American court hearing recordings and interviews - Bittrex, Inc. September 13, 2023 U.S. bankruptcy court hearing (Delaware bankruptcy case number 23-10597 styled In re Desolation Holdings LLC, et al.)

Episode Date: September 15, 2023

Per a recent Coindesk article https://www.coindesk.com/policy/2023/09/13/surprisingly-few-us-customers-want-their-bittrex-money-back/:Surprisingly Few U.S. Customers Want Their Bittrex Money BackThe U.S. Secret Service kept millions on the exchange, company lawyers told a bankruptcy court – but other creditors have been strangely reluctant to ask for their funds back....

All right. Please be seated. Good morning, all. Good morning, Your Honor. Good morning, Your Honor. Mr. Moscow, welcome. It's good to see you. Good to see you, too, Your Honor. Mr. Shepherd Carter, I like the tie. Is that black and orange? This is black. This is, no, it's not black and orange.

It's dark, dark, blue, and orange, which are the colors of your alma mater. The colors of my alma mater are black and orange. Oh, then it's black and orange. Your instincts are excellent. That's black and orange. You may proceed. Ms. Tomasco, good morning again, good to see you. I should have known that since they were the tiger.

They are the tigers. We are the tigers. Good morning, Your Honor. We sent over to Chambers of PowerPoint presentation. I can hand up an extra copy if you'd like. I have it. Thank you. And thanks for the court's time today.

It may seem like a bit of navel gazing going on here because there's not a controversy, but we did want to update the court from our last presentation and where we are, all the work is being done behind the scenes that you haven't seen. I appreciate that, and certainly no apology is necessary. I'm always happy to take a status report, as you just mentioned, I really have limited visibility into most of the cases that I have, and often then it just turns into a very ugly surprise when everything blows up all at once.

So I'm hoping that's not going to happen here, but I certainly do appreciate the guidance that you're offering. Correct, John, just to level set, and for the record, Patty's Moscow, Quinn Emanuel, on behalf of the debtors, and I'm joined by my colleague Ken Enis from the Young Conaway firm. We just wanted to go through where we were. The last presentation that we gave you, we had very low engagement from the customers that we had asked to withdraw their crypto. As you know, the court entered an order allowing the customers to begin withdrawing cryptocurrency

and fiat currency as of June 15th is when we reopened the platform after the May 8th petition date. So we wanted to go through that. I also want to introduce the court to, we have a couple of the legal staff from Bitrex, Caleb Barker and David Maria. David Maria is the General Counsel of Bitrex and Caleb Barker is the Assistant General Counsel of Bitrex. Very good. Welcome, gentlemen. Morning, Your Honor. If I get something wrong, which I frequently do, they will correct me, and I've invited them to be live. So that as we go through this, if I get something wrong, they can say.

Or if the court has any questions about what we've done and all of the efforts that have gone into this and where we are with the status of the withdrawals. I'm not going to bore the court with the history, but as you know, we filed the bankruptcy petition on May 8th. The court entered the customer withdrawal order on June 13th. We reopened the platform on June 15th. This is consistent with the main goal of the case, which was to set up a process by which Bittrick's USA operations could be wound down, along with the sister company, Bittrix Malta,

which is a Maltese organization that has been roughly out of operation since, late 2018. So to that end, if you turn to slide six, you can see our Chapter 11 timeline to where we are today. Of course, we have a disclosure statement hearing coming up on the 27th. Right. And this is sort of to get everybody, you know, oriented correctly as we, as we face that. So far, I will say, we have gotten only informal comments and nothing nothing momentous with respect to the disclosure statement or the plan. We're getting language, we're incorporating it. All of that's going to plan.

Turning to slide eight, as I mentioned, we still have to comply as we're doing customer withdrawals with the various regulatory requirements for the payment. This is KYC and AML stuff. I call them Finsen and OFAC. FinCIN is concerned with financial crimes. They want to have all the KYC information from the customer, so are you really who you say you are?

And they also want to know that you're not engaging in some kind of money laundering. So that's really what they're about. OFAC is concerned with persons in foreign countries engaging in financial transactions in the US. So those two regulatory requirements are built into the algorithms of the platform. Okay. So we also wanted them to accept the updated terms of service, which also incorporate these regulatory requirements.

And so that process has been underway. So in conjunction with that, there was, of course, an increase in activity with the help desk, The company engaged overtime help desk assistance, and that has continued all the way through August 31st when the help desk was shut down consistent with the August 31st, 23rd 8. So that help desk activity kind of demonstrates how much the company has been working with the customers. There's been 47,000-plus customer help desk tickets. and a lot.

And then the other interesting thing is there's two-factor authentication. Obviously, this is dealing with financial assets. And so that process of, you know, I know in my law firm to get logged on in the morning, sometimes it takes me 15 minutes as I'm, you know, going through all of the steps. The same thing happens on this platform. So you have two-factor authentication. You're going to get a text to your phone and an email, and those two things, combined give you, you know, the best security.

High level confidence. High level confidence that you're dealing with the right person. 35,972 customers have withdrawn their like-kind assets for a total value of $143.76 million worth of crypto. This is in addition to approximately $423 million that was withdrawn during the April wind-down period. immediately before the petition was filed. So on slide 11, we've broken these numbers down by the number of customers remaining and the number of customers that have withdrawn.

So the value of crypto withdrawn is 143.6 million, broken down between Bittrick's US of 95 million and Bittrick's Malta of $48 million. Okay. So one of the things we wanted to explore was why were we getting such low levels of engagement and so in the beginning. And so we broke it down between customers with balances over $100 and customers with balances under $100.

And of the remaining customers, their balances are under $100. That's the number of those is 77%. 77% of the remaining customers have balances under $100. So we have a combination that you've talked about earlier. We have what may be stale accounts with dated or old or ineffective contact information, and then basically relatively modest amounts that nobody's necessarily wondering, where'd my money go? Correct, Your Honor.

Okay. And I will tell you, anecdotally, I've been monitoring things like the Bitrix Twitter, Bittrick's Reddit, you know, the various sites where customers are engaging more frankly and the sentiment is you know I don't want to give you all that information to get to get $35 correct okay they really are making a calculated decision they know about it and we're going to go through the notice process in in a bit but we have also prioritized we took a list of the crypto customers that remained and we put them in in rank order of highest

to lowest and we engage with them directly send them an email not just a group email sent them an email and said hey you've got this much you need to get it off and so that's where we've seen a lot of success you know understandably okay so 11 of the top 50 customers by balance have withdrawn substantially all their assets for a total of 8.7 million of withdrawn balances 517 of the 701 users with a balance over 100,000 have withdrawn substantially all of their assets. And so that, you know, prioritizing the large dollar customers has really paid off in terms of getting the crypto off. Most of the remaining accounts are inactive and have been inactive for a year or more.

51.2% have been active in the last two years. Only 41.1% of the remaining funds are associated with user accounts that have shown no activity since December 31 of 2019. The story with them is most of them signed up with inadequate KYC information. Okay. Also, we've been actively engaging with the government on a couple of accounts. Some of the accounts were involved in criminal proceedings, criminal forfeiture proceedings and we've cooperated with the U.S. Attorney's Office, the Justice Department, and the SEC to withdraw those amounts that were subject to those criminal forfeiture proceedings.

The Secret Service have one of our largest accounts of $6.2 million. We worked with that agency for them to successfully withdraw that amount. Okay. As I said, notice has been extremely robust. We knew it was going to be a large number of potential creditors. We did not spare. We spent every dollar that was responsibly spent to get notice out. But this is in addition to the numerous emails that have gone out to customers

throughout the history of the company. In particular, Bittrick's Malta, because it shut down operations in 2019, it sent more than a million emails to its users in October of 2019, advising them that it was shutting down its platform. So it was known as Bittrick's International at that time, and the company decided it no longer wanted to operate Bittrick.

International and so it started shutting down and moving those accounts over to Bittrick's Global. So additional notices went out as reflected on this slide and they were notified at the end of 2019. The Bittrick International was no longer going to support those accounts. So that was over the course of a year. A lot of effort went into getting customers off that platform. Sure. Now Bittrix US made the decision to shut down its platform in late March of 2023. But even before that, Bittrick's had reached out to customers with inactive balances, starting in March of 2022.

It emailed inactive customers and asked them to update their account information and to otherwise interact with the platform. Inactive accounts also got letters in August of 2022, and in 2023, Bittrick's mail postcards to additional inactive customers. As I said, in March of 2023, Bittrick announced via Twitter that it was shutting down its U.S. operations. It sent an email to a million 45,323 users. Reminder emails were sent to 521,000 accounts on various dates in April. Between March 31 and April 30th, the customer support team resolved 27,000 help desk tickets. After the bankruptcy, 1.6 million customers got notice of the commencement.

This is via mail? Via email. Via email. Regular mail went to. to 44,000 parties in interest, including certain customers where we knew their email wasn't good. In total, via email or regular mail, Omni served the notice of the commencement on 1.652 million customers. We similarly adopted a robust approach to the bar date notice, knowing how important it was in a case of this type. Could you remind me, what's the bar date?

The bar date was August 31. So this status report, it may seem random, but it happens to happen after the bar date before the disclosure statement. That gets pretty timely. Yeah, we thought it was timely. That bar date went to even more customers, 1.9 million customers, and regular mail to 57,000 parties in interest. So in total, two million customers received either email or mail notice of the bar date. There was also publication notice in Coin Desk,

Wall Street Journal, and the Financial Times of London and the Financial Times of Malta. OK. Times of Malta, I'm sorry. It's the Times of Malta. It's not just financial. So all of those publication notices have been filed on the docket. So there have been also, you know, social media efforts on Twitter, Twitter messages in June,

July, and at the end of July, a Reddit message on July 26th, a text message where SMS had been authorized for the customers on August 2nd. Can I ask just out of curiosity, who is doing that messaging via Twitter? Is that coming directly from the company, or is that being managed by Omni? or Kroll or somebody else. It's being done by the company. Through the company's normal social media accounts. And as I said, I've been monitoring them as well,

looking at customer feedback and seeing if there was anything that looked like a customer had a legitimate right. And we've been dealing with those throughout. In addition, we prioritized balances over 100 and sent an additional mailed postcard to 73,000 customers on August 3rd. We detailed the emails that have gone out to the email addresses on the platform and how those were targeted towards different groups with certain balances or locations in an attempt to provide

as much notice as possible to the customers. So in addition to the withdrawals, the debtors have received 3,292 claims, of which 3,240 are customer proofs of claim and 52 are non-customer groups of claim. We, just so the court knows, it is our intention because some of the claims were filed by customers with very large amounts in them. One such claim had $160 million claim. Sure. We do plan on starting the proof of claim objection process soon in the next few weeks.

We'll be accordingly happy to accommodate scheduling in connection with that. Thank you, Your Honor. And while I usually like to get creditors' votes before I object to their claims in this case, the proof of claim process is going to require company resources to resolve them. And it's as much a cost-saving measure as it is, you know, trying to get to the bottom of these claims, you know, for feasibility purposes as well. Sure. The $150 million claim plus the SEC plus FinC, you know, clients, that might get on the edge of feasibility. So we're going to have some of those objections to file there.

Okay. I understand. We filed our plan and disclosure statement on October, on August 25th. We have our disclosure statement hearing on September 26th. For disclosure purposes, we've only unimpaired priority claims because they're statutorily unimpaired. Everybody else is going to get a chance to vote. Whether or not they're impaired will lead for a confirmation objection, but everybody's going to get to vote. Okay.

That leaves our next few deadlines of disclosure statement hearing. 1318 motions on 929 voting is on October 16 confirmation hearing is from October 24th now if the court has any other questions we wanted to present that to the court showing where we are post bar date pre-disclosure state no this is particularly helpful to me I appreciate getting the heads up and again as I said I really don't have much visibility most of the activity you described is not necessarily taking place on the docket or in open court. From the outset of this case, you all reported that there were many, many holders or potential

holders and lots of people with an interest in this exercise. And you laid out with, I think, specificity what your intentions were in terms of dealing with those folks. And I think you started and repeated a number of times that the circumstances of this particular of case are very different from most of the others that are pending or in the ABI headlines, and I get it. Let me ask you a question, and it is just, frankly, out of curiosity, I confess that I have not gone back and looked again at the plan and the disclosure statement.

That hearing is coming up in a couple weeks, and I will certainly be prepared for that. But the process that you've just described clearly leads to an assumption that there will be significant assets and a number of parties that have lost interest in this exercise. They've only got $25, $50, $100 with you. They don't want to fill out a bunch of paperwork over it. They haven't thought about this since 2018. I get it. This would seem to me then to be one of these cases that has a fair number of assets at the end of it that need to be disposed of.

And I assume that the plan provides for the mechanism for doing that. Is there an expectation that there will be funds left over that are not claimed by creditors, and do they then get used in the implementation of the plan, or are they given away or is cheated, or I don't know exactly what happens? Sources and uses? Yeah. You know, so we're going to have claims. We have settlements with Vincent, OPEC, and the SEC.

Those are significant numbers. Right. We have the costs of administration. we have the claims that are on file, so those will all come out of whatever is left. But at this point, one of the reasons why we want to do some claim objections is to make sure we have enough to pay all the claims,

and if those are successful, I believe there will be money left over. Okay. Well, the claims reconciliation process, you know, is an exercise that, as you described, is often one that depends upon the judgment and discretion of the debtor about the fights that are, you know, whether it's worth picking these fights, but obviously some of these steps may need to be taken in the context of a confirmation process.

And if you need scheduling with respect to claims administration, again, you can contact Ms. Bellow in my chambers and she'll be happy to give you hearing date if you need it. Correct. We've been working with Mr. Eno's in terms of coming up with any kind of procedures that we're going to you know conform with the local rules I will tell you our approach is we're going to take the low-hanging fruit first which is duplicates and separate wheat and chaff yeah the very large claims that were filed that have no correlation with what is shown on the debtors books and records okay well I do not have any

questions and again I very much appreciate getting the report You know, this case has unusual features, but all of the crypto cases do, but these are at least features that I can understand when they're explained to me. I would ask Mr. Sheppekarter, did you have anything to answer? Just a couple. Sure. Thank you, Mr. For the record, Richepard for the United States Trustee, we haven't completed our review of the plan disclosure statement and the procedures.

Of course. Attended there, too. The deadline's 21st. I'm hoping that by Friday, I can do that. get out my comments to counsel. I'll get it that way. Get the comments out see if we can work through what you can work through. We have to apply out of objection.

You know, we'll take that up with your course. I think after that, we'll just go to plan confirmation. We'll see where we go from there. And hopefully we get there in the middle of October towards the end. Very good. Other than I have nothing else are affected. I note that we have a number of parties that are participating virtually. I would ask if anyone else wishes to be heard with respect to the debtor's status report to the court on developments in the Chapter 11 case.

Hearing no response, again, I very much appreciate getting the status report from the debtor. I had no further questions. As noted, if the debtor requires scheduling or other support from the court as you move forward through the disclosure statement and into plan confirmation, all you need to do is call Chambers and we'll be happy to accommodate with any scheduling needs to chat. With that, I believe we are adjourned. Thank you, counsel. Thank you. Thank you.