By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX's Bahamian liquidators are asserting they may be the only ones "lawfully" able to pursue "material volumes" of client withdrawals that occurred around the time of the exchange's collapse and may thus be deemed void.

Brian Simms KC, the Lennox Paton senior partner, and the PricewaterhouseCoopers (PwC) accounting duo of Kevin Cambridge and Peter Greaves, in their May 24, 2023, report to the Supreme Court argued that they could be the only party entitled to "claw back" these payouts if they came from the Bahamian subsidiary, FTX Digital Markets.

That entity is in provisional liquidation under their are as Supreme Court appointees and, if it is determined that FTX Digital Markets was the counter-party for these transactions, the trio are arguing that it is they - and not FTX US chief John Ray - who will have the authority to recover these preferential payments from clients, investors and others who received them.

"The joint provisional liquidators have further identified material volumes of customer withdrawals ahead of the petition date in The Bahamas that may be subject to claw back claims as antecedent transactions," they said in their report to the Supreme Court.

"These include withdrawals immediately prior to the petition date and withdrawals by FTX ‘controlled’ users and accounts. Where FTX Digital Markets was the counter-party to these customers, the joint provisional liquidators may be the only party that is able lawfully to pursue claw back claims for the benefit of customers and creditors."

The size of the "material volumes", or customers involved, was not identified in the Bahamian liquidators' report. However, it almost certainly includes the $100m that was previously said to have been withdrawn from the collapsed crypto exchange by 1,500 supposed "Bahamians" at the time the FTX entities were being placed into both provisional liquidation before the Supreme Court and Chapter 11 bankruptcy protection in the US.

The withdrawals violated the automatic freeze or stay imposed on FTX's business in both countries and, under Bahamian law, could be deemed fraudulent preferences where certain clients/investors gain preferential treatment by getting their money out in the final hours based on insider knowledge or contacts within the collapsing entity. Any transactions found be to fraudulent preferences would be subject to recovery and claw back by the liquidators.

Mr Ray has previously alleged that Sam Bankman-Fried, FTX's embattled co-founder who still faces multiple criminal charges in New York, did open withdrawals on the FTX.com exchange for certain customers for a period of approximately 25.5 hours, from 10.30 am on November 10, 2022, to noon on November 11, 2022.

FTX Digital Markets was placed into provisional liquidation on the former date, while the Chapter 11 filings occurred one day later. Mr Ray alleged that, during this time, nearly $100m in crypto currency was withdrawn by approximately 1,500 individuals and entities purporting to be Bahamian customers for Know Your Customer (KYC) purposes.

It is doubtful whether all were Bahamian, but several sources have suggested constantly that Mr Ray has a potential trump card in the identities of those 1,500, especially if there prominent Bahamians among them or persons with political and high-society family connections.

The Bahamian liquidators' report was released just as US prosecutors, as well as Judge Lewis Kaplan, who is overseeing Mr Bankman-Fried's New York case, agreed to split the FTX founder's case into two separate trials over "uncertainty" as to when The Bahamas would make a decision on whether he could be tried on additional charges.

Judge Kaplan, in a late June 15, 2023, order, ruled that Mr Bankman-Fried will be tried separately on March 11, 2024, on the charges that did not form part of his extradition from The Bahamas. He issued the order "in view of the uncertainty" over whether The Bahamas will give permission for the ex-FTX chief to be tried on multiple corruption, fraud and bribery-related charges that were levied following his extradition.

The order came just two days after Mr Bankman-Fried obtained an injunction from the Supreme Court barring the Bahamian government from giving the US permission to try him on the additional charges. He was also given permission to bring a Judicial Review challenge that seeks to confirm the Government cannot give its consent without allowing him to first make representations on why it should not do so.

Mr Bankman-Fried's original October 2023 trial will thus proceed only on the offences for which he has been extradited. Damian Williams, the US district attorney for New York, in arguing that the case be split into two trials, said the FTX founder's decision to bring litigation in The Bahamas meant this nation's "consent" to the additional charges may not be obtained until after the initial trial date.

"In light of the uncertainty concerning when The Bahamas will render a decision with respect to specialty, and to simplify the proof at trial and decrease the burden of trial preparation on the defendant, the [US] government is prepared to proceed to trial as scheduled on the counts contained in the original Indictment, and to consent to discretionary severance.... of the additional counts contained in the [last] indictment," Mr Williams said.

"The [US] government respectfully requests that the court schedule trial on these counts for the first quarter of 2024, or the nearest time thereafter convenient to the court, pending resolution of the government’s request for a specialty waiver [from The Bahamas]." Judge Kaplan duly granted his wish.

Meanwhile, the Bahamian provisional liquidators asserted that Mr Ray and his team continue to deny them access to all the electronic data and records on FTX Digital Markets to enable them "to discharge their fiduciaries". However, in contrast to Mr Ray, they argued there is sufficient evidence to support their contention that FTX's international customers had migrated to FTX Digital Markets and are now the latter's - and their - creditors.

"The joint provisional liquidators have identified line of credit agreements (LOCs) issued by FTX Digital Markets to customers of the international platform granted credit facilities to trade beyond the balance of their account," the Bahamian trio asserted.

"We understand that as part of the migration, an exercise was carried out to contact customers with existing LoCs, requiring them to execute revised terms with FTX Digital Markets as the counterparty and that acceptance was a condition of a continuing line of credit. The joint provisional liquidators have to-date identified a number of such LoCs signed by customers and understand that there are more examples in FTX Digital Markets records held by the Chapter 11 debtors.

"The foregoing information supports the joint provisional liquidators’ belief that the migration of customers to FTX Digital Markets had occurred," they added. "These documents had been requested specifically by the joint provisional liquidators but were not included or referenced in the information provided by the Chapter 11 debtors until after the joint provisional liquidators filed evidence of their knowledge of the existence of LoCs in the name of FTX Digital Markets.

"Then only two examples were provided. The review of the platform data, along with the other factors highlighted in our first report, such as the pre May 13, 2022, terms of service; the 13 May terms of service; and customer migration programme) lead the joint provisional liqudators to believe that FTX Digital Markets was the key counter-party with which many FTX International customers interfaced from May 2022 onwards."

Some 456,281 claims from 44,268 individual creditors, 990 institutional customers and 84 trade creditors have been filed with the Bahamian provisional liquidators. However, the trio allege that Mr Ray and his team are still denying them access to Google Drive, e-mail and Slack communications, while excluding them from talks about the reorganisation and possible sale of FTX's international platform.

"On February 13, 2023, as part of the co-operation agreement, the Chapter 11 debtors provided the joint provisional liquidators with access to the FTX International platform database. This database contained over 40 terabytes of data, and some data tables included over 10 billion transaction records pertaining to users, accounts and transaction activity," the Bahamian trio added.

"Since providing this information, the Chapter 11 debtors have declined to provide the remainder of the information to which FTX Digital Markets is entitled which is in the possession of the Chapter 11 debtors. This includes e-mail, Google Drive and Slack data for employees of FTX Digital Markets. The joint provisional liquidators still do not have access to this data at the time of submitting this report."

Arguing that there was evidence that FTX's international clients were instructed to deposit fiat currency with the Bahamian subsidiary's bank accounts from early 2022, and that all users were migrated to the latter by May 2022, the Bahamian trio added that Mr Ray and his team cited "legal privilege" as to why further data could not be provided - something that they described as "illogical" given the confidentiality provisions already agreed between the two sides.