The liquidator of bankrupt crypto exchange FTX is trying to retrieve nearly $4 billion for creditors—from another bankrupt crypto firm. After a hearing on June 15, a court in the Southern District of New York will decide whether to let FTX pursue Genesis Global Capital (GGC), a crypto lender, over payments said to have been made shortly before the exchange’s collapse amid allegations of fraud.
GGC, which filed for bankruptcy in January after being caught in the blowback from FTX’s implosion, only has about $5 billion in assets. If the court allows FTX to go ahead, a zero-sum legal battle will ensue. “If all the FTX claims are legitimate,” explains Ram Ahluwalia, CEO of wealth management firm Lumida Wealth, “the recoveries for Genesis creditors will be very low.”
The impending legal battle underscores how tightly connected major crypto players had become before trouble started brewing in the markets a year ago. First, the collapse of FTX helped pull down other crypto companies, leaving many people out of pocket. Now creditors have to wait through the slow and painful unraveling of the various businesses’ intertwined estates.
FTX, now under the management of Enron liquidator John Ray III, did not respond to a request for comment, nor did GGC or its parent company, Digital Currency Group.
The basis of FTX’s claim against GGC are provisions in US bankruptcy laws designed to ensure that everyone owed money by a failed business receives a fair share. The law gives liquidators a right to recall any payments made by a stricken company in the 90 days prior to the bankruptcy, to avoid a scenario where creditors who pull their money out quickest get the biggest share of the pot.
GGC and FTX’s business relationship was substantial. The former provided Alameda Research, FTX’s sister company, with large loans—at one point amounting to nearly $8 billion—to fund its capital-intensive crypto bets, while GGC used FTX for its own crypto trading activity. The court motion filed by FTX’s liquidator describes GGC as “one of the main feeder funds” to FTX and therefore “instrumental to its fraudulent business model.”
To fund its loans, GGC borrowed from individuals and institutions that owned large quantities of crypto, who received a cut of the profits in return. But this arrangement, combined with its close ties to FTX, made GGC triply vulnerable to trouble at the exchange.
Not only did GGC have $175 million locked up on the FTX platform at the time of the bankruptcy, but the ensuing panic led to a surge in attempts by customers to redeem crypto from GGC. Unable to meet the influx, GGC was forced to suspend withdrawals as it sought an emergency cash injection—and ultimately, to file for bankruptcy itself. (Genesis Global Trading, the brokerage arm, remains active and solvent.)
Now, GGC has to fend off FTX’s clawback claim too. The suit alleges that Alameda paid GGC $1.8 billion in loan repayments and $270 million in collateral pledges, and that the lender—and non-bankrupt affiliate GGC International Limited—withdrew $1.8 billion from FTX’s trading platform, all in the 90 days before the exchange filed for bankruptcy. FTX claims each of these transactions should be reversed.
Legal experts, though, say they’re skeptical of FTX’s chances. Marc Powers, adjunct professor of law at Florida International University, who acted as counsel in the liquidation of Bernie Madoff’s infamous Ponzi scheme, says that the exchange is attempting to “jump ahead of the other creditors” in the GGC bankruptcy. “Why should the FTX bankruptcy, or FTX as a potential creditor of Genesis, be more important than any other?” he asks.
The largest of those GGC creditors is Gemini, the crypto exchange founded by Cameron and Tyler Winklevoss. The firm’s yield farming service, Gemini Earn, which allowed customers to earn interest on their crypto, fed into GGC’s loan book. When the lender filed for bankruptcy, $900 million of Gemini customers’ assets were locked inside.
Gemini has already liquidated $280 million worth of collateral posted in August by GGC to make back some of the funds lost. But should FTX be successful in its clawback, the 340,000 Gemini Earn customers will be left significantly out of pocket. Gemini did not respond to a request for comment.
“I don’t think the Genesis bankruptcy court will grant the motion of FTX,” Powers says. “Given the size of the claim, I think it would be extremely disruptive.”
Yet in the event the motion is granted, things will get messy. There would effectively be two judges, from different jurisdictions, involved to some degree in both bankruptcies, says Powers. “That’s generally not good.”
If the case proceeds, GGC will likely argue that the $1.8 billion in loan repayments were made in the ordinary course of business, which would exempt them from being recalled. There are also questions, Powers and others point out, posed by FTX’s failure to specify the dates of the withdrawals in its filing.
But it’s not guaranteed that, even if the New York judge allows FTX’s claim to continue, the dispute will ever get to court. The likelihood that clawback cases make it all the way to litigation, says Alan Rosenberg, partner at law firm MRTH and member of the American Bankruptcy Institute, is low—they almost always end in settlement. And FTX can use this fact to its advantage. “The truth is, there’s an economic consideration to be taken into account when defending [against clawbacks],” says Rosenberg. “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 mercy for creditors, says Rosenberg, is that both FTX and GGC—as bankrupt entities—have a fiduciary duty to reach an agreement as quickly as possible. “Everybody’s goal is to make a distribution to creditors. The more you fight, the more it will deplete the estate,” he says. “Both parties have an interest in reaching a resolution swiftly.”
Ahluwalia doesn’t share the same optimism. He says the likely result would be a protracted negotiation between the lawyers of FTX and GGC over the validity and scope of the clawback claim—all of which will be paid for on the creditors’ dime.
Settling these issues will take time. But the longer the legal conflict goes on, the more money leaks from the creditors’ pot into the pockets of the law firms. “I don’t think the FTX claim is valid. I think it’s a stretch,” says Ahluwalia. “I think John Ray is billing creditors for a remote possibility. And who is making out like bandits? The lawyers.”
