• Local liquidators in ‘advanced’ Ray settlement talks

• ‘Pooling plan as ‘commingling impossible to unravel’

• Agreement would end FTX Bahamas’ $9.15bn claim

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX’s Bahamian liquidators “are in the advanced stages” of negotiating a “global settlement” with their US counterpart that will ensure equal treatment for their near-53,000 creditors.

Brian Simms KC, the Lennox Paton senior partner, and PricewaterhouseCoopers (PwC) accounting duo, Kevin Cambridge and Peter Greaves, in their third report to the Supreme Court revealed that talks with John Ray, US head of the 134 FTX entities in Chapter 11 bankruptcy protection, were focusing on the creation of a “pooling mechanism” as the best process for returning assets to the crypto exchange’s victims.

Affirming their desire to avoid renewed battles with Mr Ray, which would further slash investor/creditor recoveries through the imposition of extra legal costs and delays, the trio said “pooling” represents the best solution given that the Bahamian and US liquidation estates’ respective assets and liabilities “are so commingled that it is difficult or impossible to unravel” or separate them.

The recently-upgraded official liquidators for FTX Digital Markets, the failed crypto exchange’s Bahamian subsidiary, said talks to resolve their differences and disputes with Mr Ray have been ongoing since September and they “hope to be in a position to recommend to the Supreme Court of The Bahamas that this global settlement is entered into”.

Both the Supreme Court and Delaware Bankruptcy Court will have to approve any deal, but the negotiations appear to represent the best hope of ending more than eight months of hostility between the two sides, which erupted into the open on March 19, 2023, when Mr Ray’s team launched legal action in a bid to effectively cut the Bahamian liquidators off from access to FTX assets.

The proposed deal will also “release” inter-company claims between FTX Digital Markets and Mr Ray’s Chapter 11 estate, meaning that the Bahamian liquidators’ previously-filed $9.151bn claim against the latter will not proceed and recover nothing

Relations between the two sides appear to have improved in recent weeks, with the Bahamian liquidators finally being given access by Mr Ray and his team to the FTX Digital Markets’ books and records that are in the latter’s possession. Files relating to “36 FTX Digital Markets custodians” have been transferred to Mr Simms and his PwC colleagues, with talks over those relating to a further 40 - including “priority custodians” - ongoing.

As for the settlement talks, the Bahamian liquidators revealed: “The liquidators and debtors [Mr Ray and his team] are in the advanced stages of alignment in respect of a global settlement. The basis of the global settlement being discussed is that the parties agree to a plan that treats FTX Digital Markets customers no less favourably (when taken as a whole) than the class of FTX.com customers.

“This requires a mechanism through which assets can be notionally pooled and allocated between estates and claims determined. Based on the liquidators’ assessment, the assets and liabilities of the debtors [Chapter 11 estate] and the FTX Digital Markets estate are commingled that it is difficult or impossible to unravel.”

The FTX.com customers are creditors of Mr Ray’s Chapter 11 estate. The Bahamian liquidators have thus far received 52,931 claims from purported creditors, investors and clients of FTX Digital Markets, and added that the proposed “pooling” resolution is the best option for both avoiding protracted litigation with Mr Ray and a lengthy process of determining who owns which assets.

“The liquidators believe the pooling of customers and creditors of FTX Digital Markets to be in the best interests of the estate,” Mr Simms and his PwC colleagues wrote. “Upon settling all the terms of the global settlement the liquidators, after canvassing creditors, intend to apply to the Bahamian court to enter into a settlement to sanction and compromise claims on terms substantially proposed in the global settlement.

“The liquidators are of the view that, given the costs and risks of the extant litigation, considering a compromise with the debtors which would allow distributions through a process in which customers and creditors can either prove in the US or The Bahamas is in the best interest of the estate.

“As the debtors are proposing a plan on the basis of notional pooling of the claims of FTX Digital Markets customers and other FTX.com customers, and the assets of FTX Digital Markets and the debtors, a key threshold for the liquidators is that efforts are made to determine that the assets of the estates are so commingled as to make the separate assets of each estate and the individual customers of each estate impossible to determine.”

Mr Simms and the PwC duo said reaching such a conclusion will be critical in enabling them to recommend to the Supreme Court the settlement and proposed “pooling mechanism” for returning assets to their rightful owners.

“The liquidators have analysed the books and records of the estates, and held numerous meetings with the debtors and their advisers on the subject of commingling of assets and liabilities between the debtors and FTX Digital Markets estate,” the Bahamian trio added.

“While investigations continue, the liquidators believe at this stage that it appears on the analyses and discussions that the lack of financial records and commingling of assets make it impossible for customers to trace assets or the liquidators to trace assets belonging to FTX Digital Markets or its customers.

“Therefore, no option may exist except for a plan which is based on the distribution of assets [via] a pooling mechanism.” However, the FTX Digital Markets trio said they believe they now have access to “most of the information” held by Mr Ray and his team that is of relevance to the Bahamian liquidation proceedings.

Some 282,778 files, comprising 139 giga bytes (GB) of data and relating to 37 FTX Digital Markets employees, were handed over to the Bahamian liquidation team on July 31, 2023. And a second batch linked to a further 20 employees of FTX’s Bahamian subsidiary was presented on September 21, 2023.

Ten, or half, of the ex-employees whose data was included in the second batch were described as “priority custodians”, likely meaning embattled FTX founder Sam Bankman-Fried and members of his inner circle. It is unclear, though, whether all cloud-stored data related to FTX Digital Markets has been handed over.

“Lennox Paton, on behalf of the liquidators, carried out a preliminary review of the documents provided and noted that several document families included correspondence and information supporting the liquidators’ position in the adversarial proceedings,” the Bahamian trio wrote.

That position is that FTX’s international clients and their assets were all transferred to FTX Digital Markets before the crypto exchange’s implosion just over one year ago. That view is opposed by Mr Ray, but the Bahamian liquidators asserted: “At present, it is the liquidators’ view that migration to FTX Digital Markets of the customers was more likely than not to have been effective.

“While significant work still needs to be done in respect of this issue, and a judicial determination is necessary, it is the liquidators’ view that, based on the assumption that migration occurred, FTX Digital Markets is both cash flow and balance sheet insolvent.”

Explaining how the “global settlement”, and “pooling mechanism”, are designed to work, the Bahamian liquidators said they will establish a process that allows Mr Ray’s team and themselves to “adjudicate claims against their respective estates”.

While the FTX Digital Markets claims process has yet to begin, Mr Simms and the PwC duo said a May 1, 2024, deadline for submitting all claims is being considered “in order that the two estates will move in tandem in distributions”.

“Customer claims will be administered, evaluated and adjudicated in both estates,” the liquidators said. “The global settlement will include a mechanism by which claims will be reconciled between the debtor and FTX Digital Markets estates.

“Each estate will proceed with realising value in their estate (co-operating by using the most appropriate jurisdiction or process to realise value across asset classes). An equalisation mechanism will then apply between the debtors’ plan and the FTX Digital Markets estate such that either the debtor or FTX Digital Markets remit an amount of funding to the other estate to equalise eligible recoveries.

“The calculation of claims under the equalisation mechanism will be based on an amount for each customer’s claim that is no higher than the schedule amount in the debtors’ claim process. Insofar as additional claims can be admitted into the FTX Digital Markets liquidation they may result in a dilution of the distributions for those customers claiming in the FTX Digital Markets estate.”