• Hack forced relocation of local subsidiary’s assets

• Commission obtained Supreme Court’s approval

• Chapter 11 filings allege Gov’t violated Orders

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Securities Commission last night debunked accusations the Government “directed unauthorised access” to FTX’s systems, and aided the withdrawal of digital assets, in violation of Bahamian and US court orders.

Tribune Business has seen an emergency Supreme Court Order, dated November 12, 2022, that gave the regulator lawful permission to transfer assets potentially worth millions of dollars from FTX Digital Markets, the failed crypto exchange’s Bahamian subsidiary, to “a safer space” amid fears they were about to be stolen by hackers.

The Order, by Justice Loren Klein, completely rebuts allegations made by John J. Ray, appointed as FTX’s chief executive in the wake of its Chapter 11 bankruptcy protection filing, that he possesses “credible evidence that the Bahamian government is responsible for directing unauthorised access to the debtors’ [FTX’s] systems for the purpose of obtaining digital assets” held by the exchange on behalf of clients.

However, the potential damage to The Bahamas’ integrity and allegations from such unproven claims may now be hard to reverse. International news outlets, such as CNBC and Coindesk, were already yesterday reporting Mr Ray’s allegations and suggesting that FTX’s now-infamous founder, Sam Bankman-Fried, sought to hide assets from the Chapter 11 proceedings in Delaware by transferring them to Bahamian government control.

The Davis administration, which has been seeking to place as much distance as possible between itself and the flagship digital assets investor it once warmly embraced, declined to respond to the FTX-related claims despite the high risk of damaging fall-out for the Government, fledgling digital assets industry and wider financial services sector. Clint Watson, the Prime Minister’s press secretary, said: “We have no comment at this time.”

The Government, instead, once again left the response to the Securities Commission as it moves to disassociate itself from FTX. However, the Prime Minister’s assertion that The Bahamas will emerge from the crypto exchange’s spectacular implosion with an improved reputation as a sound digital assets jurisdiction now looks set for the severest of stress tests due to the erroneous accusations.

Well-placed sources, familiar with how events unfolded but speaking on condition of anonymity because they were unauthorised to talk publicly, said the Securities Commission was last weekend “really in a race against time” to secure and protect FTX Digital Markets assets for the benefit of clients and creditors.

They explained that the regulator had no choice but to exercise its powers under the Digital Assets and Registered Exchanges (DARE) Act, and seek an emergency Supreme Court Order on Saturday past, for fear that the ongoing hack could result in valuable digital assets being stolen and/or lost. This, in turn, threatened to deprive clients and creditors - the latter of whom includes FTX’s Bahamian vendors and employees - of a valuable recovery source.

The Supreme Court, which gave the regulator legal authority to do what it did, “ordered that the Securities Commission, as a regulator, do take the action of directing FTX Digital Markets Ltd, whether by its provisional liquidator or otherwise, to transfer forthwith to an account holder and/or digital wallets established and maintained by the Securities Commission all of the digital assets on the FTX.com platform within the possession, custody and/or under the control of FTX Digital Markets Ltd, its officers, directors, employees and/or agents, including any digital assets held upon trust by FTX Digital Markets, on the grounds that such action is necessary to protect the interests of clients and creditors of FTX Digital Markets and otherwise in the public interest to do so”.

One contact said FTX Digital Markets, as a Bahamas-domiciled entity, is not subject to the Chapter 11 proceedings in the Delaware court. However, they added that the Securities Commission - and the Supreme Court Order it obtained - took into account that the FTX companies subject to bankruptcy protection may claim an interest in some of the assets held by the Bahamian subsidiary.

This was taken care of by the reference to “digital assets held on trust”. The source added: “There was no attempt in any way to deprive the US court of its control.” They explained that the Securities Commission rather than Brian Simms KC, the already-appointed joint provisional liquidator, made the application to the Supreme Court because the latter had to determine if he was impacted by the Chapter 11 ‘freeze’ given the worldwide reach of US law.

Tribune Business was told the Securities Commission felt time was of the essence, and that it had to move urgently, because the hacking attempt threatened to cost it and the provisional liquidators control of FTX Digital Markets’ assets. “It was really a race against time for the Securities Commission to move those assets out of the control of FTX Digital Markets and into a safer space,” one source said. “The assets are now secure.

“Under the DARE Act there is authority for the Securities Commission to make an application to the court to take steps to protect the interests of clients and customers of a registrant. FTX Digital Markets was definitely a registrant... The Securities Commission took the view that they had the regulatory power under the Bahamian legislation to act. On that basis it did so.

“It couldn’t wait. The Securities Commission took the view that if it did nothing the reputation of the industry, the investors and those assets went some place else. That would be a very bad story for The Bahamas and regulation of this new industry. It decided to act. This is high stakes.”

These events were subsequently confirmed by the Bahamian regulator in a less detailed statement, which said: “On November 12, 2022, the Securities Commission, in the exercise of its powers as regulator acting under the authority of an order made by the Supreme Court of The Bahamas, took the action of directing the transfer of all digital assets of FTX Digital Markets to a digital wallet controlled by the Commission for safekeeping.

“Urgent interim regulatory action was necessary to protect the interests of clients and creditors of FTX Digital Markets. Under the Digital Assets and Registered Exchanges (DARE) Act 2020, the Commission has the authority to apply for a judicial order to protect the interests of clients or customers of a registrant of the Commission under the DARE Act.”

This explanation, though, cut no ice with Mr Ray and his legal team. In documents filed with the Delaware bankruptcy court yesterday, they alleged that Mr Bankman-Fried was seeking to move assets belonging to FTX entities covered by the Chapter 11 proceedings to accounts “under the control of the Bahamian government”.

“Mr Bankman-Fried, the co-founder and controlling owner of all of the debtors and of FTX Digital Markets, appears to be supporting efforts by the [Bahamian] joint provisional liquidators to expand the scope of the FTX Digital Markets proceedings in The Bahamas to undermine these Chapter 11 cases, and to move assets from the debtors to accounts in The Bahamas under the control of the Bahamian government,” Mr Ray and his attorneys charged.

“In verified messages posted through Twitter, Mr Bankman-Fried just yesterday expressed profane disdain for regulators, his regrets at these Chapter 11 cases having been filed, and disclosed his goal that ‘we win a jurisdictional battle versus Delaware’ to have any proceedings occur in The Bahamas.

“In addition, in connection with investigating a hack on Sunday, November 13, Mr Bankman-Fried and Mr Wang [FTX’s co-founder] stated in recorded and verified texts that ‘Bahamas regulators’ instructed that certain post-petition transfers of debtor assets be made by Mr Wang and Mr Bankman-Fried (who the debtors understand were both effectively in the custody of Bahamas authorities) and that such assets were ‘custodied on FireBlocks under control of Bahamian gov’t’.

“The debtors thus have credible evidence that the Bahamian government is responsible for directing unauthorised access to the debtors’ systems for the purpose of obtaining digital assets of the debtors - that took place after the commencement of these cases. The appointment of the joint provisional liquidators, and recognition of the Chapter 15 case, are thus in serious question.”

The Securities Commission’s explanation, and November 12 court Order, call this “credible evidence” into question. And the filings by Mr Ray and his legal team expose what is likely to be the real agenda - to persuade the Delaware court that they should take the global lead on FTX’s insolvency, not the Bahamian provisional liquidators, and that the proper forum for resolving all issues should be the US state rather than The Bahamas.

The new FTX chief executive has filed legal papers requesting that the Chapter 15 action filed in the southern district of New York bankruptcy court by Mr Simms and his fellow Bahamian provisional liquidators, PricewaterhouseCoopers (PwC) accountants Kevin Cambridge and Peter Greaves, be transferred to Delaware.

The FTX Digital Markets liquidators are seeking recognition as “the main foreign proceeding” from the US courts. This will 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.

The Bahamas, via the provisional liquidators and Supreme Court, will thus 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 that yesterday escalated further.

By trashing The Bahamas’ reputation, Mr Ray and his team are likely seeking to influence and persuade the Delaware court to rule in their favour. “This is a tussle for control, that’s all it is,” one source said.

Mr Ray asserted it was “distressing” that the Bahamian provisional liquidators had chosen to file for Chapter 15 as the two sides, via a November 15 Zoom call, had discussed “potential avenues of co-operation”. He added that no mention was made of the Chapter 15 plan, so the best forum - New York or Delaware - was never discussed.

“There is no doubt that there will need to be close co-ordination between the Chapter 11 cases and The Bahamas proceeding relating to FTX Digital Markets,” Mr Ray and his team asserted. “Whether that proceeding justifies the granting of relief under Chapter 15 must first be determined.

“Basic principles of efficient judicial administration and effective co-ordination argue strongly in favour of all US proceedings relating to the FTX group occurring in a single US court - this Court. Having two bankruptcy courts consider related issues simply makes no sense. It would result in potentially inconsistent opinions, duplication of efforts and unnecessary expense.

“The filing of the Chapter 15 case without advance notice and in the New York court is a blatant attempt to avoid the supervision of this court and to keep FTX Digital Markets isolated from the administration of the rest of the debtors, which constitute the vast majority of the remainder of the FTX group. Under normal circumstances, that would be inappropriate and grounds for transfer to this court. But these are not normal circumstances.”

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