The liquidator handling the bankruptcy of crypto exchange FTX is attempting to recover nearly $4 billion from another bankrupt crypto firm.
A court in the Southern District of New York will decide on June 15 whether FTX can pursue crypto lender Genesis Global Capital (GGC) over alleged payments made before FTX’s collapse amid fraud allegations.
GGC, which filed for bankruptcy in January over the contagion effect of FTX’s downfall, has around $5 billion in assets. If the court allows FTX to proceed, it will result in a legal battle where the gains of one party equal the losses of the other. Lumida Wealth CEO Ram Ahluwalia told Wired that if FTX’s claims are valid, Genesis creditors can expect minimal recoveries.
This legal battle highlights the close ties among major crypto players prior to the collapse of FTX, whose downfall caused other crypto companies to follow suit and left many individuals with financial losses. Now, creditors must navigate the complex process of unraveling the intertwined estates of these interconnected businesses.
FTX, currently under the supervision of liquidator John Ray III, has chosen not to provide any comments. GGC and its parent company, Digital Currency Group, also refrained from commenting.
Provisions in bankruptcy laws
FTX’s claim against GGC is based on provisions in U.S. bankruptcy laws designed to ensure the fair distribution of funds to all creditors. These laws grant liquidators the right to recover any payments made by the failed company within 90 days before bankruptcy, preventing preferential treatment for early withdrawers.
GGC played a significant role in FTX’s operations. It provided large loans, reaching nearly $8 billion, to FTX’s sister company, Alameda Research, for capital-intensive crypto investments. Additionally, GGC utilized FTX for its own crypto trading. FTX’s liquidator describes GGC as a crucial contributor to FTX’s fraudulent business model.
To finance its loans, GGC borrowed from individuals and institutions holding large amounts of crypto. In return, these lenders received a portion of the profits. However, this arrangement and GGC’s close ties to FTX made GGC particularly vulnerable when FTX collapsed.
During FTX’s bankruptcy, GGC had $175 million locked up on the FTX platform. The ensuing panic led to a surge in redemption requests from GGC’s customers. Unable to meet the demand, GGC had to suspend withdrawals and seek emergency funding, ultimately leading to its bankruptcy filing. Genesis Global Trading, the brokerage arm, remains operational and financially solvent.
FTX’s clawback claim adds complexity to GCC Bankruptcy
In another legal twist, GGC finds itself in the crosshairs of FTX’s clawback claim. FTX’s liquidator alleges that GGC, along with its non-bankrupt affiliate GGC International Limited, received $1.8 billion in loan repayments and $270 million in collateral pledges from Alameda Research.
The bankrupt crypto exchange also claims that GGC withdrew $1.8 billion from FTX’s trading platform within the 90-day period preceding FTX’s bankruptcy filing. FTX insists that these transactions should be reversed.
Legal experts, however, express skepticism about FTX’s chances. Marc Powers, an adjunct professor of law at Florida International University who dealt with the liquidation of Bernie Madoff’s Ponzi scheme, maintains that FTX is trying to “jump ahead of the other creditors.”
“Why should the FTX bankruptcy, or FTX as a potential creditor of Genesis, be more important than any other?” Powers said, as quoted by Wired.
One of the major creditors affected by GGC’s bankruptcy is Gemini, the crypto exchange Cameron and Tyler Winklevoss founded. Gemini’s yield farming service, Gemini Earn, was linked to GGC’s loan book, and as a result, $900 million worth of assets belonging to Gemini customers became locked within GGC’s holdings.
Gemini has already taken steps to recover some of its losses by liquidating $280 million worth of collateral provided by GGC in August. However, if FTX’s clawback claim is successful, it will significantly impact the 340,000 customers of Gemini Earn, leaving them with substantial financial losses. Gemini has yet to provide an official comment on the matter.
Powers suggests that the motion filed by FTX is unlikely to be granted by the Genesis bankruptcy court due to the potentially disruptive consequences it may have, given the magnitude of the claim.
Even if the motion is approved, the situation will become more complex. Involvement from judges in different jurisdictions could create challenges and complications.
Concerns surrounding FTX’s filing
GGC is expected to argue that the $1.8 billion in loan repayments were part of normal business operations, which would exempt them from being reversed. FTX’s failure to specify the dates of the withdrawals in its filing raises additional questions, as noted by Powers and other legal experts.
However, the dispute may never make it to court, even if FTX’s claim is allowed to proceed by the New York judge. Clawback cases rarely reach litigation and are typically resolved through settlements. FTX can leverage this fact to its advantage, considering the cost-effectiveness of litigation compared to a potential settlement.
“The truth is, there’s an economic consideration to be taken into account when defending [against clawbacks],” said Alan Rosenberg, partner at law firm MRTH and member of the American Bankruptcy Institute.
“Even if you have a great defense, it’s going to cost money to litigate. So you have to make a decision as to whether it’s more cost-effective to pay an amount to get rid of the claim.”
The only consolation for creditors is that both FTX and GGC, as bankrupt entities, have a fiduciary duty to promptly reach an agreement. The primary objective is to distribute funds to creditors, and a protracted legal conflict would further deplete the available resources.
“Everybody’s goal is to make a distribution to creditors. The more you fight, the more it will deplete the estate,” Rosenberg said. “Both parties have an interest in reaching a resolution swiftly.”
However, Ahluwalia holds a less optimistic view, anticipating a prolonged negotiation between FTX and GGC’s legal teams, with the associated costs the creditors bear.
As these complex issues continue to be resolved, time passes, and more financial resources from the creditors are diverted to legal fees. Ahluwalia expressed doubts about the validity of FTX’s claim, considering it to be a tenuous argument. He suggests that the liquidator, John Ray, maybe billing the creditors for a remote possibility while the lawyers benefit excessively from the situation.