American court hearing recordings and interviews - Season 1. Episode 7. February 6, 2023. In re FTX Trading Ltd., et al., chapter 11 bankruptcy case no. 22-11068, audio of the hearing held in the FTX/Alameda et al. bankruptcy proceedings pending in Delaware, USA #crypto

Episode Date: March 10, 2023

Trial before the bankruptcy court to determine if the court should appoint an independent examiner to investigate. In the next episode the court delivers its ruling.

Good? And now you can hear me. Okay. One small change on the pretrial order is you identified me as the chief bankruptcy judge at one point. I had to correct that. So, Your Honor, no battlefield promotion. I don't want it either. I'm sure your time will come. So with that, Your Honor, I would see the podium to Ms. Archeson, the movement, and we'll proceed following her lead. And just a reminder for those on Zoom, this is a formal court proceeding. You are participating in a formal manner, so you need to keep your video off unless I call on you to speak and your audio should remain off at all times. Disruptions will not be tolerated and you will be removed if you interrupt the proceedings. So with that, Ms. Arcusen, go ahead. Thank you, Your Honor.

Good morning for the record, Juliet Sarkeesian on behalf of the U.S. trustee. Are there microphones on there too? Okay. I need to pull it a little closer to you. Hopefully this is working? I can hear you now, yeah. So Your Honor, the counsel for the parties in interest had discussed and we wanted to present to you a proposal

that we would each start with not more than a 10-minute opening if it pleases the court, followed by evidence and then closing statements. Is that accepted if you're on? Yes, absolutely, yep. Thank you, Your Honor. Also, Your Honor, in the joint pretrial order, the U.S. Trustee included two motions in limine. Would your honor, when would your honor like to hear those?

Well, before we start the evidence, so let's do the openings and then we'll do the motions of limine. Thank you, Your Honor. The U.S. trustee has moved to appoint an examiner in these cases under both 1104C1 and 1104C2. As the U.S. trustee has argued in its motion and reply, section of our own. 1104 C2 of the Bankruptcy Code mandates the appointment of an examiner in a debtor's case if there is no trustee appointed, no Chapter 11 plan has been confirmed, a party in interest or the U.S. trustee has requested the appointment of an examiner, and the debtor has fixed, liquidated, unsecured debts other than for debt – the debts for good services

or taxes or owing to an insider that exceed $5 million. All of these elements have been made in this case. I think everybody can agree there's no trustee and there's no Chapter 11 plan, and the U.S. trustee has requested an examiner. All of the objectors, the debtors, the committee, and the joint provisional liquidators have all stipulated that the $5 million threshold has been met under 1104 for three debtors, Realm Shires Inc., F-TX Trading LTD, and Alameda Research LLC. As to the other debtors, the objecting parties do not stipulate that the $5 million

threshold has been met because they are not currently in a position to make that determination. However, the objecting parties stipulate they are not contesting the examiner motion on the basis that the $5 million threshold has not been met for those other debtors. So based on the stipulated facts alone, the U.S. trustee, believes that the code does mandate the appointment of an examiner in these cases under 1104 C2. The objectors argue that in addition to the elements that I've just set forth, the code has an additional requirement, which is that the court find the appointment of an examiner is appropriate

in these cases. While the U.S. trustee believes that the evidence will establish that an examiner is appropriate in these cases, the U.S. trustee does not believe that the code requires a finding that the of appropriateness for either C2 or C1, for the reasons set forth in the U.S. trustees' reply brief, which I will touch on. The objector's reading of the statutes would mean that the only time that C2 would be applicable

is if the $5 million threshold was met, and it was not in the best interest of the creditors to have an examiner. Because if it was, then it would go under C1. But so that even though it was not in the best interest of the creditors, it was nevertheless appropriate to appoint an examiner. So that, if appropriateness is a requirement, that would be the only time that C2 would apply. It's not in the best, the threshold has been met, it's not in the best interest of the creditors,

but it's somehow still appropriate. That, it's rather difficult to imagine what that situation would be. In addition, the wording of 1104c is that the court shall order the appointment of an examiner to conduct such an investigation of the debtors as is appropriate. I will note that it does not say if it is appropriate, which is different, and that's how the objectors are interpreting it. The US trustee, along with the majority

of the published opinions that have addressed that issue, do not interpret as is appropriate to mean if it is appropriate, but rather as is appropriate to modify the term directly before it, which is an investigation. So in other words, as is appropriate relates to the scope of the investigation, an appropriate scope of the investigation, not whether an examiner shall be appointed if the requirements of 1104C1 or C2 are met. And I think it's also important to note that 1104C2 does not provide for an examiner in every case in which a debtor has debts that exceed 5 million. It's much more narrow than that.

To be counted to the $5 million, it has to be unsecured, fixed, liquidated, and for debts other than goods, services, or taxes, and not be owned to an insider. Not being for goods or services is a pretty significant factor. So it's much more stringent than just having over $5 million in debt. That's my way, Your Honor, of saying that that 1104C2 does not move. mandate that an examiner be appointed in every case in which the debtor has more than $5 million in debt and anybody requested. That would be virtually every case that's before this court, I would imagine. But it's much more narrow than that. And here, again, they've stipulated there's no question that that $5 million threshold with all of the qualifying terms have been

met, at least for the three, they're not contestant for the others. So, Your Honor, I would ask the court is now prepared to make a ruling on whether 11.0.4C.2 mandates the appointment of an examiner in these cases, because if the court so rules, then there would be no need for an evidentiary hearing. Well, I'm not going to make that ruling now, but I will give you the opportunity to argue that in closing. Thank you, Your Honor. Your Honor, the U.S. trustee also believes that the requirements for 1104C1 have been met because the appointment of an examiner is in the best interest of creditors and other courts. and interest, as has been demonstrated by the testimony of Mr. Ray, Mr. Mosley, by way of declaration,

which we will be admitting, as well as Mr. Ray's testimony before the House Financial Services Committee. The U.S. Trustee will reserve the remainder of the argument for closing, unless Your Honor has any questions at this time. I'll save my questions for closing. Thank you. Good morning, Your Honor. Jim Bromley of Sullivan and Cromwell on behalf of the FTX-Seders and the Attorney. the United States debtors and may it please the court.

Your Honor, the question that the United States trustee has positive, whether or not we are in a world of mandatory rulings here, is one that unfortunately the U.S. trustee mischaracterizes in terms of both the statute, the statutory language, and the precedent that exists. If you focus first on the statute, Your Honor, before you get to C1 or C2, the word appropriate is in the statute. As is appropriate is the phrase. And that phrase, as is appropriate, has not been determined by the Revco decision in the Sixth Circuit, the only circuit decision that the U.S. Trustee hangs so many hats on. In fact, if you go to the Rev.C. decision, it's about three pages long.

The 20 minutes that the Sixth Circuit spent on writing the revoc decision should not be controlling the decision as to whether or not this court or any other court should be appointing an examiner as a mandatory matter so long as a $5 million threshold is met. Notwithstanding the E.Cristi's most recent comments, the $5 million threshold is but a peppercorn when we're dealing with supermass cases like we have here. Good bless you.

So when we're talking about cases of this size and scope and magnitude, it's so virtually certain that a $5 million threshold is going to be met and therefore under the rule that is proposed by the U.S. trustee is virtually certain that an examiner is going to be appointed in every case. And remember, Your Honor, we may be sitting here today with the U.S. trustee, but the statute is written in terms of any party in interest or the U.S. trustee. The vast majority of examiners are requested by parties and interest who have a particular point to advocate, a particular act to grine. If we simply adopted the United States Justice's point that if you meet the $5 million

threshold, an appointment of an examiner is mandatory, then we're going to have an examiner in virtually every case. And indeed, the precedent here in the District of Delaware is very important. instructed and virtually ignored by the U.S. trustee. Court after court in matter after matter, including your honor, has ruled that 1104 does not require the appointment of an examiner if the $5 million threshold has been met.

Judge Sanchi, Judge Walrath, Judge Gross, Judge Kerry, yourself, Judge Silverstein. This is not a happenstance. this is a rule in the district. The U.S. trustee makes a great deal of pay about the fact that there's not a written decision, a published decision. That, with all due respect, ignores the practice

that we all engage in, which is that we have here, in case after case, situations where we ask bankruptcy judges to make rulings, and many of those rulings come from the bench, and we consistently look at those rules rulings as binding precedent. And it's not as if one decision came out, or one comment came out. But we have a consistency here over a 15-year period and longer, even back to Judge Walsh.

That is what the law is here in the District of Delaware. And we shouldn't lose sight of what's happening here today. This isn't about FTS. This is about the United States' Trustees Office out of Washington looking to make a matter of national policy. And using this case... No, no, I'm going to object to that. It's opening.

We'll see if you can sustain it with evidence. You can make whatever comments he likes an opening. So, Your Honor, what we are looking at here is not about FTAX. Matter of fact, since we've been in front of your honor since November 11th, I would say 80 or 90% of the time we have spent in court has been dealing with issues that have been raised by the United States Trustee. whether it has to do with the creditor matrix, whether it has to do with 2004 requests that we filed. We had an objection filed over the weekend to a 2004 request to take discovery from San Banking Free. What the U.S. trustee is doing here in this case is seeking not simply to be a watchdog,

but to be a participant in a manner that effectively replaces the official committee of unsecured creditors that they themselves have appointed. There is nothing in the statute that talks about a true neutral. There's nothing in the statute that talks about there needing to be an independent party that is standing outside of the four corners of the debtors when the facts will show that the four corners of these debtors is controlled by an independent chief executive officer, an independent board of directors,

both of whom were appointed after the petition day, or on the petition date and after. The facts are going to show, Your Honor, that it is not appropriate in this case. It is not appropriate in this case to appoint an examiner. It's not appropriate in this case to conduct any investigation at this moment in time. Mr. Ray will testify that there are enormous efforts that have been made since the beginning of the case to investigate the facts and circumstances that gave rise to these violence. Mr. Ray is going to testify that the cyber-reiberation is going to testify that the cyber

security environment that characterizes these debtors is unique. That to allow anyone else into that cybersecurity environment will jeopardize the security of everything that has gone forward and everything that will go forward. With all due respect, the OSTRCities Office views this as if we have a warehouse full of sacks and potatoes. We do not. We have a virtual environment that is filled with code. And even looking at that code puts that really real.

risk everything about the cybersecurity environment. The investigation is not simply a legal investigation. It's not simply an accounting investigation. It is a technology investigation. The facts and circumstances here make it very clear, Your Honor, that if there's a case where an examiner is not appropriate, it's this case. Thank you. Thank you.

Thank you. Thank you, Mr. Kemp, Pascuali, from Paul Hastings, for the official committee of Unsecure Let me just start by saying, and I'll say some time I agree with Mr. Bromley's comments with respect to the discretionary nature of the statute. Perhaps talk some more about that in closing. I only wanted to make a couple of very brief points in opening. We all recognize that this is a unique case, and it's unique in two particular ways, I believe, with respect to the U.S. trustee's motion for an examiner. First, as Mr. Bromley just alluded to, and we will hear, test, regarding the debtors are controlled by entirely new management and boards of directors

that were installed literally on the eve of the bankruptcy cases. None of the alleged bad actors remain with the company. The new management group's task is not only to investigate what happened pre-petition as would an examiner, but also unlike an examiner to act upon that investigation and with the committee evaluate and process. prosecute claims to maximize recoveries for all of the stakeholders of these states. Secondly, unlike many other cases involving fraud in which an examiner was found to be appropriate, here there's only one class of creditors, the unsecured creditors.

These debtors do not have any secured debt. It's the committee statutory and fiduciary obligation to investigate what occurred pre-petitioned. the benefit of those unsecured creditors, customers and other creditors alike. And given the capital structure here, the committee has no incentive or reason to use an investigation for a strategic advantage in planned negotiations or otherwise, as the U.S. trustee asserts in her motion, in its motion, excuse me. The committee is perfectly positioned to investigate in these cases with the debtors, and as necessary individually.

Accordingly, Your Honor, and as you'll hear in closings and after the proof, we do not believe it is appropriate in the circumstances of this case to appoint an examiner, and unless the Court has questions now, I'll reserve further comments for closing. Thank you. No questions. Thank you, Your Honor. Good morning, Your Honor, Chris Shortmoit case on behalf of the Joint Provisional Liquidators in the Bahamian proceedings of FTX digital markets. We don't intend to put on any evidence today and we'll reserve argument for closing.

Thank you. Anyone else? Ms. Artesian? Thank you, Your Honor. May I address the motions in limine at this time? Yes. Your Honor, the U.S. Trustee has two motions in limine. The first one relates to the scope of the testimony of Mr. Ray.

Based on information that the debtors' counsel has provided to the U.S. Trustee concerning the scope, It appears that he will be testifying as a fact witness about his opinion on the usefulness of examiners in bankruptcy cases in general or perhaps just in the bankruptcy cases in which he's been involved. Now, such testimony should not be admissible for the following reasons. First of all, this is really in the nature of expert testimony, and Mr. Ray is not qualified. He's not been put forward as an expert witness, and I'm not believe he's qualified as an expert witness on whether examiners are helpful in bankruptcy cases. In addition, such testimony is also not relevant

under federal rule of evidence 401 as to whether an examiner should be appointed in these cases. Under 1104, the standard for appointment examiner is not whether it's been helpful in other cases. It is a legal issue as to whether the requirements of 1104C, have been met. The utility of examiners in general is a policy issue for Congress. It is not for the trier of fact or the trier of law. It is not relevant to consider usefulness of examiners

and other bankruptcies because it does not inform the court regarding the factors to be considered here. So, and balancing under 403, the probative value of any of Mr. Ray's testimony on this issue, it's outweighed by the danger of confusing the issues, undue delay. and wasting time. He does not have an examiner report in this case. He's giving a subjective opinion of examiner reports in other cases. That's my understanding of what his testimony is to be, and it is not relevant to whether an examiner should be appointed here.

And then our other motion in limine relates to exhibits, and it's a related motion, essentially, because I understand Mr. Ray's going to be testifying about the exhibits to which we object. So Your Honor, should I allow other parties to address this first motion in limine? Let's do the first one, and we'll go with the second one. Thank you.

Your Honor, Jim Bronwyn from Sullivan and Cromwell. I don't know that I would characterize Mr. Acquesian's comments as a motion in limine as more of an objection to the particular testimony that's not yet occurred. I can assure the court we are not going to offer Mr. Ray as an expert. So the idea that we have not submitted an expert report or we're seeking to elicit some sort of expert opinion for Mr. Ray,

I should assure the court we're not going to do either of those things. With respect to Mr. Ray's prior experience, we believe it's absolutely relevant, critical, not confusing, for Mr. Ray to talk about the two circumstances where he has run into examiner reports. Mr. Ray is the former Chief Executive Officer of Enron and the former Chief Executive of Residential Capital. Both of those matters involved the preparation and filing of substantial expert reports at costs totaling nearly $200 million. Mr. Ray was responsible for prosecuting claims. As you will hear in his testimony, he reviewed the reports and has views as to – and these aren't opinions.

These are personal experiences as to whether or not the reports were helpful or relevant to him in the exercise of his duties. So this goes directly to his own experience. We're not talking about him looking at reports that he has not had experience with. These are two matters, two very important matters, which frankly qualified Mr. Ray himself as a person with a great deal of experience in a very important matters, which frankly qualified Mr. Ray himself as a person with a great deal of experience in a very important matters. and he's dealing with Chapter 11, and one of the reasons he's here, right? One of the reasons he's in the role of he is. If there's any particular questions about that experience, then Ms. Sarkasian finds objectionable,

then I think she has the right to make objections at the time on whatever evidentiary basis may exist at the time. But to right now simply prohibit him from testifying because they are neither relevant nor could potentially lead this court to confusion we believe simply is not justified. All right, on this motion, it's difficult for me to make a determination in a vacuum as to what the testimony is going to be that might be objectionable. I would note that if Mr. Ray is going to be testifying about his experience in other cases and how it might, his perception at least, of what the efficacy or usefulness of examiners are in these types of cases, I think it would fall under Rule 701, which is opinion testimony by a lay witness.

based on his personal perception and so therefore I would allow that testimony to go forward but Ms. Sarkeesian you're free to object during the course of the testimony to any questions you think are inappropriate. Move on to my second motion. Yes, of course. And Your Honor, just to, again, Juliet Sarkeesian for the U.S. Trustee, just to make sure to preserve all objections, we will be having a continuing objection to Mr. Ray testifying about his experience in other cases or what his opinions are about the usefulness of exemptions.

and the examiner reports in other cases. I just want to put that in the record. It's noted, so you don't have to raise it every time you answer the question. I'll give you a continuing objection. I may still object a few times, Your Honor. That's fine. That's fine. So the second issue has to do with exhibits.

So, Your Honor, we were able to stipulate to, is it, 23, going exhibits, I believe. And I certainly appreciate all parties' efforts in that regard. efforts in that regard. On Friday, the debtors filed an declaration of Mr. Blachstein, attorney with Sullivan and Cromwell, in further support of the debtor's objection to the motion of the U.S. Trustee O'Point and Examiner. It attached 3,855 pages. It's the three binders, You've finally broken loose from work. Three friends, one tea time, and then the text.

Honey, there's water in the basement. Not exactly how you pictured your Saturday. That's when you call us, Cincinnati Insurance. We always answer the call, because real protection means showing up, even when things are in the rough. Cincinnati Insurance, let us make your bad day better. Find an agent at cINFIN.com. needs to be separately Exhibit 1A, B, and C.

What Mr. Glockstein attaches are the examiner reports in Enron and Residential Capital. So, first of all, this filing was untimely. The objections to the examiner report and all responding papers were due on January the 25th, and this was filed February the 3rd, one business day before the hearing. And I can assure your honor that I did not have an opportunity to review the 300, 3,8333 pages of documents. These also were not identified in response to the debtors, I'm sorry, in the debtor's response

to the U.S. Trustee's discovery. So one of the interrogatories, the U.S. trustee had, there were very few, but one of them was, please set forward in all the exhibits that you will use at trial. There was nothing about, they listed some things, but there was nothing about anything from Enron or Rescap or anything of that nature.

In addition, these documents are hearsay. They don't fall under any hearsay exception. We don't have the author of the document to lay a foundation for the documents, or the authors, excuse me, which would be the examiners. And they're also completely irrelevant to the issue that is before this court, which is appointment of an examiner in these cases. Of course, as Your Honor knows, we don't think any of this would be relevant under C2, but even under C1, the best interest of the creditors, it's not relevant what an examiner in another case put in his or her report. And I'd like to respond to,

in the joint pretrial order, the debtor set forth their statement about why they believe these examiner reports could come in. So the first thing they indicated was that the debtor set forth the judge can take your honor can take judicial notice of these reports. U.S. trustee agrees that your honor can take judicial notice of the fact that examiners were appointed in these other cases and that they issued reports that were filed with the court. We have no problem with that. But that does not make them, that does not make the content of the reports admissible. They also argue that these are admissible as business records of the relevant debtors, I assume they mean Enron and, and residential capital,

under Federal Rule of Evidence 8036. Now, 8036 is a document that is kept in the ordinary course of regularly conducted activity of a business organization, occupation, or polling, and that making the record was a regular practice of that activity, and that all these conditions are shown by the testimony of a custodian or other qualified witness or by certification that complies with federal rule of evidence, 902, 11, or 12. None of these elements are present. An example of a business record, I'm sure Your Honor is very familiar. An invoice would be an example of a business record.

Not a report created by a court-appointed examiner. That is not a business record. And you also don't have any person to lay the foundation, again, I would assume it would be the examiner, to lay the foundation, this is somehow a business record. The last thing that the debtor set forth is 807, which is the residual exception. The U.S. trustee does not believe that the requirements for this exception have been met. And in order to meet this exception, you would also still need to lay

a foundation. You would need to have the examiners in Enron and residential capital who wrote these reports testify to establish the foundation to meet 807. Also, 807B requires that the proponents give an adverse party reasonable notice of the intent to offer the statement. And Your Honor, the U.S. trustee did not receive reasonable notice here. So, Your Honor, those are the reasons why we believe that the exhibits to Mr. Glousteen's declaration that was filed at Docket 611 should not be admitted other than the first exhibit, which again does not need to be separately admitted because it's already part of Exhibit 1A, B, or C. Thank you.

Your Honor, I'm happy that the U.S. Trustee is willing to stipulate that, Your Honor, can take judicial notice that examiner reports were prepared in the Enron and residential capital matters. And in fact that we had had that conversation on Friday, maybe we could have avoided some of this. But the fact is, Your Honor, these are business records of Enron and the H. for capital. Mr. Sarkasian is absolutely incorrect that either 803 or 807 requires that the author of a document be present and able to testify.

The basic construct of records of regularly conducted activity are that the testimony that would be necessary to admit such a document as an exception to hearsay would be sufficient if it was provided by a custodian of such document. Now, it is naive to think that in a case such as residential capital or Enron or indeed FTIX, that the epitome of a business record is an invoice. The business of those entities and the business of this entity is winding down its business. The records of regularly conducted activity of Chapter 11 debtors include, by definition, those matters that are prepared and filed on court dockets.

In terms of the custodian of that document, or these documents, Mr. Ray was present in court and was the chief executive of both of those entities and is qualified to testify that these documents indeed were maintained by each of Enron and residential capital in the ordinary course of their business, which at the time was liquidating and widened down. Now that being said, Your Honor, The purpose of the use of these examiner reports is not to point to page 532 and say that on such and such a day, such and such a thing happened. The reason these reports are present in court and are sitting here in front of you is so

that Mr. Ray can testify that, yes, the reports were something that he considered during the course of his work in each of those entities and that among the obligations that he had was to maximize recovery and assets and the use to which he put those reports. He's not going to be testifying about any particular fact or assertion in any of the Enron or residential capital reports. It's merely the fact that they existed and that he considered them. So he is not going to be testifying in a manner that would require us to introduce either of the reports for the truth of the matter asserted in those reports, merely for the fact that Mr. Ray consulted with Redd and considered those reports during the course of his obligations with the Chief Executive of Beach of Ben-Rond and Residential Patel.

All right. On this one, I'm not going to allow the, other than Exhibit 1, I'm not going to allow the two reports to be admitted as evidence for a number of reasons. One, I don't believe there was fair notice to the US trustee that these exhibits were going to be introduced to I don't see how they're relevant to the issues before me today three they are hearsay they certainly don't fit within the business record exception which requires under rule 803 that they be a record of regularly conducted activities and certainly an examiner report is not a regularly conducted activity of an entity so for those reasons I will not allow them into evidence Mr. Ray can testify, obviously, I've already ruled, he can testify about his work in other cases where there were examiner reports introduced, and he can testify about his experience in that regard without reference to the reports, the specific information contained in those reports.

Okay? Ms. Sarkina, is we done with motion practice at this point, and we're moving on to the evidence? Yes, Your Honor, at least from the U.S. Trustee's standpoint. Okay. Your Honor, our testimony witnesses will be coming in by way of declarations that have been marked as exhibits. So that's Mr. Ray's declaration, that's at docket 24, and another one at docket 92, which would join exhibits 2 and 3, as well as his testimony before Congress, which is joint exhibit 8, and is on the docket at 371. In addition, Mr. Mosley of Alvarez and Marcel, Mr. Edgar Mosley, by the way of his deposition in support of first aid pleadings, which is Joint Exhibit 4 and Docket 93.

Any objection? No question. They're admitted without objection. Your Honor, we did list Mr. Ray as a witness for us, so we're not going to be asking him any questions initially, but to the extent that I understand the debtors will be putting him on, we reserve the right to cross-examine and then to go beyond, if Your Honor permits, to go beyond the scope of their direct and use him as our own witness, which again we did put in a,

we did file the notice that he would be a witness, and we did reserve that right in our notice. Is there any objection? My colleague reminded me I need to move for the admission of all the exhibits of 1 through 23. And I'm not sure with respect to Mr. Bluxtein's declaration how they want to handle that because it's only a piece of it that's coming in, but we would move for the admission of exhibits 1 to 23. Any objection? Your Honor, we have no objection to the admission of the exhibit 223.

Okay. in terms of the public of the Bucson's declaration of the SEC. And on behalf of the JPLs, there was a stipulation which was included in the pretrial order that what was coming in today was for the purposes of this hearing only and was not going to be coming in for all purposes in the case. All right, that's fine. So with the exhibit, you want to mark that as a debtor's exhibit then separately? Debtors exhibit number one as opposed to adjourn to?

Any objection? No, you're on. I would just right now it's attached to Mr. Gluckstein's declaration with the 3,800 pages. So can you just have I don't know how to do that technically, but I don't want that entire thing being coming in as an exhibit. No, I understood. We'll just submit Exhibit 1 to Mr. Gluckstein's declaration as a separate exhibit, as debtor's exhibit number one. Thank you, Your Honor. Is there evidence?

Mr. Keish? I'm sorry you are any other evidence Mr. Bromwellman Your Honor the debtors would like to call John J. Ray the 3rd to this day Mr. Ray please come forward take the stand and remain standing please please raise your right hand please state your full name

and spell your last name for the court record please John J. Ray the 3rd last name R-A-Y do you affirm that you tell the truth the whole truth and nothing but the truth and the best of your knowledge and abilities yes you may be seated your honor thank you Mr. Bromley you may proceed

Thank you, Your Honor. Mr. Ray, what's your current occupation? I'm owner of an advisory firm called Owl Hill Partners, and I'm also Chief Executive Officer of FTX. And could you please give a brief summary of your educational background? Yes, I graduated 1980 from University of Massachusetts, 1882 graduated from Drake University Law School initially admitted in Iowa, Nebraska, and still admitted in good standing in the state of Illinois.

And can you please give the court a short summary of, say, the first 10 years of your professional career? First 10 years, I began at Touche Ross, an accounting firm, doing tax work as a lawyer, thereafter I moved on to become an associate at Mayor Brown and Platt, now known as Mayor Brown in Chicago, Illinois. Practicing in initially the employee benefits and securities area, practice included M&A work primarily. thereafter I departed private practice and became employed by a private company. And what private company were employed in? Initially, it was waste management, now known as WMX. I began there in 1988 and worked there.

either for Waste Management Inc. or one of its operating subsidiaries as General Counsel of the various operating units, including certain of their public subsidiaries, again for approximately 10 years. The practice included corporate governance, securities law matters, and then at the operational level, a variety of managing complex litigation. and other investigatory matters relative to the company's operations. And after waste management, what did you do? After waste management, the company was sold, I then became general counsel of a company called Fruit of the Loom,

also based in Chicago, Illinois. It was general counsel and chief administrative officer of that company. And when did you first come in contact with Chapter 11? The company, unfortunately, shortly after I got to the company, The company went into bankruptcy. The company had a number of operational issues that led to the Chapter 11 and very quickly became embroiled in issues relative to the chief executive officer of the company who at the time had loans that were guaranteed by the company prior to my joining the company. and they became quickly issues in the Chapter 11. And did you have any role in investigating anything with respect to the CEO?

I did. I mean, ultimately, you know, within days really of the filing, the chief executive officer was dismissed by the board. I then became the most senior officer of the company and ran the Chapter 11 for approximately 26 months after the case. was confirmed out the creditors asked me to stay on to prosecute a variety of claims, including the claims related to the chief executive officer, which I did. We lit up to those cases in a couple different jurisdictions,

including the federal district court in New York, to recover the monies that were loaned to the chief executive officer. And what was the result for those efforts? We got our money back. And after Fruit of the Loom, what did you do? After Fruit of the Loom, I took a liking to Chapter 11. It sort of fit the essentially my business experience, my legal experience. And I took on a variety of Chapter 11 cases, either as a chief restructuring officer

or in many cases, essentially the liquidating trustee of a judge. post-confirmation trust primarily to prosecute claims related to the bankruptcy. A number of those cases involved prosecuting claims against accountants and directors and officers, and I certainly can take you through those cases. Can you do that for us? Yes, please. First case that, of course, you know, no notoriety and you've heard many comments in the last few months over of course was Enron I became a chairman of the board of Enron and

chief executive officer that began in 2004 through 2004 through 2008 was primarily the time period in which those cases were prosecuted the company still was very very complex in chapter 11 I wouldn't say that much was accomplished in Chapter 11 but much was left over in the Chapter 11 we still loaned a public utility in Oregon the Portland utility company we still loaned international energy business we still had several thousand employees and we still were plaintiff in over a thousand cases those cases were a wide variety virtually every single bank an American some outside North America were defendants in cases that were brought that were either fraud cases or

avoidance actions and then there was cases against law firms accounting firms including Anderson Vincent and Elkins is a law firm that was a sued in those cases but it's a massive list of cases where the company was a plaintiff recovering for various misfeasance, malfeasance, fraud, negligence, really the waterfront of events that occurred during the Chapter 11 that were ultimately prosecuted. We recovered in litigation proceeds about... I'm going to... I was waiting for the next question, but I'm going to object to this testimony based on relevance. I think he's giving his background out overall. We recovered over $5 billion in litigation recoveries against just the banks alone and the

overall recoverings in the case were approximately $26 billion, which is double the plan recovery that was estimated in the disclosure statement. From there, I took on a number of other cases. I was the litigation trustee in a company called Hays-Lamers. Hays-Lamers was in bankruptcy a couple of times. I was involved with Hays-Lamers. One, my sole role in that capacity was to sue the officers and directors for a breach of their fiduciary duty, ultimately settling with the directors related to that action.

We also sued the accounting firm related to Hays-Lamers. other cases that I've been involved in. I was essentially the chief executive officer of Nortel, which is a cross-border case, where we had conflicts between the United States operations for Nortel, the Canadian operations and the operations outside of the United States and Canada that involved 19 separate subsidiaries. A very complex case involving a myriad of intercompany transactions,

somewhat complex that went on for extended period of time due to the issues between the various silos within that Nortel estate. I also was overseas shipping group CEO, CRO, about the same time from 2012 to 2015. case another chapter 11 case the principal problem in that case as the company had understated its tax liability by somewhere between 300 million and 500 million they had achieved that status by obtaining a legal opinion from a very prominent firm in New York and that legal opinion which they relied on was the vehicle into which they avoided those taxes.

So ultimately, you know, our mission in an overseas shipping group, you know, beyond the Chapter 11 was to take on the issues surrounding, you know, the tax opinions that were in the view of the company

and ultimately the creditors that involved malpractice by that law firm. The case was somewhat unique in the sense that very has one sort of similarity with FTX almost immediately upon filing the case discovering of course the legal opinion and the faulty nature of their legal opinion we went into the Internal Revenue Service I went in with counsel at the time walked over to the offices over at the IRS around about 8th and 56th Street in New York and we walked in and we self-reported that liability which was

somewhat startling you know to the service but it was my obligation you know as an officer of the company to go in and report that of course the reactions from the Internal Revenue Service were unique there was no particular form for that very startling for the IRS to see someone come in and and self-report a liability that was half a billion dollars I don't think this is relevant but I would object to mr. Ray testifying about what was in the head of the IRS agents whether they were surprised I'll sustain that ultimately after overseas shipping I moved on to residential capital residential capital was essentially a mortgage case was a

subsidiary of General Motors. I was appointed as the litigation trustee for that case and prosecuted over 100 separate legal actions related to indemnification and breach of contract related to the sale of mortgages to residential capital in the tens of billions of dollars that ultimately were faulty, in some cases fraudulent, and we litigated those for for several years and I presided over that litigation.

So Mr. Ray, to take you back a bit in Enron when you were the CEO, were you aware that examiner reports have been prepared in connection with that case? Yes, I was very, very, made very aware of those reports. the reports when I became affiliated with Enron almost immediately my joinder we were in the middle middle of a somewhat of a skirmish related to those reports because various parties were attempting to use those reports to get access to those reports there was essentially fights over whether or not they should be directed their effect on the criminal trials that were yet to have occurred,

as well as the use of those reports that the parties had substantial disputes over. In your honor, continuing objection to the relevance of this testimony. Overruled. And, Mr. Ridd, do you have a sense of the cost to the Enron estate of those reports? The other, again, I object as irrelevant. Overrule. The amount report was $90 million. Now moving on to residential capital, is there an examiner report in residential capital?

There was. And are you familiar with that report? Yes, I am. And do you know what the cost of that report was? The cost of that report was approximately $100 million. And did you use that report at all in your collection of it? I... I...

Honor, again, I object the relevance. Oh, rule. Neither in Enron nor in residential funding and a residential capital, did I make use of that report for distinctly different reasons, but neither case, did I use those reports? And what was the reason you didn't use it in Enron? I'm sorry, Your Honor, I have to object again based on relevance. Oh, rule.

Multiple reasons in Enron. you know first when you review the Enron report which I believe is in my experience characteristics of many of the reports they're very topical they're very general they're almost sort of a curated you know gathering of statements that failed to take real positions relative to what occurred your honor I have a different objection here I I believe that the witness is testifying now not just about the Enron report, but more generally. In addition, he is testifying about the contents of the Enron report, and Your Honor has ruled that those reports are not to be admitted,

and therefore he cannot testify about the contents. Rahman? I would ask the witness to limit your comments with respect to the Enron report, not other reports. with respect to the contents. Mr. Ray is testifying as to not what the contents were, but how he used those reports in the exercise of his duties. I'm not testify about how you use the reports, but don't talk about the contents of the piece.

Sure. I did not use the reports because they were very shallow, I mean, sort of a mile wide, inch deep, and ultimately we had to... I think that relates to the contents of the report. Well, he can characterize, and you can't really talk about how he used them, I mean, I can't characterize how he perceived those reports. So I'll overrule that. Thank you.

Ultimately, the information that was in the report was, you know, it didn't go far enough relative to what I needed to do to prosecute the actions. The reports are somewhat ambivalent in the conclusory sense, and ultimately the evidence. He's testifying about the contents again, what the conclusions were. He's not telling me what the conclusions were. He's saying that he did not find the conclusions

helpful to him. I think that's appropriate. I'll hope he'll be rejected. But ultimately I had to spend all of the time to investigate and ultimately prosecute those actions and the reports themselves did not aid in that investigation. relative to residential capital, somewhat of a different story there.

Residential capital largely was focused on intercompany transactions involving the parent company GMC who still owned the equity in the company. So a shareholder was still present during the Chapter 11, and there was an investigation related to that existence. The RESTCamp is notable, frankly, for what it didn't cover. When you read that report, very, very extensive report, you can take an eye full over there. It's a very deep report. But ultimately, the tens of billions of dollars worth of mortgage fraud in terms of mortgages that were sold to the company that I prosecuted that yielded over a billion three in recoveries,

which included over 100 cases, two trials, a jury trial, and a bench trial. there's not a single word in that report related to those actions. So. Your Honor, I'm going to object. Now you're getting into the content. Mr. Ray, I'd like to just touch on it, based on a couple of the other matters that you mentioned just briefly. In connection with the Nortel case,

did you have a cooperative relationship with the creditors committee in that now? I'm going to object, Your Honor. I'm sorry to keep making the same objection, but I feel it's necessary. Yes, a very cooperative relationship. We worked tanned and glove. And was that including investigating and prosecuting claims?

Yes, we did that really on a joint basis. At the end of the day, you know, we're debtors there for the benefit of creditors, and so we worked very cooperatively. What was the ultimate recovery to the Nortel creditor? Sorry, Your Honor, I'm going to object to the record on relevance. Overrule. It was capped at 100%. It certainly could have been higher. Mr. I'd like to turn your attention out to FTCS.

Yes. Prior to your appointment, in your current position, did you have any connections to FTCS? No, I did not. Did you have any connections to Sam Bankman-Fried? No, I did not. Or Gary Wang? No.

Carolyn Ellison? No. Nishad Singh? No. Ryan Salami? No. Do you have connection with any of the executives at FTCF? No.

Did you have any connection with Mr. Bannanfried's parents? No. Can you tell me how you chose the members of the board's directors? Each of the members of the board directors was somewhat curated. Each of them have their independent. First of all, they had no involvement with FTX, similar to my position. We needed an independent board in place immediately. So really within hours of my appointment,

I saw the need to have an independent board. So I contacted several individuals who I knew that had diverse experiences who collectively as a group would form the ideal board to govern the situation. And then Mr. Ray, in your first day declaration, you described generally the state of FTX when you arrived. But could you just summarize that for the court today? The company, you know, was really unlike any other I've ever seen.

Not a single list of anything. You know, normally you come in and there's a bank account list, but there's personnel who you speak to about these things. There's lists of assets. there's balance sheets there's income statements there's professionals there's insurance there's just nobody to turn to really in the company just a complete void massive scramble for information and fortunately we had the services of you know firms at my disposal who ultimately could become what what I've described as an army of soldiers of

women and men who have been dedicated to putting this together. Your Honor, I'd like to put up on the screen a demonstrative. Do you have that in front of you, Mr. Ray? Yes, I do. Now, Mr. Ray, could you just help walk us through this, starting first with the debtor's advisors? Your Honor, I'm just, again, going to put on the record my objection to this testimony is not being relevant.

I'm not even sure what the testimony is yet. I want to hear the testimony. Mr. Ray, respect to the group that's veterans advisors, are they participating at your direction in an investigation, a series of investigations with respect FTA?

Yes, I mean the first thing obviously to observe here is the center of this wheel and I, along with the directors are empowered to deal with this sort of circle of of different advisors and different fiduciaries, as well as other parties here.

But to your bottom left, to answer your question, are the debtors advisors. And it's really a multiple set of advisors because of the technical, highly technical nature of this case. It's also driven by the lack of professionals that were ongoing. and that I could rely on that existed on a pre-petition basis. So either there was an absence of consultants or professionals, or those professionals were not reliable such that we had to replace those. So obviously, starting at the top of the hour, Sullivan Cromwell, those are named bankruptcy lawyers,

immediately at the time of the filing with haste, we employed Quinn Emanuel, and we did that for purposes. of not only their bankruptcy expertise, but they had one of the more renowned lawyers in the country in investigatory work, Mr. Bill Burke, who's in this courtroom. We brought on Ernst & Young

because the company on a worldwide basis did not have reliable accounting professionals. In some cases, we didn't have income statements and balance sheets at all. All of this had to be recreated. And as you'll see in a moment, to the far right of me, you know, it sits the IRS who's investigating various tax positions taken by the company, and Ernst & Young was brought in to do that.

So we really needed those sort of books and records. Down below, of course, is the Landis firm, who's counsel here in Delaware and are also available for other purposes relative to the debtors cases. Down below is Porella Weinstein Partners, the investment bankers to sell the portfolio. This is the portfolio of roughly $5 billion of approximately 400 investments that were made over a myriad of industries in a relatively short time period from October of 2021 primarily to the petition date. Then below that is Alvarez and Marcel restructuring professionals that are really sort of the backbone, along with solving Cromwell relative to almost everything that has to be achieved in these cases.

We also brought on Alex Partners, Alex Partners, another well-renowned firm that had a particular expertise. related to investigations and tracing and certain skill sets that were essential given what had happened in the company and their particular expertise was essential relative to the underlying investigations that have led to not only our future prosecution of the avoidance actions, but they've aided immensely the investigation in replying to the regulatory stories that I'll get into in a moment. And then last but not least is Cigna. Cigna is a highly technical cybersecurity firm. This case is about cybersecurity or the failure of cybersecurity. security. This firm was needed to protect what was a crumbling shell of securities around

assets that are highly vulnerable and their services were critical as we saw in the the waking hours of the morning of the 11th as these petitions were being filed. you know, hacking was occurring. And so this firm, you know, was not only instrumental in stopping that, but also rebuilding an environment that's highly sensitive to this day because of the nature of crypto assets and the vulnerability of crypto assets. You know, over last year, there's been something worldwide reported about $4 billion worth of crypto that's been hacked. And so these folks are essential for us to have some integrity in our systems to allow us to preserve assets

and to repair what was a dangerous, dangerous environment relative to the storage of hot wallets and other wallets related to the company's crypto. Now, Mr. Ribb, what steps have been taken to replace prior management? I'm sorry, now that his testimony is over, I've been. would like to renew my objection. Obviously, under 11.04 , the US trustee does not believe any of Mr. A's testimony is relevant, but even under C1, as to whether this is in the best interest

of the creditors. The fact that the debtors have a lot of retained professionals and we're working together is not relevant to the issue as to whether an examiner should be appointed even under C1. Overruled. I'm sorry, could you repeat the question. Sure. What steps have been taken to replace prior management?

Prior management has been terminated. There's no one that was in a control position that today is in a control position whatsoever. That was eliminated immediately on my taking control. Now, when you took control, the omnibus corporate authority, which is Debtors Exhibit 1, referenced a request for Mr. Bankman, brief consult with his counsel at Paul Weiss regarding director of

appointments. Did you ever consult with Paul Weiss? No, I did not. And why not? I didn't think it was in the best interest of the estate to consult with lawyers for someone who we now know has been charged with crimes. Now, Mr. Ray, I'd like to draw your attention on the demonstrative to the lower right-hand corner, federal criminal and regulatory Are you saying that? Yes, I do. Are you familiar with criminal and regulatory investigations that are on going?

Yes, I am. And what have you directed the company and your advisors to do with respect to those investigations? I made it very, very clear from the beginning of my taking control on virtually the day of the control that we would do with whatever the government requests relative to cooperation. We believe that ultimately not only is that required, but we believe that it's the best interest of creditors to allow these regulatory authorities to get full access to the information on a real-time basis as we're learning

about what happened to the company. either virtually getting information again real time and we believe that was sort of fundamental to our you know mission here which is to maximize value for the creditors and do you receive regular reports on the materials that have been given to the investigative authorities virtually daily I'd like to I'll come back to this slide in the moment but I'd like to turn to the next one. You familiar with this slide? Very much so.

Your Honor, I'm going to, again, object on relevance. Oh, believe. And Mr. Ray, what does this slide? Well, the first part of it, it talks really about, speaks to the volume, the massive amount of data that we have produced. As you can see, we've collected 10 terabytes of data, over 27 million documents. We provide an analysis on several hundred thousand documents. We've interviewed and received pro offers of 24 current and former employees. And then we've also provided analysis relative to the transactions inside the company's databases.

The company's databases include a couple of different databases, the primary databases, the AWS system, which is Amazon. web services where where we housed some of the wallets the hot wallets and the database itself is in the millions of terabytes of data so it's it's a vast resource of information unfortunately in a somewhat unconstructed environment which requires you know the assistance of you know of people like Alvarez and people like like Alex partners to sift through the terabytes to ultimately provide useful data to the regulatory authorities. Are you familiar with the cooperation that's been given to the U.S. Attorney's Office

for the Southern District of New York and the Department of Justice's National Crypto Currency Enforcement Team? Yes, our teams that have been involved with virtually, you know, a daily request. As you can see, we've had over 150 requests from the Southern District. produced substantial amounts of information and provide the substantial cooperation relative to instances where they wanted specific information related to certain actions prehistoric actions for the company so it's virtually an ongoing exercise but the last you know roughly 90 days have been an extremely

intense effort to provide the information that the government has requested, which obviously yielded substantial results on record time. Now, Mr. Ray, are you familiar how these requests come in from the Department of Justice? Yes, I am. I'm familiar with how they contact the company. they do that through Sullivan and Crime Well primarily. And have you ever, are you aware of any instances where full cooperation was not given immediately? That wouldn't be tolerated.

I'd like you to turn your attention to the next slide. Now, in addition to the Southern District of New York, U.S. Attorney's Office, you're familiar with other U.S. Attorney's offices that have submitted information requests? We've had full participation. You know, we've had numerous requests have shown by this chart from other prosecutors around the country. The Securities and Exchange Commission has had a number of requests. Again, all cooperative presentations that have been provided. The CFTC has been extremely active here in connection with their investigation and have submitted thus, you know, over 150. requests on a state basis, not shown in this chart, but we have entered into dozens of cease and assist orders with respect to licenses around the world and the money transaction sector licenses that were maintained by the company.

So this chart really doesn't show the full gambit of the things that we've done to cooperate on a state, you know, in local basis, as well as these particular federal agencies. If I can throw your attention to the next slide. Yes, this is really what I'm referring to. We self-reported to 26 state regulators. We produced a mountain of documents there as well. I know we've been in regular contact with these agencies, not leaving it to the agencies to come to us. We've taken a proactive effort to work with them.

We've hosted update calls with these agencies. They're almost treating these agencies, in effect, like their own committee, if you will, and giving them real-time information. No, Your Honor. No, room. Now, in addition to the various states and state authorities, are you aware of additional requests that have come from Congress and non-U.S. authorities? Yes, I've been very, very active and personally involved.

in these requests as you as everyone's reported testified in front of Congress but leading up to that congressional testimony we've had a hundred requests from the Financial Services Committee we've had requests from the Senate as well and follow-up testimony that has been provided to the House Financial Services Committee and then we've also been involved in regulatory requests from outside the United States they're listed here in pretty extensive requests that stem from our international operations and we have exchanges that for example are in Japan and Singapore Cyprus we have European operations where we host the European

Exchange so all of these agencies relate to the operations outside the United States and they've been very active in terms of requests as well as us responding to those requests and since the you're aware of the appointment of the creditors committee in these cases yes I am and so what has been the level of cooperation with the creditors committee since its appointment well I'd like to think it's a model of how a company should work with the you know the creditors committee my approach really is a sort of a partnership approach with the creditors committee we've had numerous requests from the committee

They've been in place, I think, for less than probably a full 45 days, something to that effect. So we had a head start, if you will, which was helpful. That head start allowed us then to really put the committee in a position right away where they could be a true partner with us in this whole process, this journey we're on to figure out where we're going with the assets and the recoveries here. So we've had, you know, we have lots of calls almost hourly contact between the professionals and the committee and the debtors. I've personally had a call with members of the creditor committee. I've also given my contact information on a personal level to the co-chairs of the committee with a full invite for them to call me at any time related to any requests that they might have or any views that they might have that they'd like to share with me on a personal basis. So we really have, I think, hopefully, what I think should be a model for cooperation in this important mission.

Now, let's go back for a moment to the directors that were appointed. Did you appoint the directors with any keeping in mind the potential for any conflicts between silos? Yes. It's no coincidence that the way we establish the director position. It is not one board. They often function to get information at the same time, just for efficiencies and clarity as to the information. But each director is a director of a separate silo. So they have duties as a director, for example, of the Almeida silo.

The other directors do not. there's a director for example for uh uh uh uh uh... uh...

each of the directors there is you know one silo where there's a two directors on a silo but each of these directors essentially have their own silo and their own responsibilities related to their silo in the subsidiaries beneath it uh there's also a subsidiary director for those silos

who's uh who's separate as well and do you have separate uh board meetings for the directors in the separate silos we have joint meetings which are informational for all the directors and then we have separate meetings for the directors related to their unique silos so we actually put presentations together that only deal with that director and that director's unique silo information and we do that for a few reasons one is that we want to really give in-depth information related to that silo to that particular director but we also

want to create an environment under which that director can raise any issue whatsoever with respect to their silo versus any other silo or any other issue that exists in the FTX environment so we want to create an efficient process which allows all the directors to share ideas ensure their experiences ensure access to the host of you know professionals we have but we also have a very sterile environment where each director gets to spend you know quality time relative to the specific information that relates to that particular silo, for example, if there are assets that are in that silo, not in another silo, or if there are intercompany claims, for example,

that directors want to discuss in their silo vis-a-vis other silos, they've got the environment in the forum to do that outside of the presence of the other directors. So that's really the model we created. Now, Mr. Ray, I'd like to go back to the cybersecurity environment that you mentioned a few minutes Now, is there a physical location right now where FTCX is located, the company? No, there is not. The company was described, and I think we refer to it in the first day petitions, as it's located in the meta-universe, but we have no physical location whatsoever.

So the investigation's work that's been taking place so far, how does that take place, in the metaphors? How does that investigation takes place? Carefully, because all of our data is stored in the cloud. It's stored electronically. This isn't a case where, for example, like Enron, where we owned a 100,000 square foot facility and we owned a forklift, and we hired a forklift operator

to go get the documents and something. someone required them this requires someone to go into our data environment to do their day job now on the first day of the case we received relief that provided indemnities for certain individuals who were accessing that environment do you recall that yes I do and why was that indemnity required the reason for that and it's very extensive I'll try to keep it focused and brief, but you're allowing and requiring, more importantly, you know, professionals to enter into a highly fragile, computerized database.

Where things can happen and go wrong pretty quickly. If you open up that database, you're subjecting yourself to third-party hacks. you're subjecting yourself to inadvertent errors. I guess the word sometimes that might come to mind to sort of thick fingers or whatever. You literally could hit the wrong key in this environment and destroy hundreds of millions of dollars worth of value because you've misquered letters to a code,

a key, if you will, a password that allows you to open up a wallet. This is an environment that has to be very cleansed, very clinical. This is not something for people to bounce around in without creating tremendous amounts of risks, external risks, internal risks. So it's really, it's a laboratory that you have to work in very, very carefully. So I'd like to show you another demonstrative. You're familiar with this slide? Yes, unfortunately.

And so could you please describe what this is depicted? Well, this depicts a couple of few different things. As you can see, the bricks around this wall shows the state of what our AWS environment was at the time of the petition. a very loose environment, one that is probably a case study for how not to have a controlled environment for crypto. Very vulnerable. We had hot wallets in a system where multiple people had access to passwords, wallets that, you know, sitting in a system that are accessible virtually by anyone who could access that data system. So these, there's multiple access points into an environment that literally held billions of dollars worth of the company's assets. And as you can see to the right, there's a few different, you know, words set out in red print there.

pre-petition, this environment allowed insiders to freely transfer assets of the company with no accountability and no tracing. Literally, one of the founders could come into this environment, download half a billion dollars worth of wallet's on it with a thumb drive, and walk off with them, and there'd be no accounting for that whatsoever. virtually unthinkable really in a controlled environment what you'll see down below is that you know while we were securing this this environment that you have the petition date we signed the power that gave me the right to advise on the filing of this that was done at 4.24 a.m. in the morning on the 11th by

7 o'clock in the morning I was reviewing petitions by 10 o'clock we were filing the first positions or first petitions by early afternoon we had I think achieved most of the filings of the petitions and then throughout that day those early hours or within six seven hours you know we were doing the normal first-day petition filing and one of our team one of our advisors not someone inside the company one of our advisors that we had hired detected movement of crypto off of our wallets. And so immediately, effectively on the filing, we had an issue with the crypto being stolen from the company. At the same time, there were efforts.

at the time we didn't fully realize what was transpiring, but there was efforts by the provisional liquidators to also secure assets for the protection of customers. This was all happening simultaneously. So your normal first day petition as chaotic as it sometimes can be, this was something that I have never experienced. It all stems from the failure of this system and the lack of integrity related to this system. And we were fortunate enough because of the professionals we had to stop the crypto being stolen.

We were fortunate, of course, that the provisional liquidators were also able to capture some of this value and held in custody in the Bahamas. that presumably could have been also stolen in this time period. And those hacks went on virtually all night long. I think that they somehow ceased around 4 to 5 a.m. the following day, we had over 100 people on the phone trying to stop these hacks because at that point you have no passwords. know where the wallets are in this environment someone described the wallets sort of in this AWS system is sort of needles in a haystack of needles and we don't have the wallets we don't have the passwords obviously some people did have passwords

that were accessing these so it was really 48 hours of what I can only describe as pure health mr. Brownlee before you continue how much longer do you think you have I'd say another 15. Let's, okay, we'll go ahead and finish up, and I'll take a recess before we can cross. Thank you, Your Honor. Now, Mr. Ray, you can take a look at the next slide. There we're.

Sorry. So, Mr. Ray, could you describe the computing environment at FCX today? We have created, you know, the environment, you know, as it should be. I mean, we've hired experts in computer science and, cryptography. I've mentioned the insignia group as well as the Albersa Marcel group that have been essential to rebuilding the brick walls around these wallets

to give them some security. We have gotten access to the code and controls and the data to prevent any further loss by way of hacking. We've moved hot wallets into what's called cold storage to secure those. We have also gone off to exchanges where wallets are contained and move those wallets over to a controlled environment. So this first exercise with the assistance of computer experts

is to provide integrity to the environment, increase the security, move those wallets into cold storage, secure the assets for the benefit of customers and creditors. That, of course, involves, you know, the analytics that these experts use to find wallets. And also, what's key here is to, we're doing a tracing analysis of will, to look at unauthorized transfers of crypto that either were in or while it's in the environment itself,

all with the goal, this isn't sort of a study for study's sake. There's a purpose here to what this is beyond, just the integrity of the system and maintaining it and securing the assets. This is effectively to also recoup those assets to investigate who moved assets and for what purpose, the source of the funds for those assets. which, whether that's external or on an intercompany basis,

when we're investigating who did that, the potential misconduct, the wrongdoers, the clawback opportunities related to that, and of course in the process of that, all of the evidentiary work that we're doing to cooperate with the government is not an exercise for exercise sake. There is no sort of billing code that just says cooperate with the government. We look at all of our cooperation, really on an end-use base,

What do we do with that information? What's the byproduct of that investigation? The byproduct is always with an asset in mind or a recovery in mind. It's not sharing for sharing's sake. It's how do we use that information that we've provided to ourselves and to regulatory authorities to then synthesize it in a way that provides us with the tools that we need. to recover on avoidance actions to inevitably file actions related to misfeasance or malfeasance against insiders for example and then obviously you know there's the

compliance with our chapter 11 obligations and disclosure you know that's an outgoing obligation that we have and and that's fulfilled through this very exercise and then lastly as I mentioned I mean our our byproduct of that you know leads to sharing evidence and cooperating with the authorities. But this is an ongoing, you know, circular effort, right? You know, answers be get questions. We provide information. That information gets synthesized.

That turns into new inquiries, new questions, and we're continuing, you know, to evolve in the process. And we've been at it 90 days. It's night and day. When you see this environment today, it's a very simple chart. But to get from where we were 90 days ago, which what I would describe, as pure hell to where we are today is pretty satisfying and then mr. Ray do you think that there would be a danger of introducing a party into the environment

objection his opinion on this issue is not relevant to reports determination providing a front and that's the overall I there is a danger and and you know beyond you know the you know the We have a lot of seats at the table. We're happy to feed all those people at the table. But what's unique about this, you know, is this controlled environment? This isn't some, you know, lawyer exercise, you know, where we bring in a well-heeled professional who observes some misconduct by people.

Literally, you have to operate in this laboratory. to investigate, to secure these assets, and to develop the process of translating this data into a recoverable assets for customers. This is just too fragile of an environment for me to accept yet another seat at the table with someone who just bounces into this environment and puts ourselves at risk.

We've come too far to allow that to happen in my mind. That's all I have for this witness at the moment you're on a observing time for redirect. All right, thank you. All right, let's go ahead and take a 15-minute recess. We'll reconvene at, what does that place at, 1125. Okay. I have a funny bill. You got to go on my jacket like that.

On the record, I'm going to be ready. Thank you. I'm record, Juliet Sarkesian, on behalf of the U.S. trustee. Good afternoon yet. No, still good morning. Good morning, Mr. Ray. Good morning. So Mr. Ray, in Enron, when was it that you were appointed?

In 2004, I believe July of 2004. And was that after the plan had been confirmed? It's prior to the confirmation date. Was it after the examiner's report had been filed? Yes. And prior to that time, July 2004, you had no involvement with the Enron case. That's correct. You did not lead an investigation of the Enron debtors, did you?

I led the prosecution of those cases, yes. What type of actions were you prosecuting? Virtually all types. There was accounting malpractice, legal malpractice, breach of fiduciary duty, crime. there was actions against insurance carriers for failure to pay there was avoidance actions virtually you know any type of affirmative recovery that one could think of now you testified something to the effect that you did not feel that the examiner reports in Enron or Rescap were

particularly useful to you in your roles that's correct so do you know whether the courts in those cases viewed the examiner reports is being helpful no I don't you don't know either way I don't know either one your honor since mr. one or not do this but since mr. Ray testified about his opinion as to whether these examiner reports in these other cases were helpful. I would like to bring to the court's attention what the courts stated in the confirmation order in Enron as well as a transcript in the RESCAP case.

I can... It's not evidence, Your Honor, but he testified about his opinion and these orders and transcripts are part of the court record and the court can take judicial notice of them. Well, I think you argued earlier I can take judicial notice that they were filed, but not the content of those documents. That is true, but at least with respect to an order, the order says what it says. Well, if it's an order, I will take judicial notice of the order.

It's in a transcript. I will not take the notice of the transcript. So the order that we have is in, that one is Enron. It's the findings of fact and conclusions of war. I'm sorry, I'm sorry, I'll provide a copy. And can I also ask you done to the witness? Oh, I'm sorry. I'm sorry, and I apologize, because I was actually going to ask the witness about, but he's right.

Since the witness didn't know, I can do this later. You can do this later. Yes. Now, Mr. Ray, you talked about appointing directors, correct? directors, correct? Yes, I did. And your power to appoint directors came from the omnibus

corporate authority that was signed by Mr. Sandbankton-Kreed, is that correct? In part. What's the other part? Well, I was at that point I was the only officer of the company and

pursuant to that power, I was able to I had the power to nominate directors and elect them. So when you say the power, you mean the owner of this corporate authority? Yes. And that's Debtors Exhibit 1. I can, do you have Exhibit 1? Or you know what?

We can look at, do you have a binder up there? I do. Okay. If you could turn to Exhibit 1A, please. And that is the petition. of West Realm Shire's Inc. Is he here? I'm sorry?

Whoever that was kicking out, please. If you look at the top of the page, it has the ECF page numbers, so if you could turn to page 11 of 20, please, and does that say on the bus corporate authority at the top? Yes, it does. Is that the on-vis corporate authority that gave you the authority to appoint directors

for the debtors? Yes. Now, I'm sorry, let me rephrase. If an examiner is appointed, if the court appoints an examiner in this case, would you cooperate with that examiner? I will follow whatever orders are issued by this court. Assuming that you were directed to cooperate with the examiner, would you do so? Can you explain what you mean by cooperation? If the examiner needs documents, for example, that the debtor.

have, would you provide those documents to the examiner? I think there might be some caveats to it, but yes. Are there other things that you would not provide to the examiner if he or she asked? I'm a question. That's a fair objection. Okay. You had testified that, I believe you would testify that all, I don't want to misstate your words.

Did you testify that all former management has been terminated? has been terminated? I said that any former management that was in a control position has been terminated. But there still are some officers currently at the debtors that were present

prior to the petition date, correct? There are employees that are employed who were also employed pre-petitioned. They're not officers of the company. We do have a stipulate, I would point to,

we have a stipulated fact that there are certain officers that still remain? Are you saying that's inaccurate? I'm saying that you may be confusing titles with officer positions, which are different in a corporate context that sometimes get confused. For example, the general counsel of the company is the title. I've not stripped that person of their title, but they don't function as general counsel, and I'm an officer with the company. I certainly haven't appointed him as officer,

petition so you're saying that there are some individuals who hold officer titles at the debtor that were there pre-petition that are not in control positions in the company what do you mean by control positions of control the the controlling the actions of the company making decisions related to the company's business or operations is that sufficient Are you aware that you had given some testimony regarding cooperating with various state attorney general's offices and the like? Is that correct? Yes.

And are you aware that certain state attorney general's offices or other state agencies have in fact joined in the U.S. trustees' motion to appoint an examiner? I believe there was two joiners. I think Wisconsin and one other state. You don't recall there was a third one more recently? If you say so. Attached a bunch of letters from other state agencies. You didn't see that? I'm sensing.

Did you see that? They detached letters from other state agencies supporting the joinder? I don't know which ones you're referring to. I did review two of them if there's a third. I'll take your word for it. I did read the two that were filed. There's a third I may not have read it.

The governor of the Texas State Securities Board? You didn't see that? Your Honor, can I just ask the relevance of this? I mean, we're happy to stipulate that the Texas joinder was filed. I've seen it, too. He testified. Yeah, he testified about how he's assisting them, and I think it's relevant that they are,

joining in the motion okay well I get that point but I don't know what else he can elaborate on that you said he didn't see the third one I've seen it I just just want to thank you your honor I just wanted to make sure if I said Texas you might have said oh yes now I remember are you aware of any state agencies that have objected to the motion to fall a motion to appoint an examiner I think didn't you just say that the two states three states had objected to no it joined Oh, joined. I'm asking, are you aware of any that objected?

No, I am not. Now, your firm is called Out Hill Advisory, correct? That's correct. And are you the only employee of Out Hill? Yes. So you are, among your services, some of the services you're doing relate to ongoing investigations of various pre-petition actions.

I'm sorry, what case are you referring to? Oh, I'm sorry, FTX. I'm sorry, in FTX, is one of the services you are currently performing is investigating certain actions that took place pre-petition? Is that something you're doing? Well, in my capacity is CEO of the company. I am overseeing every aspect of the company's business operations, including investigations related to pre-petition conduct. But you're not personally conducting any of that yourself?

That depends on the topic or matters, but in some cases I am. Are there other employees at the debtor that are performing those functions? Yes. Okay, and are you overseeing them? Yes. And you're billing on an hourly rate in this case, is that correct? That's correct. Do you know approximately how...

many the amount of fees that your firm has incurred to date in connection with the services you perform for the debtors through through what day through any date today or the end of last year whatever date you might have information on the most recent date I would have information on is the period from November 11 which is the start of the engagement through December 31 And that approximate amount excluding expenses is $690,000, which is simply the number of hours spent times the hourly rate. What did the examiners report in Celsius network? Yes, I have.

Are you aware of how many times that report references FTS? I did not do a word count. But you did notice there were references? I'm sure there was the word FTCX. I don't, I didn't, again, I didn't do a word count. Did you look at the examiner's report in the CRED case? No, I did not. Have you ever been an examiner?

No, I have not. Have you ever represented an examiner's counsel? Excuse me, as counsel. No, no, I have not. A moment, please. Sure. Your Honor, my course is completed. I can wait until after.

to deal with the order in the Enron case. Let's see if there's any redirect, then we'll... No redirect, yeah. Okay. Mr. Ray, thank you. You may step down? Okay, thank you. Your Honor, may I approach?

Yes. Yes. It's not an exhibit. It's not going to mark. It's... It's... Yes, effectively, yes. Okay.

So this is the findings of facts. findings of fact and conclusions of law confirming the supplemental modified fifth amended joint plan of affiliated debtors pursuant to chapter 11 of the United States bankruptcy code and related relief in Enron and Southern District of New York case number 0 1-16034 and the date is I don't have the docket number on this I apologize I don't know why I notice at the top it says not for publication yes effect of that on my ability to take judicial notice at this time. I understand, Your Honor. I said, Mr.

My colleague tells me it is available on the Bank of Supports website. What does it say? Not for publication. It is available on the Bank of Supports website. But not on the docket? It's on the . It predates pace. The problem is the date, apparently.

It's from 2000 and for I think that's what the issue was, Your Honor. I mean, it's not, it's obviously not a written decision, but again, Mr. Ray was able to, was allowed to testify as to his opinion as to whether the examiner report was useful. And it would seem to me that the judge's opinion on that matter is at least equally relevant. Your Honor, we're not, I don't know that this is the judge's opinion.

It says not the publication. I don't even know what part of it 130 babies of 60 people. Oh, I can tell. Yes, I would point that out. So I would first point out on page 101 in the first full paragraph, fifth line down, the court states the ENA examiner has provided valuable services to the estates of ENA and its subsidiaries and satisfaction of his duties imposed by the court.

personally or under four examiner reports this references one examiner it doesn't say the report was helpful it just says the examiners provided services we don't know who wrote this opposed findings of fact that the people are generally drafted by council we haven't had a chance to look at it we object for the use of this and we're not even sure we've been used it before if it doesn't impeach mr ray he said he said he hadn't seen it so Your Honor, I mean, the U.S. trustee's position is that all Mr. Ray's testimony is completely irrelevant, but he objected, obviously, repeatedly to him giving his opinion about whether he thought the examiner

reports were useful in the two cases he was involved in. In Enron, it was after the fact. He came in after the reports were filed. So, again, if he's allowed to provide that testimony, if the court can take judicial notice of an order of the court. order of the court, findings, fact, and conclusions of law that was signed by the judge with these findings. And there are some other provisions I would read about some of the other examiners that they started with that one.

Mr. Ray's testimony was a criminal testimony. It's his own experience of whether an athlete's report to help to put him in a job that he conducted and that he was supervising. I'm sure that there are people who think that the examiner report was helpful. I think that I think Mr. Batson, who earned $9 million, writing it, probably thought it was helpful. But none of that's relevant to this case. I agree that none of this is relevant to this case. Mr. Ray is the chief executive officer of FPS. All right, hold on.

Well, the problem I have is one that says not for publication. I have no idea where this came from. I have no testimony where it came from. So it's not authenticated. It has an electronic signature, but that doesn't tell me much. unless I have something, usually there's a web address that is identified on it

or it comes from the docket and there's a docket entry identified on the document. And frankly, I mean, what you just read to me is not... I'll take it for what it is, what you just read to me, but I don't think I can take judicial notice of this given the way it's being presented to me.

I need to have to have... some authentication of the document I don't have any. Your Honor, could I just speak to my colleague for one of them? Sure. Have the web address where it came from, would it be helpful if we forwarded this to you? I think unfortunately the only way to do this is to have your colleague take the statement. Unfortunately, this colleague did not personally download the document. Another colleague did that's not present in the courtroom and is in another state.

That's a problem. Yeah. Okay, Your Honor. So we'll... There's nothing further to be dumbed by this. I understand Your Honor's ruling, and again, normally I would never do anything with these types of doctors. I think it is completely irrelevant to the issues before the Court, but again, because of Mr. Ray's testimony, and I agree, you know, I think there's a little bit different to say, well, other people might have thought that the report was helpful, but the Court's opinion is more important than other people's opinion. I understand your point.

Thank you, Your Honor. We're moving on to final ordinance? Yes. Do you have any other evidence? I guess we have, you are done with your evidence. Do you have any other evidence, Mr. No, you are. Just one clarification before the evidence closed,

again, for sure for the joint provisional liquidators. It's unclear whether to what extent the presentation that was given is coming into evidence or not. And normally I wouldn't care since it would just be coming in for this proceeding. But there was on that global, or I guess it was the first page of the chart, which showed all the corporate logos and the admin burn that's going on, there was a line that went out that said other fiduciaries enlisted the JPLs,

and I want the record to be very clear. I don't think the implication was being made, but the chart shows it that the JPLs are fiduciaries for the debtors. They're fiduciary book Chapter 15 debtor. That's all. Well, those were demonstrative they weren't admitted into evidence, so they're not part of the record. Campus quality for the committee, Your Honor. We have no additional.

Thank you. Any rebuttal? Ms. Sarkis? Oh, I'm sorry. I'm sorry, Your Honor. I didn't hear you. Any rebuttal evidence? No.

Okay. All right. So we can go to closing. Thank you, Your Honor, again, for the record, Juliet Sarkesian, on behalf of the U.S. trustee. Your Honor, I am going to. make sure I'm not repeating my opening argument but I think that we've had some evidence today and I'll speak about that in a minute but of course US trustees position as I did indicate I am repeating my opening under 11 0 the requirements

for 1104 C2 have been met and in fact the only facts that could have been disputed were stipulated by the debtors and the other objectors and therefore the U.S. trustee believes that an examiner is mandated. Of course, the scope of such examination will be decided. If Your Honor was to appoint an examiner, the scope would be dealt with after that. Don't need to do that before him? I mean, how do I determine as is appropriate if I don't know what the proposed scope of the examination? Well, of course, Your Honor, the U.S. Trustee does not believe that the as is as is appropriate.

as is appropriate relates actually to the scope of the examination and not to whether an examiner should be appointed. And the number of cases... It has to apply to one of the other. I mean... Yes, it's a scope. Yes, it applies to the scope of the investigation. So that's my question. I don't know what scope you're asking me to grant.

How would I know how to do that? I can't just say I'm going to appoint an examiner and... Your Honor, I understand that. in other cases and I believe that included residential capital. You know, the court said that will be reporting the examiner. And that residential capital did actually think that as is appropriate was a requirement that had to be found and they found it was appropriate. But the court nevertheless said, okay, the scope will be dealt with.

Now the parties get together. The U.S. trustee appoints and, you know, nominates and a group. appoints an examiner and then the examiner meets with the parties and they talk about the scope and then they come back to report. But, Your Honor, I am happy to give you, I circulated last night to all the other parties because we've had a number of questions about scope. So last night we said, all right, here are some examples. I can't say that this is ever, here are some examples of the types of things that would, you know, a, excuse me, an examiner could investigate. So number one, the facts and circumstances surrounding the misuse of customer funds, free petition, identifying the individuals and entities that were involved in that or who knew about it or should have known about it,

and determining whether any of those individuals remain employed at the debtors or otherwise have some continuing involvement in the debtors affairs. Also, investigating any actions taken by the debtors, they're all. officers, directors, employees, or others to conceal the misuse of customer funds, including by way of software. That was something that Mr. Ray in his first day declaration talked about the use of software to hide to conceal the misuse of customer funds. And then again, whether such individuals remain employed at the debtors.

Also investigating who was responsible for the debtors' corporate controls and governance, the gathering and maintaining of financial information, systems of integrity, the control of the debtor's cash, maintaining the security of the debtor's digital assets, maintaining the security of customer cash and customer digital assets, and what actions were taken or not taken by the debtors, their directors, officers, employees, or others in that regard, and determining whether any individuals or entities who were responsible for such failures remain employed by the debtor or have continuing involvement in the debtor's affairs. And again, this is picking up on Mr. Ray's first day declaration when we talked about just a

complete lack of these various controls and financial information and all of these issues that he said was the worst thing he'd ever seen even worse than Enron. So that would be one. Who was responsible for that? Who turned a blind eye? So that would be another area. Also just I think more generally investigating all allegations of fraud, dishonesty, incompetence, misconduct, mismanagement of the debtors by their also.

directors, employees, or others, determining whether any individuals or entities who committed fraud, dishonesty, and confidence, misconduct, et cetera, remain at the debtors or have continuing involvement with the debtors' affairs. And then also investigating the facts and circumstances revolving around all of the hacks of the debtors' exchanges that occur both before the petition date and after the petition date, determining what individuals or entities were responsible for those hacks. and separate issue, what individuals or entities on behalf of the debtors were responsible for preventing such acts, whether those persons, whether they were negligent in the performance of their duties,

and whether those individuals will remain employed by the debtors. And then finally shedding transparency into the relationship between the FTX entities and the Celsius entities. Again, this is not meant to be a comprehensive list, but I'm providing, as I did provide to the other parties yesterday evening, these are the types of things that we could see an examiner looking into in these particular cases. So pretty much anything and everything that happened pre-petition, that's what you're asking for. Your Honor is the final determiner of a scope of the examiner, not the U.S. trustee. These are just things that we think would make sense, but scope of the examiner.

scope could be different. And I will also point out, Your Honor, that, you know, there was testimony by Mr. Ray about securing, having secured wallets and that, you know, having an examiner could, I guess, create some type of a security risk, I think, was what he was saying. Number one, I mean, I certainly hope there wouldn't be a security risk with any examiner. I mean, obviously, you'd appoint an appropriate person. But a lot of these issues I don't think would even involve having to look into, I really don't understand a whole lot about the system. You don't all have to admit, but, you know, looking into cold wallets, hot wallets, any of the... Well, you wanted him to investigate what happened with the customer funds, which would require investigating what happened with the cold wallets, the hot wallets, and the entire computerized system of the debtors, wouldn't it?

I'm not a technology expert, Your Honor. I think that some of it could be done. I also don't know what type of documentation there is about. I think some of that could be done without actually getting into wallets. It certainly, because there will be transfers, once the money is taken from the wallets, it was then transferred to Alameda is my understanding. I don't mean to be testifying, but that's my understanding. And it may be that there's things that could be traced as the Halifatahata Alameda, the

would not require actually going into the wallets themselves. But I am very, I am not the type of person that could really clarify that. I'm sorry, Your Honor. I don't understand how that works well enough. Obviously, any examiner appointed would have to be somebody that was very knowledgeable about that area, about cryptocurrency. And you think certainly that would be appropriate to have somebody is very knowledgeable of cryptocurrency.

But to the degree that that type of investigation is needed, I feel very confident that the debtors, and one with their professionals, will take every step to make sure that all, that there's no compromise in any system that all security that's needed is there and protected. And that they would hopefully cooperate with the examiner as much as possible. An examiner can't get access to this unless the debtors give the examiner access. There's no other ways to the examiner to do it. So it would be, the debtor would be supervising this. There should not be any type of a security risk under the circumstances. Let's talk about your view on the mandatory nature of 1104.

So 1104 says that if I don't appoint a trustee, that an examiner under C can be appointed, and the appointment and I should take into account an investigation of the debtor as is appropriate so what does that mean as is appropriate I know you say that doesn't mean if appropriate but doesn't as is appropriate also mean as is necessary well that would relate well that would relate to the scope well I guess your honor I think what your honor is is getting to and please correct me if I'm wrong, is that there are other parties here that are conducting

investigations. And we're well aware about the debtors conducting investigation with its professionals, presumably I understand that the committee is doing the same. And I think in that regard, what's relevant is that the code talks about, you know, if these elements are met, an examiner shall be appointed. It doesn't say an examiner shall be appointed unless the debtor is investigating itself or unless there's new management of the debtor or unless there's a committee that can undertake that process.

I mean, even my understanding is, Your Honor, in Pred, that there was a committee and there was new management and Your Honor so appointed an examiner. And there were other cases that we cited in our reply papers and probably our moving papers as well, where there's creditors committees in most cases. Clearly, the Congress was aware that the creditor committee has the ability under the code to conduct investigations,

but they nevertheless approved 1104C1 and 2 and said, under this circumstance, it's an examiner that has to do it. It's not good enough to have a committee do it. It's not good enough to have a debtor, even if it has new management to do it. Well, in credit, I indicated first that I didn't think it was a mandatory obligation.

under 1104. And two, there were still, the two main founders of that company were still in charge. They had appointed an independent director, but they were still there in running things, which informed my decision on whether or not I should appoint an exam on that case. So let me ask you, hypothetical,

say a debtor meets the debt threshold under 1104C2, and a week before the confirmation hearing, a creditor comes in and says, we want you judge to appoint an examiner. Because we think there was something happened at the firm. We don't know exactly what it was, but we think there's something wrong, and we want an examiner. Am I obligated to appoint an examiner in that circumstance and put off confirmation of the plan for however long it takes examiner to do a report?

Your Honor, I think, first of all, I don't think the provision requires that confirmation not go forward and it doesn't say that if an examiners but I understand why it would make sense to do that but I don't think that that's a requirement. How could I confirm a plan if I've appointed an examiner to let me know whether there was insiders who did something wrong? Well so I think so UAL Corp which is a bankruptcy Northern District Illinois back in 2004 actually I think addressed that issue they said that if you have a situation and which the case with a debt exceeds the threshold and, you know, a party sought an appointment

of an examiner to investigate a private dispute. That's how the court put a private dispute. With the debtor, it does not raise issues as to the quality of the debtor's management. The court could limit the scope of the investigation to, quote, whether there is good cause to engage in the inquiry suggested by the move in, close quote. So, and that's 3.0. Well, that would be an inquiry into whether I should appoint an examiner. No, I think I thought what the court was saying is you do appoint an examiner, an examiner looks to see, if somebody comes in and makes allegations that seem to be motivated by litigation tactic

or something doesn't seem to be in good faith, then the code provision does state that an examiner still has to be appointed if that threshold is met, but the examiner can look into, are there any grounds for these allegations. Is there anything? And of course if it's found that there are, then presumably the scope would be, the court would expand the scope to look into those allegations that the examiner found there might be something there. What if the creditor comes in and says we think there was a $10,000 fraudulent transfer to an insider or company. We want an examiner to investigate that. But the debtor is on the verge of the of administrative insolvency. And if I appoint an examiner is going to push him over the edge,

do I still have to appoint an examiner then too? I mean, Your Honor, under the code provision, that would appear to be the case. We don't have that situation here, obviously. Well, I'm trying to get it is, are there exceptions, which means that there are, there is some discretion that has to be applied, determining when, and how to apply that discretion should be on the court, should not on an examiner appointed, who then tells me whether or not he thinks I should appoint an examiner further to investigate?

Well, the court does have discretion if it falls under C1 of 1104. I mean, if the threshold, and again, remember, Your Honor, the threshold is not $5 million in debt. It's $5 million in very particular kind of debt, which is not every case. But if that occurs... Quite a few of them.

in this court. If that occurs, if that threshold is met, and the other things, there's not a confirmed plan, there's not a trustee, there is no discretion in the statute. That is the US Trustee's view. That is the view of the only circuit court that ruled on this, and the few district courts that have ruled have reversed the bankruptcy court under the saying,

there is no discretion. It must be appointed. Now, I understand, certainly understand the court's concerned that someone might be, again, acting in an abusive manner, you know, acting for under for wrongful purpose. Again, that's certainly not this situation. I think that's one of the things that, well, for unful purpose or that they're, that the, they're not really asking for an examiner.

I mean, there's nothing to examine, like some of these cases in this district where it was a part of plan confirmation and a party was trying to. to get an examiner appointed to basically look at legal issues or like in Malincraught where there were allegations that counsel representing certain tort claimants had done things that were improper because that was not the debtor, it has to be action by the debtor. And so we do have some, it has to actually fit. Somebody actually has to be asking for an examiner to actually investigate the debtors, the action of the debtors, not something else.

something else, not a legal issue. But if it does fall, if they meet all of the requirements of 11.04C2, the U.S. trustee believes that there is no discretion by the court, that that's what Congress intended. And we cite, and we go through the legislative history in our reply brief, that was what this was a compromise, where there were certain parties that wanted to have trustees appointed automatically on a large basis.

That didn't happen. this was the compromise, that an examiner would have to be appointed under these circumstances. Let's talk about kind of the overall scheme of 1104, because 1104 says, you don't even get to 1104C unless the court decides not to appoint a trustee. So why would the appointment of a trustee obviate the need for an examiner? Well, the trustee has the ability to conduct all sorts of investigations. I mean, that's part of what a trustee does. And a trustee is someone who is appointed who is independent, no connection with the company before they filed for bankruptcy,

all of the attributes that we have with Mr. Ray and the independent directors who've been appointed in this case. But Your Honor, there is a difference between a trustee and new management. I mean, again, the code doesn't, so let me foresee doesn't say, unless there's new management or unless there's a committee that can conduct the investigation and I think that it's very important that a the difference is an examiner or trustee certainly let's stick with an examiner the examiner has to prepare a report and that is a public facing report is independent and does not represent any constituency yes mr. Ray does not have a prior connection with the debtors He was appointed by Mr. Sam Banking Free, and he is the CEO of the debtors. He does represent a constituency, that is the debtors. He is not independent, not like an examiner.

And even though a committee also represents a constituency, but again, Congress was aware gave committees the ability to do investigations. They don't file reports with the courts. They're different than an examiner. They can settle, so can the debtor. The debtor can investigate things, investigate claims, and settle without that investigation ever becoming public. Well, they'd have to file a 9019 motion. They do have to file a 9019 motion, but it is not the same, and I've seen many a 9019 motion.

It is not the same thing as an examiner's report. This is, again, this is what Congress decided needed to be done under these circumstances. And even, Your Honor, honestly, even if you say, all right, you're reading as is appropriate to mean if appropriate, this is a case where it's hard to imagine that it's not appropriate. I mean, I will use, for example, Judge Sonshi in Vistion. Thank you. Judge Sanchi, in there, he did not believe that C-2 was mandatory. And there he said that he also, I said, he didn't, it seemed unclear as to, you know, what actually was being asked of the examiner to do. And I believe this was also, if it wasn't at confirmation, it was close to it.

But Judge Sanchi said, quote, at some point there has to be a level of smoke, if you will. Not a lot, but more than none, more than just a width of smoke. And let's compare that to what Mr. Ray said in his declaration that's being admitted as Exhibit 20, paragraph 9, saying that FTC's situation is a dumpster fire. So we don't have a situation where there doesn't really seem to have been any wrongdoing, that somebody's coming in and asking for an examiner for an improper purpose. Again, this is assuming, I'm for a moment, assuming, which of course the United States trustee does not agree to, but if as is appropriate means it has to be appropriate,

we think it's very appropriate here, and of course we think for the same reasons that it's in the best interests of the creditors. We understand that, you know, Mr. Ray was not prior management. But again, 114C nowhere, whether it's under C1 or C2, it doesn't say, unless you have new management, unless there's a committee, unless you have federal and state agencies doing their own investigation,

none of that's in there. But none of that, those elements are relevant to whether or not an examiner should be appointed. And again, because an examiner, it is a public facing, it does do an, he or she does do a report. I'd like to talk a little bit about, hold on just one moment, Your Honor. I don't want to go out of order and confuse things. Right. So, again, residential capital, which again is one of the cases that the objective, the objective, do rely on this one of the written opinions that says it's not mandatory.

But even there, the court said when it did appoint an examiner, it said it must be appointed, quote, notwithstanding the ability of any other party to effectively and expeditiously investigate the debtor, close quote. So we're not the, the fact that there is a committee or are other people that can do it is not relevant once the elements have been, the elements of 1104C have been met. And again, an examiner is required to publish a report. A committee, the committee has discretionary ability to investigate. It's not required, and they are certainly not required to file an end report,

and conducting an investigation is specifically removed from the list of the debtors in possession duties under 1107A. So, again, the fact that there's new management, none of that is relevant. And it's not novel to appoint an examiner in situations in which you have a governmental, you know, law enforcement or regulatory agencies conducting their own investigation. That happens all the time. Those agencies will not be filing a report with this court as to the results of their investigation. It's a set to completely separate function that they are performing.

The debtors also talk about, again, talk about the law of the same. district. He cited a Third Circuit opinion say there is no such thing as law of the district. That just doesn't exist. He also said the bench rulings are binding precedent. They're not binding precedent. In fact, I mean, Judge Warwrath won't even let you quote back her own bench rulings to her. I'm not saying that all the judges are like that, but it's not it's not binding precedents, certainly. I want to talk a little bit about the cost of the court. issue. Cost is not mentioned anywhere in 1104. This is not a case like Dewean LeBouf in which the, Your Honor asked about converting to Chapter 7. That was a case in which

the court indicated that the cost of an examiner would result in the case, the debtor's cases being converted to a Chapter 7 and most likely becoming administratively insolvent. That is absolutely not this case. In fact, Exhibit 15, which is the debtor's interim financial update as of December 31st of last year, which is, I want to call it, they haven't filed any monthly operating reports. It was their way of filing something along those lines, although it doesn't comply with a monthly operating report. But on page 11, it shows the debtors having,

the debtors having unrestricted cash of over $1.2 billion. That's apart from custodial cash. That's apart from restricted cash. So this is not a situation in which these debtors' cases are going to be converted or they're going to become administratively insolvent because there's an examiner. That doesn't mean that there's no budget for the examiner. Of course there's going to be a budget for the examiner. But there's no reason to believe that the cost of the examiner doing an investigation is going to be more than the debtors professionals conducting an investigation. And I point to Exhibit 10, which is a supplemental declaration of Mr. Dieterick of Sullivan and Cromwell.

It attaches the list of professionals that worked on and will build time. They haven't followed the fee application yet. It's built time on the matter. There were over 150 individuals, of which 30 have billing rates of over $2,000 an hour. So to the extent that an examiner is doing certain investigations, to prevent duplication, that should mean that the debtors professionals can cut back in what they're doing in that regard. I will also say that the debtors' arguments regarding the cost of an examiner should not be given weight because the U.S.

trustee, as one of its discovery requests, asked for documents reflecting any budget or estimate of the cost of an investigation to be performed by the debtors' professionals of any of the events leading up to the debtors of the Chapter 11 filing, fraud, bad acts, etc. The response to that was an objection to say they did not provide the information, and it said, on the, quote, on the grounds that it is irrelevant to the examiner motion. Well, we agree, but the debtors can't have it both ways. They can't say, oh, it's going to be so costly to have an examiner based on examiners in other cases, but at the same time not be willing to produce their budget or estimate for what is going to cost for the debtors' professionals. to do the same kind of investigation? Well, I can take my own experience and say,

given the scope of what you laid out earlier, the proposed examiner investigation, I can give you a ballpark what's going to cost, and it's going to be in the tens of millions, if not hundreds of millions of dollars, to do that investigation, because they're going to have to hire all the same types of experts, financial advisors, cybersecurity advisors,

crypto advisors, who are all going to have to have to We're all going to have to do the same thing that the debtor's already started to do, and the committee has already started to do, and the government has already started to do. It's going to be, if it's the scope that you're asking me for, it's going to be expensive. Or the alternative is I have complete discretion, right? I mean, I can say, okay, I'll point an exam or your budget is $10,000.

Are you going to find somebody to take the job? No, no, but I think that's effectively the same thing as, not appointing an examiner. Isn't, doesn't that show why 1104C really doesn't make any sense to be a mandatory obligation by the court, that it's not subject to discretion? It's kind of the same as Rule 65, injunctions. I think it's 65D says if the court imposes an injunction, and it's a little different for debtor in Chapter 11, but if a court imposes an injunction in Rule 65, if you read the language,

of Rule 65, I think it's D, says you have to impose a bond. But courts have almost universally said, I can set the bond at whatever. If I can set the bond at a dollar, then certainly I can say you don't need to set a bond at all, especially if you have an individual suing a major corporation and the individual is successful in getting an injunction and you're going to impose a billion dollar bond on that party

who can't do it and then they lose their case. No, you can't do that. So courts have universally said that's not. said that's not a mandatory obligation even though the language if you read it the way you propose here would make it mandatory so there's always discretion by the court right your honor we would not agree and again other cases the district courts the few there have not been a lot but the few district courts and the one circuit court that ruled on this disagree the district courts were reversing on the circuit

court as well I believe we're reversing the the determinations by the bankruptcy court that there was discretion under 11 0402 and I said no there's not it says what it says shall mean shall this is what Congress wanted but I can set the budget of whatever I want well if it's set to the point is the equivalent of not having an examiner then the statute really hasn't been complied with I mean all it says is I have to appoint an examiner doesn't say I have to give them a hundred million dollar budget we would hope that your honor would not provide no budget for the examiner if your honor was to appointing examiner that's again

effectively not a pointing examiner but I understand the point your honor's making a few other things I'd like to mention again if your honor was looking under if we look for a minute under C1 the best interest of the creditors or another way If they, whether, again, if one was to use the as-as-appropriate as meaning if appropriate, we do believe that there's plenty here. And I think part of this shows the joinders that were filed to the U.S. trustees appoint, a motion to point an examiner, there were joinders filed. It was one by Texas State Securities Board and Department of Banking.

That's at 600 on the docket. And they attached letters from state agents. or Attorney General's office from 15 other states, and D.C. supporting the joinder. It's a total, when you add the other joinders that were followed before, 18 states and the District of Columbia. And what the Texas Joinders said

was that Texas is currently undertaking an investigation of the debtors for violations and connections with transactions of business in Texas and with Texas account holders. And then they say, this will require constant access to information and documentation in connection with its investigation, and it would benefit from working with

and gaining this information from a neutral third-party investigator who focuses on investigating the debtors as opposed to running the debtor's business. And, you know, Mr. Ray has a lot of jobs here, and, you know, we have a situation where the debtors' schedules and statements have yet to be filed. And they were, it's been, you know,

they filed the cases on November 11th. We have no scheduled and statements. We have no monthly operating. reports we have this I want to call it a faux monthly operating report that they filed. We have no 2015.3 rule statements. They have not been filed. So we're missing a lot of very basic documents in this case. And my hope would be that Mr. Ray could focus on doing that and have the examiner focus

on doing an investigation as to what happened pre-petition. They also, the examiner also has to look at the hacks that happened post-petition as well. when Mr. shortly after Mr. Ray came on board. But that, I think, is what these joiners are saying. Let him focus on that. Doing is a great idea. Let the examiner focus on doing examination and investigation. Another thing that I'm sorry,

I already mentioned that in the, and I do want to clarify, the list that I gave your honor about possible things for the examiner to investigate was simply that. It was simply examples. We have not taken a position. We don't feel that this was the right time. We haven't taken a position.

Oh yes, it has to do all of these things. But because we were asked repeatedly by other counsel, what is the scope, what do you have in mind? These were some examples. And, you know, Your Honor is the ultimate, ultimately determined that. I do not want to say that, you know, we're insisting that each one of these things be investigated,

or that these are the only things. You know, this was what we came up with to give Your Honor and to give other folks an idea about what could be appropriate for an examiner to look into. I believe that is one argument, unless Your Honor has any further questions. No worth of questions. Thank you very much. Thank you, Your Honor. Good afternoon, Your Honor. Jim Bromley and Sullivan and Como.

Your Honor, the U.S. Trustee makes a very clear policy-driven argument that the Court has zero discretion under Section 1104. Section 1104 C2. If the $5 million threshold is met, which is going to be met in virtually every large case, certainly in every mega case, and certainly in every super mega case, the import of the U.S. trustee's argument is that this Court and no other court has discretion to determine whether or not an examiner should be appointed. That is simply not a realistic or accurate reading of the same court.

statute or the precedent. And it is, frankly, Your Honor, disconcerting because there are two places where discretion, we believe, matters. One is with Your Honor. And that 1104, and the language which phrase, and particularly the phrase as is appropriate, provides you with discretion. But frankly, Your Honor, in the discretion to have brought this motion to begin with, and that resides with the Office of the U.S. trustee. There is zero evidence that's been put on before your honor today about whether or not C1 has been satisfied by the movement who bears the burden.

Nothing but conclusory statements, that because Mr. Ray had put in a declaration that said that there's some sort of fraud that has occurred here, period full stop. It is in the best interests of creditors under C1 for an examiner to be appointed. And keep in mind, the U.S. trustee moves under both C1 and C2. We believe there's zero evidence under C1.

Mr. Ray testified for over an hour, an hour and a half. The grovement of his testimony is that it is not in the best interest of creditors, stakeholders, or the estate for an examiner to be appointed. Mr. Ray testified that he is independent, that his directors are independent, that he has at his direction commanded a group of highly sophisticated professionals. professionals to take care of a highly technical and dangerous environment. That environment was so dangerous that on the day that these cases were commenced that over $400 million were stolen because of the condition that the prior management left the company

in and that security environment. If it was not for the immediate action of Mr. Ray and those advisors under his direction, this company would have simply faded away, been stolen, bled dry. And yet the US trustee stands here and says, I don't really understand these technical things. It's going to be okay. I'm sure they'll work on it. I'm sure it'll be fine. And then the US trustee stands up today and says, while I haven't said anything about scope,

now I'm going to read to you what the scope is. And it's everything, everywhere all it wants. We have in front of you, Your Honor, two sets of examiner reports from two other mega, super mega cases. Those binders represent 200 million. $200 million. That's it, $200 million. And the U.S. trustee says, well, you have $1.2 billion of unrestricted cash under balance sheet. You should spend some, a lot of that, and completely replace everything that's being done with a new set of professionals we're going to do the exact same thing. With no evidence that any of those professionals or this examiner to be

appointed would be any more independent, any more independent, any of the professional. any more qualified, any more able to secure these assets, it's simply going to be a duplication of effort and an enormous amount of expense. The fact that we may have $1.2 billion of unrestricted cash is not the point. We need $8 billion of unrestricted cash. We do not have enough money to pay back all of our creditors, and the U.S. trustee, for pure purposes of public policy, because bleach and sunshine is a public policy that we need here, says that we should spend tens or even hundreds of millions of dollars to provide some guidance

to states that have written one paragraph that said we agree with what they said before. And the evidence that Mr. Ray has put on and is uncontradicted is that we have done nothing over the past 90 days other than cooperate and provide massive amounts of information. to work regulators all around the world let me ask you quite you mentioned bleach and sunshine so let me ask you about one issue the US trustee raises which is that under 1106 if I pointed an examiner there'd be a public report file and what is the view of the debtors in this case of the need to provide the creditors in this case with something that shows them what's been done, what investigations have been undertaken, how they were undertaken, and what the results of those investigations are. Because under 1107, a debtor in possession doesn't have that obligation. Well, there are two things around, right?

One is what we've already done and we'll continue to do, and then there's what the Bankruptcy Code provides in other sections. So what we have already done is one of the exhibits, which we have agreed to jointly, agreed to jointly is a very extensive presentation that the debtors made to the creditors committee. It is not normal course in a case of this size or substance that when you meet with the creditors committee that you publish the same day for the public the complete contents of the presentation that we made. We did that. We will continue to do things like that. It is the view of Mr. A and the management of the directors that there is this is a different case we need to approach that in a

different way do we have a specific schedule of things that we're going to say and at what point no but are we going to continue to follow in those footsteps that we've already said for yes we will in addition your honor we have an obligation to put together a disclosure statement that disclosure statement in a case like this is going to be a recitation of everything that has taken place and it will be up to you, your honor, to determine whether the information set forth in that disclosure statement is adequate under the circumstance. We believe that in order for us to confirm a plan, we're going to have to put together a disclosure statement that brings that bleach and sunshine to this situation. So we believe that, well, and I will note, 1106 and 1107 and 1104 do not require in every circumstance that there be a public report.

When we talk about the debtors furthering public policy, we have spent literally tens of millions of dollars complying with public policy by reporting to the Congress, to the House, to the Senate, to the U.S. Attorney's Office in the Southern District of New York, and three other districts. It has led to the indictment of three individuals who led the company in record time. There have been lawsuits already filed by the SEC and the CFTC. When you talk about the debtors dedicating assets to transparency to the public process, I don't think you can find a case where debtors have done anything matching what these debtors have done in the first 90 days of the case.

And will we continue to do that? Yes, we will. What Mr. Ray testified to is that on a daily basis, we receive emails that, in substance, say, We would like you to look at these transactions, these individuals, and get us this information in 24 hours. And what that requires, Your Honor, is us to actually go in, and when I say us, it's the entirety of the investigations team, to go into this virtual environment and track down the information that's being requested by the authorities.

It's not simply going into a warehouse and picking things off of the shelf. is interpreting code, it's making sure that when the code is discovered and accessed, it doesn't trigger things that Mr. Ray was talking about that might damage assets. We don't have, there are no wallets, there are no keys, there are no buildings. Everything we have is a series of zeros and ones. And any time that environment is accessed, it creates risk and damage, that damage will occur. And so every time we're going into that environment, the investigation exercise is also securing assets. It's also figuring out whether there are claims as to whether or not the

issues that we're finding in the environment have some explanation that's other than a mistake or incompetence or inexperience. Maybe it's fraud. You don't know. You don't know. know that. When we talk about fraud in court, we often talk about badges of fraud. You don't have badges of fraud in the same way when you're sitting there and having digital experts in Israel and in the United States trying to figure out why the code was changed from X to Y, by whom, who had the right to change it, who had access to it. All of that is a consolidated exercise that takes place every single. single day. So quite honestly, the idea that we are able to simply hand over that environment

to an examiner is naive. Mr. Ray said he will comply with any order of this court and I know he will and I know we all will. But the idea that there's going to be some ability to find somebody else out there put together a team and have that team operate as independently and as effectively as the team that's in place, and then write a report, simply means that we're going to add, on top of this, months, if not years, of additional time,

and tens of millions, if not hundreds of millions, of additional cost. And who bears that costs? The creditors, Mr. Pesquale's clients. We should not be sitting here duplicating the same thing that is happening every single day because the U.S. trustee believes that there's a policy point of view that 1104 says that it's mandatory no matter what. And the slippery slope of that mandatory argument is not in this courtroom.

It's not because the U.S. trustee is going to be an advocate or a pushing a particular agenda. I don't believe that. But 1104 doesn't stop at the U.S. trustee. It says party in interest or the U.S. trustee. Any case law that is established in this case that says mandatory means mandatory means that every single Chapter 11 case with more than $5 million worth of debt is going to be at risk of being held hostage at confirmation at the first disclosure statement hearing. At any point in time, it will just become a weapon in the arsenal of every party in interest because if it's a weapon, you take the discretion away from the courts, the weapons only in the hands of those who are in the courtroom. And the idea that we will then be reduced to saying the only choice

that the courts have is to say, no, you know, no, I'm not going to give the examiner a budget. Well, I think that's a, and as all, as the courts have continually ruled here in Delaware, that's a silly decision to make. Because the point is, it's not as if the level of, 1104 doesn't provide the language. It does. And the history of 1104, the legislative history that was cited, I think incorrectly by the U.S. trustee, illustrates that point. There's not a court that's really gone into this in any level of detail. The Revco case, with all due respect, 1990, the drugstore case, there's two and a half pages, not much analysis, they don't mention the words as is appropriate, and they don't go into the legislative history. That's not much of a circuit decision in my mind.

What happens in that situation, if you read 1104, 1104C says that the trustee hasn't been appointed. 1104E says the U.S. trustees shall move for a trustee in certain circumstances. They haven't done that. They have to move under 1104A. No one's moved for a trustee under 1104A. Why is 1104 even there?

Why does it bounce back and forth between trustee and examiner? because the pre-code rule was trustees were appointed. And the United States decided, to our credit, that debtors in possession were a better way of reorganizing companies than putting them in the hands of the Securities and Exchange Commission and trustees. 1104 is a backstop in case things don't work out. I just think 1104 might be a leftover from the, days when we used to have a chapter 10 and a chapter 11. I think that's right now.

The point being is notwithstanding the fact that I think that's the legacy, the introductory language as is appropriate is not irrelevant. The U.S. trustee reads shall and ignores as is appropriate. Whether as is appropriate modifies investigation, a point or examiner, This court has the discretion to determine whether it's appropriate. In our view, an examiner is not appropriate. In our view, a report is not appropriate. Thank you, Your Honor. Ms. Squally?

Thank you, excuse me. Thank you, Your Honor. Kemp, Ms. Squally again for the committee. Mr. Bromley really hit on all the key points, and we couldn't agree more, but all of his arguments. But I do think there are a few particularly important points that I'd like to reemphasize if I may, and it'll be as brief as I can. The U.S. trustee, first of all, concedes we heard Ms. Sarkasian

in her closing say that she recognizes the committee's statutory authority to do an investigation under 1103C2 of the Bankruptcy Code. And as you heard, Mr. Ray testify, the committee has been doing that. The committee was appointed on December 15th. It's not even been

two months yet. And in that time, as Mr. Ray testified to some extent, the committee has been working lockstep with the debtors to understand what happened pre-petition. And more importantly, perhaps, and all ties together, and it's one of the points I really want to make to the court, is the investigation doesn't stand alone. It fits in with the rest of what this case will need to be.

And ultimately, what do distributions look like to the creditors of these estates? And so the investigation informs the next steps in this case, including whether there will be what we have been calling a 2.0, some type of reorganization, or whether it will just be monetizing the assets of this company. That's all to be determined. And the investigation, again, informs all of that.

So what have we done as a committee in the less than two months since the US trustee appointed the group? As you heard Mr. Ray say, we serve, extensive discovery requests on the debtor. We did it informally. We still don't see a need to have to come to the court for that. We've been working cooperatively and we have been prioritizing our requests with the debtors and receiving prompt responses to what we ask. Over 70,000 pages or 70,000

documents, excuse me, have been produced as you heard Mr. A testify that have previously been produced to the regulators. We are efficiently reviewing those documents, doing targeted searches on any number of issues that we become aware of or know from the Mr. Ray's prior testimony before Congress and first day here. We are evaluating with the debtors their pre-petition relationships with their professionals. And by that I mean their attorneys, their accountants, their auditors, and we're in the process of coordinating with the debtors' counsel on the next steps there, which will be pursuing discovery and ultimately evaluating potential claims.

We have filed a joint 2004 motion for authority to serve subpoenas on insiders and related parties. I think that's on for Wednesday of this week to be heard as an obvious avenue necessary for investigation. And these are just some of the things, of course, Your Honor, but I think that's on the The last, and I think this is really important, and Mr. Ray testified, is with respect to the cyber security environment, the committee does not have access to the AWS and the system. For the very reasons Mr. Ray testified, however, we have had excellent coordination and cooperation from the debtors' cybersecurity experts. And our committee members, of course, are very knowledgeable in this area, as customers.

of the debtors, and this is their business, so to speak, and are consistently bringing issues to us that we bring to the debtors. And we're very quickly getting answers to those inquiries. And so the system is working. The investigation process is working. And there's, in our view, and as you've heard, argument, would not be appropriate in these circumstances

to appoint an examiner when things are proceeding the way the code has designed them to proceed with the committee. exercise its statutory authority. Now, I do want to touch your honor on the cost. The United States trustee said there's no evidence that the cost will be more if an examiner is appointed. But I think it's obvious that it would.

So the debtors and the committee would not just sit idly by if an examiner would to perform its own examination. At a minimum, we'd have to work with that examiner. We'd have to provide information to the examiner. We'd have to coordinate with the examiner. And there's obviously incremental cost that would be incurred in that process. There's no other way that they could proceed.

And I think I did mention this in opening, Your Honor, but I do want to mention it again. Given the capital structure here, where there is no other credit or group that our unsecured creditors would be competing with, there's no incentive for our committee to do anything but what I would. call it an unbiased investigation.

The investigation is not going to be used for any adversarial purpose, which again was argued by the U.S. trustee in the motion. Continuing with the issue of LaCosher, Your Honor, we do think it's entirely inappropriate for an examiner be appointed in order to, for the purpose of issuing a report that satisfies some public interest outside of these cases. For the very simple reason, as Mr. Brownlee mentioned, the cost of an examiner will come out

of the unsecured creditors' recoveries. There's no denying that the work that we're doing is that there is a significant cost to that work. But it's necessary work. And the examiner's investigation would just be over and above what is already being done and those costs that are being incurred. I think Judge Walrath in the Washington Mutual case

said it well on that particular point, not only acknowledging that the committee was well positioned to do the investigation, but quote, excuse me, not quote yet, that it would not be, and here's the quote, it would not be fair to the creditors in this case to be saddled with the cost of an investigation into systematic problems that would only benefit future parties but not benefit the parties in this case.

And that's exhibit D to our objection. It's the transcript page 98 starting at line 12. That's exactly the situation here. Given the investigations already going on by the professional committees, CFTC, FCC, the prosecutors, the public interest is being well served in all of those ways. Our purpose here is to investigate for the benefit of the stakeholders in these estates. I think the only other thing I really wanted to mention, Your Honor, if I may, is just with respect to your Honor's question about the report.

Mr. Bromley mentioned entirely correctly there will be a disclosure statement in this case. That disclosure statement will detail the results of the investigation. We, as the Creditors Committee, have an obligation in that context to make a recommendation to creditors as to the provisions of the plan that that disclosure statement will describe. and we of course take that obligation seriously that document will explain the results of the investigation I'll mention also of course as is the committee's obligation to the extent that we're able subject to confidentiality and other privileges and the like the committee will be providing information on its website which is now up and running and to the extent practicable on social media as well so we will take all necessary steps to inform creditors of what's transpiring, again, with the obvious

limitations around confidentiality and keeping in mind work product and the fact that this investigation will be used to evaluate claims going forward to maximize recoveries to creditors. I think that's all I have, Your Honor, for now, unless you have any questions. No questions. Thank you. Thank you. Mr. Shore. Thank you, Your Honor, Chris Shore from Whiteen Case for the JPL. I'll try not to be duplicative here. At the end of the day, it was before the court.

Questions of law and questions of fact, but it's kind of hard to ignore that, based upon the U.S. trustees brief in the first half of Mr. Ray's testimony, that the policy implications of this are coming to the fore and what we do about examiners in big cases. I'm going to start with a simple proposition. There is, in fact, zero policy reason to support the U.S. trustee's interpretation of the statute.

According to the U.S. trustee, you get outside of C1, the court's already determined that it is not in the best interest of the estate to have an examiner. We move into C2 land. In every case with $5 million of funded debt, a party in interest, including the U.S. trustee who would have no economic stake in the outcome of the case, needs to file a motion, and everybody in the case must have an evidentiary. hearing like this, this is not free, and there must be an examiner appointed and we'll all figure it out later. In fact, none of the case law supports that. All the cases dispose of that issue the way Your Honor was asking questions in one or two ways. They use the word as is appropriate to modify must appoint, or they say, as is as is appropriate, as is a appropriate modifies investigation. On the mandatory point, I'm not going to repeat

what counsel have already said on that except to say in their reply brief the US trustee charges that the JPLs wrongly quote the legislative history in HR 95595. That's not accurate. In fact, write down, that exactly what it said there. I think their point is that it's not binding legislative history, which again is wrong. If you look at 92 staffs, 2688 which lists the legislative history HR 595 is listed there. I think what the US trustee is arguing is that because of the debates on the floor after the initial bill somehow that's the binding legislative history here but I'll be

made very clear no legislative history at all that addresses the point that they're trying to make that whether you call it weaponizing or empowering parties in interest or someone with no economic stake in a case to bring a case to a halt. Nobody, none of these senators or representatives were saying that on the floor. So there is no support for this kind of policy idea that shall mean shall. It's going to have to come down to the text of the statute and I'll focus on the and examination as is appropriate. U.S. trustee bears the burden of showing what an examination is a examination is an examination is appropriate.

examination is an investigation is appropriately give you the contours of what's going to go on and we can have a debate about whether or not that is appropriate in fact the motion as we point out in our papers just says I want it to the fullest extent of the of the statute as written now courts have not accepted that courts generally look to what I list is five things when they're trying to figure out what an appropriate examination is. They ask first, is there really a need for an examination here? I'll get to the smoke point in a bit.

What is the scope of what the examiner is going to be doing? What is the cost of the examination on the estate? What is the appropriate duration of it? And then ultimately, we get to a report, how are we going to be using it in the case? And how do we deal with issues like privilege and whether it's hearsay or not, all all those kind of issues to get resolved. Again, the U.S. trustee is silent on that. And of course, I've got some problems.

First of all, it seems easy to say at this case, we need to examine the report. There's a dumpster fire. No, we're all standing around right now in a building that is burnt to the ground and two of the three principles of the company have pleaded guilty to arson. So do we really need to spend $100 million for an examiner

to come in and say, uh, the building burned down? We know it burned down. We know there were no corporate controls. We know, based upon the pleas of two of the three principles, that frauds occurred here. So the US trustee has done nothing other than posit that there is smoke without really answering the question, so who cares.

Obviously, there needs to be an investigation to determine who's responsible for that. And I trust that the US trustee and the debtors are working on that. And if monies need to be clogged back the war, be caught back, but we don't need to really know the why here. Second, appropriate scope. I agree with your honor.

How can you appoint an examiner, especially on the topics we're talking about, unless we know what the scope is? Or how can the US trustee do it? Should there be an accountant? Should it be a cryptocurrency guru? Should it be a cyber crimes investigator? Should it be a corporate controls expert?

How do you get to the issue of an appointment without knowing what the cybercrimes? scope's going to be. I don't think I've ever seen a blank check case, which was basically being posited here, where the court directed the U.S. trustee just point somebody who's examinery, and then we'll figure out what he or she's going to be doing. There has to be real context around this, particularly when we're talking about the next point, which is cost and duration. There are cases, I was in Rescab where Judge Glenn kicked the can down the road and there were reasons for that? There are three reasons why you can't kick the can down the

road here without giving the examiner what you said. If it's going to be a $10,000 investigation, an examiner needs to know that when picking up the charge first with respect to the $1.2 billion in cash. I think that's a little misleading. As the US trustee points out in the reply, or actually in the moving papers, there is an issue is to what is this is customer funds and where the customers are and everything else. So it's not fair to say that the debtors have in fact free access to use all the cash they're listing is unrestricted. Second on this, assume it is $1.2 billion of cash that can pay admin claims, that first

chart is breathtaking. The number of individuals who were already involved, that didn't list. the committee advisors, right? This case is burning super hot. We'll find out just how super hot when the VAPs start coming in. But the comfort that there's going to be $1.2 billion in available cash doesn't answer the question of how much distributable value is there going to be in this case,

and how is $100 million examination going to relate to that. Third, and I agree with Mr. Pascuali, the concept of de-duping, We'll just point an examiner and everybody else is going to sit. That never happens. The committees continue to work. The debtors continue to work. And actually, if you focused on Mr. Ray's testimony about the second and third demonstrative, where he lists all the work they're doing to coordinate with the requests,

that's what's going to happen with an examiner too. The request is going to come in, Mr. Bromley. I need 70,000 documents. They're going to go through and say, well, what do we do with privilege? What do we do with these documents? is how do we control the data so that it's secure. And it's just all going to continue to build. In other words, $100 million is additive, not subtractive

from other work that goes on. And finally, appropriate form and use. There is, in my experience, no evidentiary value to an examiner's report. It just kind of comes out. And whether your honor would feel that that was important or not, I don't know how. I don't know how important it is when we're not dealing

with a case with insiders in situ, and rather, we have a whole new group coming. And sometimes it helps courts with doing things like, has the plan been proposed in good fit for things like that. I just haven't heard anything articulated by the United States trustee that would go to that issue. It's not going to, as the US trustee's trustee seems to posit, going to lead to an indictment.

The court can't indict anybody here. nor can an examiner indict anybody here. So the government authorities who are doing their investigations aren't going to get any help out of the report. And then finally, on this point of important public interest in looking at this, this is not a case in which governments are sitting behind. In other words, there's not somebody out there

protecting the public, as seen. The Congress is looking at it, the CFTC, the SEC, the IRS, all the state governments. They don't need to outsource their work to the creditors of the debtor. Because the irony of the position here is that the creditors who are just going to want to get their fiat currency and crypto back are going to be forced to bear the cost of an examination that's only going to tell them to who, when, where, and why they lost money, but not actually give them money back. You can't tax them to answer questions that no creditor is coming forward and saying,

we want answers to. We're willing to pay as customers for an investigation into this work. If the U.S. trustee or other government agencies won't work, it looks like, or want answers, it looks like they're getting the participation they need from the debtors, and I'm sure that will continue. So from the perspective of the JPLs, whether you look at it mandatory or an appropriate investigation. I don't think the U.S. trustee has met their burden here to really explain why we should all be paying for that.

Mr. Key? Kee. Is this your color? All you too. Thank you, Your Honor, again, for the record. Julian's Harkughey on behalf of the U.S. trustee. I have a few points to reply to. I think they're all mostly comments. Excuse me, the debtors council made.

So we're winding back the clock a few minutes. So one thing that debtors' counsel indicated was that the U.S. trustee had put in no evidence to show that we comply with 1104C1. So our evidence is the declarations of Mr. Ray. Now, we didn't put him on the stand and have him, you know, go through and make those statements, but those are in evidence. And paragraph five of his first day declaration says, quote, never in my career have I seen such a complete failure of course,

corporate controls and such a complete absence of trustworthy financial information has occurred here, from compromised systems integrity, faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated, and potentially compromised individuals. This situation is unprecedented, close quote. And that's just one piece of what he says in this one declaration, and it also, of course, his testimony before Congress. So that is all in evidence, even if we didn't put on a live witness today. And that goes to the best interest of the creditors. And again, if one is looking at the, as is appropriate,

the way that certain cases have looked at it, and Your Honor has looked at it in the past, it also establishes that it is appropriate to have an examiner. This is not a case where, you know, there's not a whip of smoke about wrongdoing. There's, as Mr. Ray said, a dumpster buyer. Debtors Council also mentioned this report that they gave to the creditors that was then filed on the court docket, which is our joint exhibit nine. And, yes, they are correct that they did file it on the docket. It's 20 pages.

It's a power point. There is a lot of charts and pictures. I'm not saying there's no information in it, but it doesn't compare to something like an examiner's report. like an examiner's report. So the debtor, both the debtor and I believe some other counsels are referring to, you know, $5 million worth of debt. In any case, is the US trustee going to be required to file a motion for an examiner in any case

with $5 million worth of debt? It's not just $5 million worth of debt. There's a lot of restrictions, and that is not every case with $5 million worth of debt. But in addition, I just want to be clear, U.S. trustee is not required to file a motion for an examiner. It is under 11.04E. There are certain situations in which the U.S. trustee would be required to file a motion for a trustee,

but there is nothing requiring it. The code says we can, we can file a motion, but we're not required to. And I think that, you know, one could see throughout the years, the U.S. trustee is not filing examiner motions in every case in which the debt is over $5 million. again, any debt or specific debt. It is discretionary. The U.S. trustee does when it feels it's the right thing to do. One counsel cited to Washington Mutual transcript at page 98.

In that case, Judge Walrath said that the debtors had been, quote, investigated to death, close quote, and that she could not imagine in any examiner finding one unturned stone. That's at page 9, excuse me, transcript 98, lines 12 to 17. That is not where we are in this case. The debtors just, you know, filed a few months ago. U.S. trustee filed the motion to point examiner 11 days after the first day hearing, 20 days after the petition date.

The debtors, even at this point, are nowhere near being investigated to death. Also, the debtor's counsel and some other counsels, brought up that there will be a disclosure statement filed at some point possibly, depending on what happens. A disclosure statement is not a report of an independent examiner. I mean, there's no comparison to those two things. Clearly, Congress knew that in Chapter 11 cases, debtors filed disclosure statements. Again, 1104 doesn't say, unless the debt or has or may file a disclosure statement.

What it says is, after the plan is confirmed, you can't make the motion. you can't make the motion. I mean, well, it wouldn't meet the requirements. But there isn't a disclosure statement here, and it's irrelevant to 114C. And, Your Honor, there's two other things I want to point out. At the end of Mr. Romley's argument, he said the debtor's view is a report is not appropriate.

We just want that to be very clear that the debtors have no intention of filing any report as to whatever investigation they may be doing, whereas, of course, an examiner is required to do that. And finally, Your Honor, it is, U.S. trustee agrees that Your Honor has the discretion to set the scope and a budget for any examiner, if you were to appoint an examiner. But the court should not abuse discretion in such a way

that it completely eviscerates 1104C2 as it's been approved by Congress. Thank you. Thank you. I'm going to take a recess here and I'd like to see counsel for the four parties in chambers in my conference room over here and I'll come back on the record after that. They're still coming. I think we're missing a few folks still.

Back on the record, Jimane? Okay. Back on the record. So I requested to see the parties in chambers just to have a brief discussion about whether there was a way to find a path towards a consensual resolution of this motion. And the parties have indicated they want to discuss that. So I'm encouraging them to do that. In the meantime, I'm going to take the matter of under advisement.

Wait to hear from the parties. I think we have another hearing scheduled on Wednesday, and maybe by then the parties can give me a status report on where this issue is. And I've told them to ensure that there's no concern. about my being upset about somebody who holds up the process. I've told if anybody objects to resolving it, I will rule on it. They should contact chambers,

let my judicial assistant or my courtroom deputy know that there has been an objection, that our counsel can do that. Don't tell me who's objected, just tell me there's been an objection, and then I will go forward with ruling on the underlying motion. So with that, do we have, I think we have some other housekeeping issues before,

adjourn? Retention apps that need to be moved, potentially moved? Your Honor, we will, Adam Landis for the record, the Administrative Cod, we will file an amended agenda for the hearing on Wednesday, but we believe it's only one matter that we need to go forward. Okay, that's the objection to the 2004 again? That's correct, Your Honor.

And that's, I assume there's no witnesses for that? There are none, and we would ask the court's indulgence to do that virtually. Yes, that can be done virtually. There's no witnesses that can be done virtually. Anything else then? Before we adjourn? All right, well, thank you all very much.

I appreciate the arguments. It was an interesting argument. Thank you. Thank you. Thank you.