Tue 06/04/2024 18:57 PM
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Relevant Documents:
Complaint / Memorandum in Support
Preliminary Injunction Motion
Declaration

The FTX Group debtors have moved to safeguard their bankruptcy proceedings against a “recently revealed” plan to create an “alternative, non-bankruptcy” claims process by plaintiffs in the FTX Cryptocurrency Exchange Collapse multidistrict litigation in the U.S. District Court for the Southern District of Florida. The debtors say MDL plaintiffs’ counsel are attempting to “divert” up to $1.2 billion in assets and “pocket” $400 million in fees while “ignoring” the debtors’ chapter 11 plan.

Through a complaint filed Monday, June 3, in the bankruptcy court, the debtors seek to enforce the automatic stay against third-party litigation plaintiffs and enjoin the MDL proceedings against FTX founder and former CEO Samuel Bankman-Fried, former FTX Chief Compliance Officer and Alameda Research general counsel Daniel Friedberg, former FTX Chief Technology Officer Zixiao “Gary” Wang, former FTX Director of Engineering Nishad Singh, former Alameda CEO Caroline Ellison and venture capital defendants. The filing also demands turnover of any property or documents related to the debtors' property or financial affairs that the MDL plaintiffs received from the defendants.

In conjunction with the complaint, the debtors are requesting a preliminary injunction enjoining the MDL actions for an initial 180-day period in order to permit the debtors’ solicitation and confirmation of their plan. A hearing on disclosure statement approval is scheduled for June 25 at 10 a.m. ET.

According to the debtors, the actions brought against the former FTX insiders and VC defendants assert claims belonging to the FTX Group debtors. The filing notes that other estate claims purportedly asserted in the MDL will be addressed separately by the debtors’ co-counsel responsible for those claims.

The filing argues that the MDL claims for fraud, breach of fiduciary duty, conversion, misrepresentation and other claims arose prior to the petition date and are therefore general claims belonging to the estates. The debtors underscore that they can and are pursuing a myriad of “virtually identicalclaims for the benefit of all stakeholders.

The debtors argue that the MDL actions violate the automatic stay by asserting general estate claims and ask that the bankruptcy court exercise its jurisdiction to preserve the claims for resolution in the chapter 11 proceedings. According to the debtors, MDL plaintiffs’ counsel are advancing claims for injury through the named defendants’ “uniform misconduct” such that the claims are not particularized to any plaintiff and belong instead to the estates.

Despite the debtors’ ownership of the claims, the filing asserts that MDL plaintiffs’ counsel are targeting funds subject to the U.S. Department of Justice’s forfeiture recovery efforts as a result of the former FTX insiders’ criminal convictions by routing the funds through the MDL rather than through the bankruptcy process.

The filing notes that as described in the FTX examiner’s report, the debtors cooperated with federal prosecutors to secure the convictions of the former FTX insiders and continue to coordinate with the DOJ concerning the distribution of seized and forfeited assets in the bankruptcy. The debtors point out that the investigations led to a 25-year criminal sentence for Bankman-Fried and guilty pleas for other insiders, including Ellison, Singh and Wang.

The debtors observe that one of the MDL co-lead counsel “curiously spoke in support of Bankman-Fried at his criminal sentencing, stating that Bankman-Fried had been ‘very helpful’ to the Defendants’ efforts to undermine [the bankruptcy court’s] jurisdiction and that ‘there should be some consideration for that.’” According to the debtors, the cooperation contemplated under the proposed settlements requires Bankman-Fried and the other former insiders to produce a “wide variety of documents,” including information relating to FTX’s investments in artificial intelligence company Anthropic.

Given that none of the claims in the MDL “concern or even mention” the Anthropic investment, the debtors posit that MDL counsel’s “desire” for the information “instead relates to ongoing collateral attack” on the bankruptcy proceedings. The debtors note that the bankruptcy court approved the debtors’ sale of their Anthropic shares over the objection of a MDL class member, and the MDL claimants now allege that the Anthropic sale “evidences the FTX Debtors’ mismanagement of estate assets.” Any “gripes” regarding the sale, “irrespective of their frivolity,” the debtors assert, can only be brought before the bankruptcy court.

The debtors emphasize that the plan’s projected above-par creditor recoveries depend on reaching agreements with governmental agencies to prioritize victim recoveries, including a “proposed arrangement” with the DOJ under which more than $1.2 billion of forfeiture proceeds could be distributed through the plan. The assets seized by the DOJ include approximately $626 million seized from Emergent Fidelity Technologies, an entity associated with Bankman-Fried, consisting of proceeds from the sale of Robinhood stock.

The DOJ also holds approximately $379 million of fiat and digital assets secured from accounts on third-party cryptocurrency exchanges, approximately $150 million in cash seized from accounts registered in the name of FTX Digital Management, and two private planes purchased with approximately $35 million of estate assets.

The debtors say MDL counsel is attempting to “subvert” the bankruptcy process through a series of “attempted” settlements with Bankman-Fried, Friedberg and the other former insiders. The settlements would grant broad releases of claims for “zero” consideration other than assistance in the plaintiffs’ attempt to “derail” the bankruptcy proceedings, say the debtors. Although Friedberg is not named in the MDL, the filing says MDL counsel has “purported” to settle claims against Friedberg, “blatantly disregarding” the debtors’ adversary proceedings against Friedberg and Bankman-Fried and other former insiders.

According to the complaint, the true consideration that the MDL defendants are providing under the proposed settlements is an agreement to allow MDL counsel to collect excessive fees. “[U]unsurprisingly,” continue the debtors, the proposed settlements make “clear” that MDL counsel would “take up to 33%” of the restitution and forfeiture funds in attorneys’ fees and expenses, despite the fact that the DOJ “collected and continues to collect” forfeited assets with the assistance of the debtors for the benefit of FTX victims.

Even if the court finds that certain claims in the MDL are not estate property, the debtors contend that the plaintiffs’ continued pursuit and settlement of claims is interfering with the debtors’ reorganization efforts, “warranting an extension of the automatic stay.” The proposed settlements “create clear risks of double recovery, collateral estoppel, and record taint” that would impede the debtors’ efforts to maximize recoveries and “fairly” distribute estate assets.

The debtors point out that the MDL proposed settlements lack details about how they would be “administered” in parallel with the debtors’ chapter 11 plan, including whether class members barred from receiving plan distributions would be eligible for settlement recoveries, preventing double recoveries as the debtors’ plan provides, and whether members would be subject to know-your-customer requirements.

Given the high attorney fees and deficiencies in the MDL proposed settlements, the debtors argue, they should be allowed to proceed with their confirmation process, which in turn is expected to pay “all claims of exchange customers and nongovernmental creditors for their actual Petition Date losses … more than in full.” The protection of the automatic stay or an injunction is necessary to ensure the debtors’ ability to proceed with the plan and provide equitable treatment of all creditors, the filing concludes.
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