into the financial engineering, which appears to have contributed to the insolvency of FTX Digital.”