By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The Securities Commission’s top executive yesterday confirmed it is in talks for its $221.55m claim to rank behind FTX’s clients and other victims in the creditor payout queue.

Christina Rolle, the regulator’s executive director, told Tribune Business this was an “appropriate” position to take as the first priority was to make former customers and other creditors of the fraud-destroyed crypto exchange “whole” through the recovery of all that is owed to them.

The negotiations over the Securities Commission’s mammoth claim, which represents penalties and sanctions levied against FTX for breaching anti-money laundering and terror financing regulations, were revealed in a report filed with the Supreme Court earlier this week by the joint liquidators for the crypto exchange’s Bahamian subsidiary.

Brian Simms KC, the Lennox Paton senior attorney and partner, and the PricewaterhouseCoopers (PwC) accounting duo of Kevin Cambridge and Peter Greaves, who are overseeing the winding-up of FTX Digital Markets, disclosed that the talks with the Securities Commission have focused on the latter “subordinating” its claim and standing behind other victims in the creditor payout queue.

“On August 15, 2024, the Securities Commission submitted a proof of debt in the FTX Digital Markets liquidation for a claim value of $221.55m representing the regulatory penalties imposed by the Securities Commission for FTX Digital Markets’ statutory compliance breaches,” the liquidator trio revealed.

“The joint official liquidators are in ongoing discussions with the Securities Commission regarding the potential subordination of the Securities Commission’s asserted regulatory claim to claims by other customers and creditors, including interest on such claims. Further, to direct any proceeds in respect of such asserted regulatory claim, if any, to the Supplemental Remission Fund to be established by the Chapter 11 debtors.”

That is understood to be a fund which, once established by John Ray in his capacity as head of the 134 FTX entities in Chapter 11 bankruptcy protection in Delaware, would receive monies due not just to the Securities Commission but other global regulators with claims against the crypto exchange. These monies would then first be used to further compensate victims of its November 2022 implosion.

Ms Rolle, yesterday signalling the Securities Commission is amenable to such a resolution, told Tribune Business: “We’re in the process of negotiating a settlement for penalties related to anti-money laundering and counter terror financing breaches.

“As part of that settlement, there will be subordination of the Commission’s claim in favour of the clients of FTX first. It’s subordinated in their favour. Other regulators have also subordinated their claims. It’s an appropriate thing to do as a regulator. As regulators our priority is for clients to be made whole. The settlement will be made public once it is finalised.”

The Bahamian liquidators also praised the Securities Commission for “expeditiously securing” customers’ digital assets in the immediate aftermath of FTX’s collapse to protect them from potentially being hacked and subsequently stolen or lost. Those assets have now been transferred to the custody of the Chapter 11 proceedings as part of the settlement with Mr Simms and the PwC duo.

“The global settlement agreement also includes a resolution in relation to the digital assets which the Securities Commission of the Bahamas had expeditiously secured to protect creditors and the company from an unlawful dissipation of its assets, ultimately resulting in the transfer of the digital assets at the direction of the joint official liquidators to the US debtors for the benefit of customers and creditors of both estates,” they said.

“Between 19-22 April, 2024, the Securities Commission, under the instruction and supervision of the joint official liquidators, transferred all of the seized assets to the US debtors.”

Elsewhere, the three Bahamian liquidators revealed that they have accepted 87 percent of claims submitted by some 41,264 former FTX clients. Of the $866.9m in total claims submitted in the FTX Digital Markets liquidation proceedings, some $754.5m have received the go-ahead to be paid out. Payments will take place in 2025 in co-ordination with Mr Ray and his team.

In addition, some 62 non-customers have submitted total claims of $407.4m. However, the bulk of this sum, $377.4m, is described as a “contingent, unliquidated, general unsecured claim from a third party” that is understood to be the liquidation administrator for formerly bankrupt crypto lender and bank, Celsius Network. 

In total, the Bahamian liquidators have thus received $1.274bn in total claims. Others, though, appear to have had less validity. “Three claims that appear to be facially frivolous or errant of $2.9 quadrillion have been excluded,” the trio reported.

“Manual proof of debt forms were provided to customers who had difficulties accessing the FTX Digital Markets claim portal. As of the date of preparation of this report, 666 manual proof of debt forms with aggregate claim amounts of approximately $12.5m have been received. Since these forms are still undergoing data extraction and validation, the numbers are subject to change and have been excluded from the above tables.

“Fifteen accounts which are on the exclusion list of Chapter 11 debtors have been excluded from the above tables. These excluded parties could be insiders or current or former employees, officers or directors of the Chapter 11 debtors or its affiliates or defendants or named plaintiffs in any pending litigations brought by or against any Chapter 11 debtors,” they added. 

“Accounts which are on the reduction list of Chapter 11 debtors with fraud-related and/or litigation-related flags have been excluded from the above tables.” Creditors are already being notified that their claims have been accepted in full, in part or rejected, and the Bahamian liquidators are now carrying out Know Your Customer (KYC) and anti-money laundering due diligence on them prior to making payment.

“The joint official liquidators have set up KYC processing centres and have commenced conducting KYC, anti-money laundering and sanctions screening checks on all creditors confirmed as participating in The Bahamas process,” Mr Simms and his PwC colleagues said in their Supreme Court report. 

“The KYC standards applied by the joint official liquidators in The Bahamas process are substantially the same as those applied in the US process, although differences may arise in consideration of relevant regulatory standards in The Bahamas or elsewhere.

“Non-customer creditors will also be asked to verify their identities. For a claim to qualify as eligible for distribution, both the original claim beneficiary and the current beneficiary or claim owner - to the extent that claims were sold - must meet the relevant requirements,” they added.

“The joint official liquidators have adopted a ‘risk-based’ approach’ to the KYC in accordance with the relevant regulatory rules, and have established two levels of due diligence which are linked to the risk categorisation of the customer as determined upon receipt of the customer KYC information. The two levels of risk categorisation are ‘standard risk’ and ‘high risk’.”