American court hearing recordings and interviews - Season 2. Episode 1. April 12, 2023. In re FTX Trading Ltd., et al., chapter 11 bankruptcy case number 22-11068, audio of hearing held in the FTX/Alameda et al. bankruptcy proceedings pending in Delaware, USA #crypto

Episode Date: April 23, 2023

After a few weeks without hearings in the bankruptcy proceedings, a hearing was held on April 12, 2023. For more hearing recordings accompanied by the amazing RSS.com technology for auto-generating transcripts, please access this podcast on RSS.com https://rss.com/podcasts/the-comi/If these recordings are valuable to you, please consider supporting this podcast through Value4Value.

Please be seated. Good afternoon, Your Honor. And may it please the court, Adam Landis from Landis, Rath, and Cobb, counsel to FPX Trading, Limited, and the associated debtors. Your Honor, we filed an amended agenda in the case today, noting that items 1 through 5 are adjourned. Item 6 through 8, 11, 12, and 13 have been resolved with orders entered, for which we thank Your Honor for taking care of that. We only have three matters going forward. Number nine, with respect to the debtors request for extension of their exclusive periods to file and solicit plan of realization.

Number 10, the state relief motion, and number 14 is a status conference with respect to emerging. Before we head into the agenda proper, Mr. Dieter would like to address the court with a update as to matters since we've last appeared at an omnibus hearing. Okay, thank you. Mr. Deidore.

Thank you. Good afternoon, Your Honor. Andy Debrick for the debtors with me as my partner, Brown Gluckstein. I think we have a presentation. Does it? Do I press it forward? It's not it. Remove that person.

So thank you. Your Honor, it's been three months since we were before you at Nominable this hearing. We'd like to thank Your Honor for the efficient manner in which the cases have been conducted so far. The Court has issued more than 38 orders on certificate of counsel, including 30 orders that reflected negotiated solutions with stakeholders. As a result, the debtors have been able to focus almost entirely on the business of the case rather than court appearances. The first months of the case have been extraordinarily busy and productive.

There's an overwhelming number of ongoing work streams and novel issues in every discipline. Today, the situation has been stabilized, and the dumpster fire is out. And as I will explain in a moment, we anticipate filing a planned reorganization in July. I would like to spend some time on a case update for the court. First, and perhaps most important, are assets available for stakeholder recovery? Our estate consists of many investments, businesses, and causes of action that have not yet been monetized. Valuing these now is impossible. However, we are tracking distributable assets, cash,

class A or category A cryptocurrency, which we define in previous submissions and securities. Here's a chart of these assets at petition date value, including cash receivables from the settlements and transactions recently approved by the court. We now stand at $6.2 billion, an increase of $800 million from the update to the court in January. This increase in value is more significant if we take into account current assets. pricing. On this next slide, at current prices, our distributable assets have increased to $7.3 billion, a $1.9 billion increase from my January briefing. What goes up can go down. Prices will fluctuate during these cases. As we will discuss in a moment, one of the important tasks

of the debtors is being a good and prudent custodian of $7.3 billion of asset value. We will be increasing distribution assets, hopefully dramatically, as the case progresses. But it's also important for us not to lose what we have now. Next, Your Honor, I'd like to review some significant events by subject matter. The first is our investigative work. In addition to everything else, the debtors are conducting an extraordinarily complicated forensic investigation in coordination with multiple law enforcement agencies in the United States and around the world.

On in this case, the Board of Directors decided it was in the interests of the estate to expend the resources necessary to create a centralized collection of information under the debtors' control and to make this information available to law enforcement agencies in a transparent and reliable manner. The debtors believe that this cooperation has and will continue to benefit the estates economically, especially as we approach the formation of a plan and the coordination of the distribution of estate property with the distribution of property, such as well, and the coordination subject to criminal forfeiture.

Government cooperation is in our financial interest. The investment has been substantial. Over 1.3 terabytes of data has been collected and compiled. Much of the information has been provided only to government authorities, sometimes directly and sometimes in summary presentations. The debtor is limited in what it can say publicly and provide to certain parties in interest because of the pending government investigation.

However, the debtor is one of the debtor's one. The debtors were able to publish earlier this week the first interim report of Mr. Ray to the independent directors, a report that focuses on control failures at the FTCS group prior to filing. The gist of this report is clear. Mr. Bankman-Fried repeatedly, pervasively, and often persuasively, lied to stakeholders and the customers and creditors in order to maintain a digital con game. The FTX exchanges appear to the user as legitimate. In fact, superficially, they appear to process trades and information more quickly and conveniently

than competitors. The app worked beautifully. But in truth, it was a facade, a digital Potemkin village, or perhaps more apt, a video game. Behind the user interface, there was no correspondingly sophisticated reality. no equivalent process for segregating assets or reconciling trades, no reliable relationship between positions reflected in the online game and the underlying positions held in the real world. The debtors are working on a second report

that will focus on the violation of basic principles of asset segregation. The debtors will endeavor to make these reports available on a rolling basis and hope they will facilitate the common understanding necessary for productive plan discussions. Other developments include the guilty pleas of Mr. Singh, joining Mr. Wang and Ms. Ellison. Those who have pled guilty also have agreed to provide assistance to the government, and Mr. Wang in particular has provided material assistance to the debtors as well, helping us locate additional assets.

And we've seen additional charges against Sam Payton Free. We also appreciate the U.S. criminal authorities working in parallel with us, us to secure assets. This includes approximately 100 million of cash in the name of FTX digital markets, as well as the often discussed hood stock. From the debtors perspective, Your Honor, we see no tension between the debtors and the US

attorney as to whether particular assets are recovered by the US attorney or by the debtors. In this case, we believe victims entitled to restitution and creditors entitled to a distribution in Chapter 11, are functionally equivalent. We will continue to work with the U.S. attorney on this basis. Operationally, we've reconciled customer balances across an incredible 10 million accounts. We have a considerable cost and expense fortified the AWS security environment. We've retained a core team of continuing employees, and Your Honor has approved to KERP.

We've rationalized our use of office space and our footprint. And, importantly, we have returned crypto, to customers in Japan by opening for withdrawals. Japan has a cryptocurrency regulatory environment that was responsive to the Mount Gawks in solvency. Cryptocurrency generally must be kept in segregated cold storage, and customers have a clear ownership right in the cryptocurrency under Japanese law. As a result, Japan is the one place in the world where cryptocurrency was actually kept segregated by FTX, and the segregation was never broken.

The debtor has also been working very hard to open the draws of segregated cash in Cyprus, where there are different but also effective customer protections with respect to cash deposits. These jurisdictions, however, are notable exceptions. Everywhere else, the situation as to customer rights and asset segregation is unclear. Accounting and tax are things normally taken for granted by lawyers, but the debtors now are not reviewing balance sheets because there are no reliable. there are no reliable balance sheets. Instead, the debtors have been building balance sheets

from primary source material. That material includes banking records, AWS, the cloud environment, QuickBooks, and a category of unstructured data, which is accountant speak for emails, text, and even chat room entries. The initial fruits of this effort were the reports the debtors made public on customer shortfalls

on the exchanges, and the schedule and statements filed only last month. Efforts now underway include recreation of inter-silo and inter-debtor transactions, led by our financial advisor Alboriz de Marcell, the development of historical financial statements, led by a team of forensic accountants and Alex partners, and efforts to put the debtors in a position to file accurate tax returns, led by Ernst DeMeil. As I mentioned previously, one of the important tasks of the debtors is managing $7.3 billion in effectively liquid assets.

Over 75% of our cash is in 345A compliant accounts, which in the current banking environment, the protections of 345 seem especially prudent. About $500 million of our cash is held outside of 345A compliant accounts pursuant to our cash management order. We continue to examine whether or not we can move more of that cash into 345A accounts. Our cryptocurrency, the debtors hold 1.6 billion in cryptocurrency at current market values

in cold storage controlled by the debtors. The remaining category A cryptocurrency is staked or on third-party exchanges, and we may migrate that into cold storage over time, but it's impractical to do it at the current moment. The board is monitoring all of these exposures, taking expert advice on cryptocurrency custody and security risks, and discussing the risks. involved in potential alternatives with the committee and other stakeholders. These assets will continue to grow. Avoidance actions and other outbound litigation will be an important source of recovery for creditors.

Actions so far include our $460 million settlement with Modulo, a $53 million cash settlement with DELTEC, avoidance actions against three other Chapter 11 debtors. These include a $445 million administrative, preferrifice, claim into the Voyager bankruptcy, and substantial claims against BlockFi and Genesis. These early avoidance actions are the tips of the icebergs. We have reviewed substantially all the historical off-change transactions by the debtors at this point. All the transactions that we believe may be avoidable, and the facts of these suggest compelling causes of action

relating to several billion dollars of lost value. We also are advancing our work to review preferential transactions. preferential transactions on the exchanges themselves. Finally, in addition to the Grayscale litigation, which we've commenced, and then finally turnover actions, one of the most difficult issues that we've faced is that we continue to discover assets of the debtors that were held by nominee owners on behalf of Alameda and FTX. One example is the court's recent authorization of the turnover of an account at OKC coin, including over $150 million of cryptocurrency

held in the name of an individual but belonging to Alameda. We'd like to thank the dozens of exchanges and other parties that have been cooperating with us in these activities. We also have many valuable assets to sell. The court has approved the $96 million sale of our position in Mistin Labs

and the $45 million sale of a position in certain Sequoia funds. We received We have a, as we've said before, a very substantial set of venture book investments. We have now reviewed substantially all of those investments and are trying to decide the path forward on a venture investment-by-venture investment basis. The de minimis asset sale procedures that have been approved by the court we've used for $5 million of proceeds so far,

although there's dozens of transactions under discussion. And then finally, we have ongoing sale processes as announced that have yet to reach their conclusion. These include the transactions that we've mentioned before, as well as token investments, and other stray investments of various sorts. So where is all this going? We stand here today in the middle of April. In the second quarter, the debtors complete the 90-day review period we set for internal discussions

concerning the continued operation of the exchanges, discussions which the committee has been an active participant. We'll be discussing next steps and alternatives for the potential restart or recapitalization of the exchange, conventional ideas and novel ideas, with the committee and other stakeholders over the coming weeks. We also are going to start plan discussions later this quarter. Our goal is to file with the court a preliminary plan of reorganization in July. We would like to set a bar date promptly. Our current expectation is that we will set a non-customer bar date at the end of July.

Our customer bar date requires the creation of a bespoke claims portal and raises a number of complicated issues. We're preparing the portal in consultation again with the committee and want to have an operating demo to run through prior to launch. So we anticipate the customer bar date, like the government bar date, will be at the end of September. That's a bifurcated bar date process, but it allows us at least to get the information that we're going to yield, the non-customer bar date will yield.

This is in part because the level of information we have about non-customer claims is, let's just say it will be benefited by the bar date process as we start to decide we have a pretty good idea now of the nature of customer claims against the estate, but the nature of non-customer claims we have a lot less certainty. And so we've bifurcated the bar date so we can approach the plan. plan process having a better sense of how significant are non-customer claims, in particular, loan counter-party and other claims into Alameda. We're aiming to have a disclosure statement filed in the fourth quarter, a disclosure statement

hearing in the first quarter of 2024, a plan solicitation that bridges the quarters, and finally, plan confirmation in the second quarter of 2024. These are of course an aspirational calendar, but we believe it's a sensible calendar. And we believe the filing of a plan early is important given the nature of the case. So far in the case, we've avoided serious litigation with economic parties. As we've considered internally at great length, the central legal issues in the cases, such as the nature of customer entitlements, the distinction or lack of distinction between legal entities, they all raise significant equitable as well as legal questions.

The same is true for stakeholder assertions of constructive trust, a phrase that we've heard, Your Honor, from dozens of different stakeholders all across the capital structure seeking to elevate their own claim. The debtors believe that discussion, settlement, and if necessary litigation of all of these issues will be easier if we first table the plan of reorganization that shows all stakeholders and potential litigants the big picture of how they and others will be treated. We need to show stakeholders that plan first and resolve disputes about the plan second, given our facts.

Throughout this process, asset recovery efforts will continue. That's all I have, Your Honor, but we wanted to make sure that we, at least were able to tell Your Honor and stakeholders not just something about the history of what's accomplished, a roadmap going forward. So absent questions from your honor, I'll turn to today's agenda. Let me just ask a question about the exchange restart. What does that entail? How will it work? Do customers, will they be able to withdraw fund or their coin that's being held in the exchange? What's the anticipation of how that's going to play out? The short answer is we don't know yet. So there's two exchanges, of course.

There's actually more than two exchanges.com and the U.S. exchange. The options being considered include a restart of the exchange from an operational and a functional perspective. It is likely that requires the raising of significant capital. There's a question posed whether the assessment. state's capital should be used for that or whether it should be third-party capital. There were some people that look at it as an M&A transaction. Can we dispose of the assets, including the going concern value of the estate, for proceeds to the estate and distribute those proceeds?

There are possibilities that customers could have an option to take part of their proceeds in, you know, that they would otherwise receive in cash from the estate and receive from some kind of an interest in the exchange going forward. There are as many opinions on this, I think, as there are professionals involved in the case, and that's a lot. So it's a very, you know, I don't think we have an answer at this time. What we have committed to do, as we spent the last about 90 days, the 90-day period we gave to kind of the initial consideration of this is expiring, and we're going to sit down with the committee and other stakeholders and think about it. There's also a sequence and a timing question, so there are some to believe that if there's any thing,

to be done with the exchange, it should be done quicker as quickly as possible, which might imply some kind of 363 or other architecture, and others that believe perhaps the exchange should be coupled with other assets as opposed to just being the exchange itself. So a long-witted way to say, Your Honor, that all options are on the table, but we don't have any particular path forward at this time. Does there need to be a resolution of the, I know there's litigation, about whether coin that's being held in the exchange is property of the estate or is it customers property. Does that need to be resolved before we can reopen the exchange? No, I don't think so. I think that it depends on the nature and the structure of that

transaction. And that's again one of the things we're thinking about is if we want to do something with the exchange in advance of what I think is already an aggressive timeline for the plan as opposed to waiting to resolve when we resolve the plan, then I think we're all going to have to get together and come up with a way to monetize, if you will, the estate's investment in the state's, the value the estate has in the exchange in a way that is without prejudice to the plan issues. But there's obviously a relationship.

Thank you. So on the agenda today, Your Honor, we only have three items, as I think Mr. Olandis mentioned. The first item, Agenda 9 is exclusivity. Then we have Mr. Bickman-Free's motion for relief from the automatic stay, and then a status conference discussion in the emergent case, agenda item 14.

So your order all turned to the exclusivity motion filed the docket 846. The debtor's request to extend the exclusivity period by six months is unopposed. The committee did file us. to which we responded and absent question from the court we'd ask the motion to be entered I don't have any questions did the committee want to be heard on it we would like to your honor yes thank you your honor Chris Hanson with Paul Hastings on behalf of

the official committee I'll try to make this brief your honor the committee's statement that was filed in connection with exclusivity was accurate and not misleading it was direct and aimed at helping the court to try to understand the committee's frustrations to date it was also aimed at holding the debtors to their newly minted timeline and their commitment to be more transparent with committee members than they have been to date. Unfortunately, the debtors filed a surprisingly insecure response that the committee believes is disingenuous in some ways, and we have no choice but to correct the record.

As we noted in our statement, the primary issue the committee has had with the debtors is their lack of trust and engagement at the committee member level. The debtor's own exhibit highlights their concern. Of the 1,636 documents provided to the committee as listed on the exhibit, only 21 of them, 1.3% of the total, were seen by the members of the committee as designated as non-professional eyes only. Of those 21, two were the so-called UCC reports that the debtors referred to a few times in their response.

To be clear, those are not really UCC reports. They were debtor documents that were shared with the members of the committee on the same day that they were released to the public and accompanied by two of the three meetings that were listed on the debtors exhibit, which were walkthroughs of the documents hours before they were publicly released on January 17th and March 2nd.

Obviously, if the committee members have been given advance access to the decks, they could have asked more intelligent questions, made the calls more productive, and provided valuable input on those presentations, but they were not provided with that opportunity, despite the requests of the committee professionals to do so.

The only other meeting of the three that are referenced in the deck happened on March 30th, after the committee delivered the debtors a draft reservation of rights on exclusivity that was far more strident than the one that it ultimately filed. At the time of the delivery of the draft document, the committee requested a case timeline and a meeting with Mr. Ray. The debtors did not disclose a case timeline to the committee professionals at that point, but they did, however, provide a high-level timeline when the call with Mr. Ray took place a week later. The debtor's reply would have the court believe that both its detailed timeline

and the call with Mr. Ray were products of the debtor's own volition, but they simply were not. They were prompted by the committee, and we are pleased with Mr. Dietrich's disclosure of the timeline today. That's the kind of information that we believe the court deserves and that we believe the public deserves and that we believe all the creditors and the customers deserve as well. However, as an example of how the committee members have been helpful to the debtors, which is not referenced in any of the pleadings, is the situation that unfolded over the weekend after the Silicon Valley Bank failure. That weekend, Mr. Ray reached out to the committee professionals and the committee members, and a productive dialogue occurred where the expertise of the committee members was helpful to the debtors

in navigating a unique situation that confronted them with respect to certain stable coins. It was and remains the committee's hope that similar, interactive, roll up the sleeves, and get-to-work meetings, like those will continue. The committee also takes issue with what the debtors seem to be trying to convey in their reply as to the committee's role, which is simply one of administrative oversight. As the court knows, that is definitively not what a creditors committee is limited to. Section 1103 of the Code provides for the non-exclusive and expansive list of topics that are appropriate for a committee, including the investigation of the acts, conduct, assets, liabilities and financial condition of the debtors, the operation of the debtors' business,

and any other matter relevant to the case or the formulation of the plan, in order to carry out its role as a fiduciary for all creditors in a Chapter 11 case. Similarly, Section 1109 of the Code permits committees to be heard on any issue in the case. In the end, Your Honor, the committee believes that its members have real-world, digital asset, and cryptocurrency trading knowledge and expertise that can prove helpful to the debtors in addressing the many issues in these cases, and to expedite their conclusion. The committee looks forward to the forthcoming plan negotiations

and the hard work to be done and the many other tasks that are necessary to achieve its goal. One note on the restart of the Exchange, Your Honor. The committee does have a subcommittee that is focused exclusively on the restart. It incorporates many of the concepts that Mr. Dietrich discussed, and yesterday we were happy to deliver to the debtors a term sheet on that basis, and we look forward to working with them going forward.

Thank you. Thank you, All. Mr. Dieter can any response? Obviously, I expect the debtors and the committee to cooperate fully and there be a free flow of information between the two. I did not appoint a examiner because we have an independent board of directors and independent CEO running the debtors. So I expect that there will be an open and free flow of information. And we believe we have and we will continue to try our best on that front. The U.S. trustee, Your Honor, made, I think, a wise choice, appointed a single committee in this case.

And we are, despite our growing asset value, far away from an equity distribution, meaning that there should be alignment at a fundamental level between the debtors and the committee. And certainly in our relationship with the professionals, We have had what I think is really an open, transparent from our end, very productive working relationship. But we take the feedback into account that we should do a better job of maybe perhaps now that the case is established and some of the security and other informational worries are fading in importance, we can continue to push in involving committee members directly, not just the professionals in some of the decisions that would make.

Thank you. Anyone else wish to be heard on the exclusivity motion? I'm satisfied that the requested relief is appropriate. I will enter the order. Has it been uploaded? Your Honor, I believe it has. To the extent it has not, I will get it up later. Okay, thank you.

Thank you, Your Honor. So I believe the next motion at Your Honor is from Mr. Bainment-Frieds, counsel. So I will feed the podium. Okay. Good afternoon. Your Honor. Gregory Dunlund, Montgomery McCracken, on behalf of Samuel Banking-Preet.

I'm joined by my colleague, Edward Schmitzer. He has been admitted pro-H-J in this case. He will be handling up. Thank you, Your Honor. Mr. Mr. Mr. Smithsler, from Montgomery, McCracken, Walker and Roads, on behalf of Samuel Bankman-Feed. We're here today on Mr. Bankman-Tree's motion for relief from the automatic stay to extend applicable to permit insurers to advance and to reimburse defense costs and fees under

director and officer's insurance policies. The relief sought is quite customary, as we highlighted in paragraph clarity of our motion, including orders entered by this court in other cases. To be clear, Your Honor, Mr. Bankman-Feed is only seeking an order permitting the insurers to advance or reimburse costs. He's not seeking an order determining coverage or an order awarding him $10 million. Specifically, Your Honor, paragraph two of our proposed order states the automatic stay imposed under Section 362A of the Bankruptcy Code does not apply, or to the extent does apply,

the automatic stay is lifted and modified solely to extent necessary to permit and authorize Realm and Beasley to evaluate coverage and to make payments under, and in accordance with the terms of the DNO policies to or for the benefit of Mr. Bank and Free for the reimbursement and payment of any covered defense costs incurred in connection with dependent claims. Your Honor, also contrary to what some of the objecting parties have claimed, Mr. Bankruptorne is also not seeking an order to the exclusion of any other insured who might have coverage. Far from him, Mr. Bankmanfried simply sought coverage since he had no choice after the debtors refused to indemnify him and refused to stipulate to stay relief.

It was not his right or place to seek coverage or stay relief on behalf of any other party other than himself. They are surely free to do so as long as they comply with the Bankruptcy Code. and the policies. Your Honor, why does Mr. Bankman-Preet need this coverage? Because he has been named as a defendant or is otherwise involved in criminal, regulatory, civil, and other actions and proceedings

that have resulted in and can be expected to continue to result in significant unreversed, unreimbursed legal fees and other expenses. We identified those actions and proceedings in paragraph 16 of our moving paper, and I will not repeat them here. Your Honor, Mr. Bankman-Freet is covered by insurance policies designed to protect

against exactly this circumstance. The policies are structured to provide coverage for defense costs in these circumstances so that individual insurers, like Mr. Vanquen-Fried, can mount an effective defense. There are two policies relative to this motion. The first is the Realm Insurance Policy, Realm Insurance Private Company Management Liability Policy, which was attached to the motion as exhibit B.

And the second policy is the excess claims made, directors and officers liability insurance policy, which was attached to the motion of exhibit B. Exhibit C. Your Honor, there are five important parts of those policies that I would like to highlight for the court, which were highlighted in the opening paragraph of our reply papers. First, the policies contractually mandate reimbursement by the debtors of expenses incurred by individual insured as the debtors agreed to indemnify all individual insured persons.

Second, the policies require the insurers to advance defense costs if the debtors refuse so that the insurers can mount the defense. Third, the policy's prioritized payment as to the individual insured, not the debtors, if, quote, the loss due and owing by the insurer under a liability coverage part exceeds the then remaining limit of liability applicable to such loss. Four, the policies provide that a bankruptcy of the company shall not relieve the insurer of its obligations under this policy. And five, the policies require the company, in this case the debtors, to waive and

release the automatic stay with respect to the policy or its proceeds and agree not to oppose or object to any efforts by any insured to obtain relief from the stay. Why are we here, Your Honor? We're here because Mr. Bankman-Fried asked the debtors to indemnify him as they were required to do under the insurance policies, but the debtors refused to do so. After being denied this right, Mr. Bankland-Fried, through counsel, asked debtors' counsel to stipulate to relief from the stay, which is also customary in this court as well as other courts and again the debtors refused to do so it was in light of that that we

had no choice but to file this motion whether the court concludes that the proceeds of the policies are property of state or sorry don't know whether this court concludes that the proceeds of the policies are not property to state because coverage is likely to be exhausted by side-day claims or if this court concludes that the proceeds of the policies are potentially property to state stable they should be granted so the policies can be used for the purposes that they were obtained to provide coverage to individual insured like Mr. Bankman-Free. Your Honor, as the Eastern District of New York Bankruptcy Court explained in the first central

financial case, quote, DNO policies are obtained for the protection of individual directors and officers. In essence, and at its core, a D&O policy remains a safeguard of officer and directors' interests. Your Honor, let me address the elephant in the room. Yes, Mr. Bankman-Fried has been indicted and is a defendant in multiple lawsuits. But Mr. Bankman-Feed has not been convicted of a crime or found civilly liable, contrary to what the abjecting parties may have stated in their papers.

He is subject to an indictment and only that. As this court is unaware, an indictment is not a conviction. It's merely an accusation, no different than a complaint. Mr. Bankman-free, like any other person, is and must be presumed innocent unless and until found guilty of any criminal wrong. He is like any other former director or officer of a complaint. that seeks access to a D&O insurance policy to pay for legal fees.

Coverage under those policies for those legal fees does not change simply because some people hope or believe that Mr. Banking Creed is guilty. I'd like to address the three responses that were filed, Your Honor. First, the Committee objection. As we noted in our reply, we submit that the Committee's objection should be rejected, as they seek relief on behalf of the debtor, belief that the debtor is contractually barred from seeking something that the debtor is recognized in their papers. Well, let me ask you about that first, because I question whether or not that provision is even enforceable in bankruptcy. Isn't it void as a public policy issue?

How can a debtor, how can a company say pre-petition, we're going to agree that if we have property of the estate, we're going to agree to waive our right to seek a stay? We're going to waive our right to object to someone who wants to lift the estate. to pursue those assets. Seems to be counterintuitive to the whole purpose of the bankruptcy code. Understood, Your Honor. It's like how I believe agreements to make a debt

non-dechargable are not necessarily enforceable in the bankruptcy. Your Honor, it's possible. I will admit we did not look into it. The debtors in their papers agreed, if perhaps was the only thing that they agreed with us on in their papers. Your Honor, it may not be enforceable. We do not rely upon that.

We rely upon reasons for why stay relief should be granted here. But I did want to note it. The debtors, like I said, did apparently agree with it. So they apparently were comfortable with it. And maybe it's because the policy is going forward post-petition, and so you could get into questions there. But honestly, Your Honor, I don't know. We're not relying upon that.

We're not asking you to grant, we're not asking you to strike all the opposition because of that and grant our relief as effectively unopposed. Okay. Well, let me ask you another fundamental question. It has been the rule in this court. at least and I've ruled the same way, that where a debtor is a co-insured under a policy,

it is property of the debtors of state. And the debtor here is a co-insured under these policies, correct? Yes, correct, Your Honor. So they would be under precedent in this court. It is property of the debtors of state, right? Your Honor, as we set forth in our paper, we believe because of the priority of payments

that side A will come first, that there will not be... There will not be anything left likely for the debtors, and we believe because of that, an example of case law supported, that it's not property estate, but as we put in our papers, should this court conclude otherwise, that is why we also sought relief from the stay to the extent the proceeds of the policies are fine to be property of state. They do have a potential interest. We believe it is contingent, and it is less than individual insureds, which includes Mr.

Bankruptry but does include other members, but Your Honor, to the extent you conclude that because of that contingent interest, it is property to state, that is why we also seek safety relief, Your Honor, as our alternative ground. Well, doesn't that also contradict your position that you're taking, that the priority of payments, you're saying, you're saying that Mr. Freed, Bankman Freed is not seeking to deplete the $10 million. He doesn't think he, apparently doesn't be he's going to deplete the $10 million. So the priority payment provision hasn't kicked in yet.

Correct, it has not. Which means anybody can file a claim, including the debtors. Correct. Anybody who is permitted to under the policies and under any bankruptcy code provisions that are applicable is permitted to submit a claim, and I would expect that the insurance companies will abide by the policy and review the claims, determine which are appropriate or not, and pay them out as they would do as if there was no bankruptcy proceeding.

If that means Mr. Bankman-Free receives reimbursement, obviously that would be great from my client's perspective. If it means others also receive reimbursement, I'm sure that is great from their perspective. If it means the debtors receive some type of reimbursement for some type of cost that they incur, that is also possible. The insurer will follow the policies, which is all that we're asking. We're asking for the right to submit the claim and allow them to go forward because insurance has specifically told us, and we understand why, as sure, this court, they have told us that,

They will not look at our claims until stay release is obtained. Okay, go ahead. Your Honor, you touched on the fact that there are potential other parties that was a point that the committee made in their objection. Once again, we don't believe that's a basis to deny the motion. If there are other parties that would like access

to the policies, they merely need to comply with the policies and comply with any applicable code provision. What I mean by that is if they are individuals and they are not being somehow cut covered by an ordinary course professional. I suppose they would need to file a motion for relief from this day, be before this court. And if it's granted, then they can do,

assuming this court grants the motion we filed, they would have a right to do it. But our point, Your Honor, is nothing in relief that we've sought prevents those other parties from doing so. And Mr. Bankman-Fried shouldn't be penalized simply because he filed a motion and others have chosen not to. And honestly surprises us, Your Honor.

We filed this motion a while ago. If there were these other parties, I don't understand why they have haven't filed something, but that is their choice. What you heard your honor in, or what you read your honor, I should say, in the debtors in the committee's papers, is there are these other employees who the debtors have chosen to, it looks like, effectively indemnify,

and they're going to indemnify them by providing them counsel from Covington and Berlin as an ordinary course professional. And they've chosen to do that. They've chosen not to indemnify Mr. Bankin-Fried to challenge his right to get reimbursement, but they've now told you that they're going to seek reimbursement under the policies

for at least perhaps some of Covington-Burling expenses. Why do I point this out, Your Honor? Because it shows a reason why this instant motion should be granted. I don't think it would be appropriate to have one set of former employees getting legal counsel effectively for free from their perspective, whereas another set of employees,

or in this case another set of one employee, receiving having to pay for his, on legal counsel and having no right to seek reimbursement. Given this unequal treatment, Your Honor, we believe stay released should be granted so that Mr. Bankman-Fried is certainly not worse off than these other employees who are getting this benefit of the legal fee. Well, can I just list the stay for everybody? Say go file your claim against the insurance policy?

Your Honor, I suppose you could. I would submit that I believe generally speaking a motion needs to be filed to seek relief. motion was not filed for that. I believe it's up to those individuals or entities to file that relief. We did go to the trouble. Again, we went to the trouble because the debtors refused to stipulate to it.

Had they told us in response to a request for stipulation, yes, Mr. Spencer, we think stay relief makes sense. How don't we make it for all individual insurance? I would have said yes. I would have said yes. I tell you today. I know I would have said yes. They didn't say that.

They just said, no, go ahead and file your motion. So I did. If this somehow wants to be converted and not I would be more than happy for this to be one of the, I believe they said there were 30 things, maybe that they resolved contentially. I'd be more than happy for this to be 31, if I'm counting right.

It wasn't yet, if we can make it number 31 today. Tell me where to sign, Your Honor, I would do so. Well, maybe I need to send everybody out in the hallway for a little bit, see if you can resolve this motion. But go ahead, finish your argument. Go ahead. Your Honor, bizarrely, the committee should ask that Mr. Banking Free will suffer,

the quote is, will suffer no real prejudice that the stay is not lifted. It's hard to respond to that claim, because I don't even understand how it could be made, given that Mr. Bankman-Fried is a defendant in multiple civil actions, a defendant in various governmental action, and he has to pay for all that legal representation out of his own pocket and have no access to insurance proceeds of a policy that specifically apply to his current predicament. The hardship is clear, and multiple courts have recognized that.

By way of example, Your Honor, in Downey Financial Court, Judge Johnson stated, quote, The insureds would suffer a very real and easily identifiable hardship if the stay is not lifted. Specifically, the insured would have to pay 880,000 defense costs, as well as any defense costs incurred, subsequent to the finalist's motion out of their own pockets. Your Honor, if I can next move on to the objection filed by the class action plaintiff, the owner's objection. As we said in our reply, Your Honor, we submit that objection should be overruled because, A, they have no standing to seek the funds under the D&O policies. B, they wrongly placed their interest in potential recoveries in their adversary proceedings ahead of everybody else, including Mr. Bankman-Fried's rights under the D&O policy. And lastly, they falsely claim that Mr. Bankman-Feed has been found liable for, quote,

both civil and criminal and lawful conduct. The simple fact is that it would be patently unfair to allow the class actions to proceed against Mr. Banking free, but at the same time deprive him of the right to access the proceeds to defend against these claims. This right to defense was recognized by the Southern District of New York and the MF Global case and also by this bankruptcy court and allied digital, both of which we cited in paragraph 20 of our reply. Lastly, Your Honor, I want to touch upon the debtor's objection.

I've already mentioned the state relief, so I won't repeat that again. I've already also mentioned the Covington-Burling issue. I think if there is another basis for access to the DENO proceeds, claims should be made. I was a little surprised that the debtor said it would be both unfurling. and inequitable for you to grant this relief. Again, as we said before, what we think is unfair and unequitable is that Mr. Bankman-Feed was denied indemnification right. He was then denied the debtors agreeing to a stipulation,

and instead the debtors have chosen to indemnify certain employees for whatever reason and provide them with counsel free of charge, while at the same time trying to stop Mr. Bankman-Free from having any access to the Dino proceeds. So if there's anything that would be unfair and effort, inequitable Your Honor it would be to deny this motion with respect to Mr. Bankman Free. Your Honor, in sum, we respectfully request this court grant the motion and enter

the proposed order that was included with the motion. Thank you. Thank you, Your Honor. I want us to go first. Committee or the debtors? Thank you, Your Honor. Tempascuali of Paul Hastings for the Official Committee of Unsecured Creditors. First, Your Honor, let me just very quickly address the point that the committee shouldn't be heard today. The committee is not a party to policy or party interest to the case there's no reason offered either in contract or in law as to why the committee objection shouldn't be heard and i know your honor through your questions uh it seemed to be recognizing that but i did want to mention that i think your honor one of your

questions was right on point as well and that is mr bank mcfried misinterprets the policy the policy here does not provide any priority to the side a claimants in the circumstance in which we stand here at the moment. The priority, if any, only arises under the terms of the policy if a claim is going to at that point exhaust the policy. So there is a sharing of the 10 million in aggregate proceeds between the CIE directors and officers and the debtors under side B, C, and D of the policy.

And because there is a sharing, Your Honor, as Judge Silverstein explained in the Boy Scouts case very recently, The debtor's interests in the proceeds requires protection from depletion and overrides the interests of the directors and officers. That's 642, Bankruptcy Reporter 504 and 573. So as we stand here today, it's actually the estates that have a priority to the proceeds of the policy, not the directors and officers. Given that, Your Honor, I think, again, your question to recognize this. There's no question as a matter of law and contract that the proceeds here are property of the estate. And Mr. Bankman-Fried then has the burden of convincing this court that stay-relief is appropriate.

No evidence has been presented by Mr. Bankman-Fried in that regard. And so let me hit those points in particular. The first, Your Honor, is that... excuse me, it just lost my place. There is prejudice to the estates if the stay is lifted and Mr. Bankman-Fried is able to access the insurance proceeds for the very simple reason that the debtors will then have to pay the costs of defending various claims,

various investigations that are pending now, not hypothetical, but that are pending at the moment, including the class action complaint that that the movement mentioned in argument and posed the motion as well. So there's nothing speculative or hypothetical about it. That exists today. And absent being able to access this particular policy of these particular debtors, the debtors would be, the assets of the estate would be diminished in that regard.

Second, as to the prejudice that Mr. Bankman-Fried claims that he would sustain, again, No evidence has been presented. And in that regard, more particularly, the motion itself at paragraph 22 references that Mr. Bankman-Fried by and through counsel submitted notice letters to various other insurance carriers, including realm here. But no evidence has been presented as to what other coverage

Mr. Bankrupt Fried has made claim to and may be receiving. In particular, we mentioned in our opposition, it's the committee. committee's understanding that there is a $20 million D&O policy of a different debt or paperbird that does not contain side B, C, C, and D coverage, and thus the issues that we're discussing today are not raised. But as I said, no evidence in the record in that regard at all. Now of course, the Court has great discretion and latitude in determining whether to lift the stay and in considering balancing the equities. The Court can consider in this regard

the charges and claims that are very significant against Mr. Bankman-Fried, his alleged complicity in the very actions that led to these bankruptcy cases, and the fact that three of his closest executives have pleaded guilty to serious crimes. Those are all relevant facts before the court today, and that's even while recognizing, of course, that Mr. Bankman-Fried has the right to contest those charges and claims. But the facts still remain of what the charges are as we look at the balance of the equities before, Your Honor. Finally, Your Honor, just if the court is inclined to grant the motion, we would request that the movement be required to comply with Bankruptcy Rule 2016 and file applications with the court so that we can, the states can monitor what proceeds from these policies are being used and in what manner. So unless the court are sending other questions, those are the points I want to raise.

Thank you. No questions. Thank you, Your Honor. Good afternoon, Your Honor. For the record, Brian, Blochstein, Sullivan, and Plumwell for the debtors. Your Honor, we filed a response to the motion, as Your Honor knows. We share the concerns that Your Honor raised about the enforceability of the provision prevents us from objecting. We, of course, understood the committee was going to be objecting to this motion.

We thought it proved not to necessarily get into a fight with the insurance carriers at this stage. From our perspective, Your Honor, there are a number of points that Mr. Bankman-Fried has assorted that are inaccurate. Mr. Vasquale addressed a number of them, particularly how the policy works, and it is critical here, Your Honor, that the debtors do have coverage under this policy. We do believe it's an asset of the estate, and we do believe that the debtors today have claims under that policy with respect to side B, side C coverage.

So it's not a hypothetical as to whether there's a real interest here of the debtors, as the court is considering whether or not the grant state relief for Mr. Banking Free. The other point raised and articulated again today, with respect to the fact that we are as the debtors choosing certain current and former

employees to indemnify and provide counsel to cooperate with investigations is of course true and that's this is mr. Frank McPhee's papers make it sound like this was novel and new that arrangement was disclosed back in February and in the declaration provided by the Covington firm in connection with their OCP retention in paragraph five it was disclosed very clearly that we had debtors had requested that that firm provides services to represent quote current and former employees of the debtors in connection with ongoing investigations by the government as well as related inquiries from counsel the debtors and

third parties and of course your honor that's providing a benefit to the estate these are individuals that have information and they're sharing that information with the debtors in connection with the investigations highlighted and walked through by mr. Dean Rick earlier and with the government mr. Bankman Freed is not in that camp mr. Bankman Fried of course is not cooperating with the debtors there was a suggestion that we forced him to file this motion today we did decline to enter into any sort of stipulation is to stay relief we have no obligation

to do so, even if the provision in the policy is enforceable, despite the concerns your honor raises, it doesn't require us to cooperate Mr. Banking Fried. It simply states that language states that we would not oppose state relief, which we have not done. We do think that certainly the question the debtor is to be clear, have no intention of cooperating with Banking Fried on this or other issues at this time. With respect to the question of one former officer and director versus others accessing the policy, and we did raise this in our submission, Your Honor, we do think that if the court is so inclined

to access the policy that Mr. Bankman-Fried should not get a leg up among the other potentially insured parties here today. So we certainly understand and agree with the points raised by the committee, but to the extent stay relief is granted, it probably should be granted for all. Thank you, Your Honor. Thank you. Anyone else wish to be heard before I go back to Mr. Schnitzer? Okay, Mr. Snitscher.

Thank you, Your Honor. I'll be brief in responding. Your Honor, first with respect to what the committee said, they used the word sharing, and this was a word that they also used in their motion, which I wanted to highlight. They want to give Mr. Bankman free nothing, and they want to give all the proceeds to somebody else, whether that be Covington, the debtors, or somebody else. I don't believe that's the definition of sharing. I don't believe that's the definition of sharing.

So I think if you truly want to do what the committee is asking, which is, have this policy shared, the relief sought should be granted. If it's to be in a stipulation where it's granted with respect to an individual shared, then people can file their claim. Certainly, but sharing does not mean all the money goes to everybody except for Mr. Banking Free. That's not sharing. Your Honor, I would also note this goes to their argument on terms of the prejudice to the

estate. They're arguing basically that they'd be prejudiced because we would have access to money and they would have the debtors or the other insured would have access to money at the same time. They're suggesting that basically the estate should get all the access to the money first and only if somehow after that there is left over, then the debtors. perhaps someday years in the future you should grant this motion. That is not what the body of law says on this, Your Honor.

I don't believe that's correct. They also made a point with respect to indemnification. And I would just say, Your Honor, any payment of defense costs, and this is from the Allied Digital case, quote, any payment of defense costs will remove any indemnification claim individual defendants would have against Allied Digital. That works for Mr. Banking-Feed as well. Mr. Bankman-Fried does have a potential indemnification.

claim against the debtors. If he receives reimbursement from the insurance proceeds, that satisfies the claim, same as perhaps any of these other individual insureds have. Your Honor, the debtors again made this point about these other parties and I just wanted to state something clearly. They stated in their papers that we inappropriately sought the relief only with respect to the payment of insurance proceeds to Mr. Bankman-Free. Again, Your Honor, from my perspective as Mr. Bankman-Pree's lawyer, that's all I could you. Your Honor, I don't believe it's appropriate. I believe it would in fact be unethical for me to file a motion for relief from this day on behalf of people who I don't know. I can't even identify their names and who actually I believe are being represented by another law firm, Your Honor. I believe I'd be subject to, we'll say lots of problems if I did that. So I think the suggestion that this was inappropriate, particularly when any party could have filed a motion at any time including a few minutes before this hearing, Your Honor, that's not correct.

Last year, Your Honor, the committee suggests that this should be subject to some sort of FIAP. In support of that, they cite to a 2005 case out of Ohio on a 2008 case from Florida. Notably, they failed to cite to any case from Delaware. We have seen no case in Delaware that does that. I'm not suggesting that means they don't exist. As you know, case, there's not the easiest thing to search so it's possible. I don't believe it's appropriate. I don't believe it's appropriate, particularly in this case.

Mr. Bankin-Fried, as you know, is a defendant. in multiple class actions and is a target of multiple government investigations. If he had a file of FIAP setting forth what his lawyers are doing for him, you'd either have one or two situations. Either you'd have to reveal his strategy to the people who are trying to proceed against him, or we would have to essentially redact almost the entire invoice such that what you would have before you would look like a bunch of black lines, is what it looked like. So, Your Honor, I don't believe it's appropriate.

I also believe it shows really the true intent here, and that's just to frustrate Mr. Bankman's ability to defend himself, not only trying to deprive him of the right to proceeds, but then trying to condition it, well, if you can have a right to proceeds, he should have to file a fee out, something that they didn't suggest with respect to any other individual, something that doesn't govern Covington and Burlington right now, as long as their fees are under $200,000.

So it seems like this is, once again, special treatment for Mr. Bankland-Fried. Well, in general, I would say everyone likes to feel special. This is not one of those circumstances here where he should be treated differently. I would say this, Your Honor, if you do believe some type of notice is appropriate so that this court is aware and so that perhaps other parties aware, you could do what was done in one of the cases cited by the committee, and that's the case in Reed Beach, First National Bank shares. It's 451B.BR 406.

In that case, what the court said is the insurers should review fees paid under the defense cost provisions of the policy to ensure that the costs actually relate only to the defense of the directors and officers, and that the fees and expenses were actually incurred and unnecessary and reasonable, and at these five business days prior to dispersing any funds, they should notify, in that case it was a trustee, notify the trustee of the amount of defense costs paid. So basically what the court did in that case is said, told the insurers, do your job, do what your policy requires, to do in what you were presumably doing before the bankruptcy, and right before, as in five business days,

you're going to disperse fund, notify the bankruptcy estate that you're going to search so that people kind of have a running total of what's being done. So if you believe that some type of notice is appropriate so that people kind of know the balance, that I would suggest is a reasonable solution, which would not get into Mr. Bankrupt. If you're anyone else's attorney-client work product

and just general defense strategy issues. Thank you, Your Honor. Thank you. I'm going to take a recess here. I don't know if there's any willingness or desire for the parties to talk to one other about a potential resolution here. I mean, the options are I open this up for, I lift a stay for everybody so people can assert their claim

as it comes in, and the insurance company will decide who paid who doesn't. Another option would be I don't lift the stay, but at the end of the day, at some point in the future, parties come forward and say, well, this is the cost that we incurred at this period of time and so we want reimbursement under the policy, something that effect. The other third option is I just deny the motion. So I don't know if, I'm going to take a recess so you can talk if you want to. I don't know if I'm going to come back and give you a ruling right now.

I may. I may not. But let's take a recess for, let's take a recess until 220 and I'll come back on the record. Yes, sir. Your Honor, I rise only to correct something on the record, Jeff Savin from Venable, representing OKCoyne and their affiliate OKX.

And I am happy for this court's approval and for all the cooperation that we got from debtors' counsel that led to the soon turnover and transfer to these estates of more than $160 million. But the information that was exchanged was all pursuant to a confidentiality. The motion itself and your order doesn't designate

which of the two exchanges otherwise is turning back what money. The accounts themselves are identified in the motion. The letter approves it. And so I don't want anyone on the press listening or anything else to say that it was OK coin as I think inadvertently Mr. Diedrich is referring to that is returning this particular account that has

roughly $150 million. Just wanted to correct the record. Thank you. All right, let's take a recess. We'll come back. Thank you. Your Honor, I think we've all agreed that at least the debtors in the committee have

and we've advised Mr. Bankingfried's counsel that we would just like a ruling from the court. Okay. Well, in order to lift the step, The burden is on the movement to prove cause. And frankly, I have zero evidence to establish cause here. Mr. Bankman-Fried did not put on any evidence whatsoever as to what the balancing of the equities here. What harm is going to occur to him?

I don't know what other insurance policies he has access to. I don't know what other assets he has access to privately that would allow him to cover these costs and then recover them later under this policy I have nothing to show that there was a cause here There's also the burden on mr. Banking free to prove that there would be no harm to the bankruptcy estate that has not been done either and finally that he had the probability of success on the merits and I have absolutely no evidence whatsoever on that either So at this point, I have no choice but to deny the motion for lack of evidence. I'll do so without prejudice.

If Mr. Bankman-Free wants to come back and put on an evidentiary hearing and will establish the elements necessary for me to lift the automatic stay, he's free to do so, but we'll deal with that another day. So for now, the motion is denied. The party should submit a, or Mr. Banking Fried's counsel should submit a form of order denying the motion without prejudice. And we'll go from that. Anything else before we adjourned for the day?

Thank you, Your Honor. Again, Brian Glockstein for the debtors. The only other thing on the agenda today, Your Honor, was still, was item 14, which was the status conference in the emerging case. The parties did submit yesterday afternoon and agreed upon stipulation that the parties worked through since the hearing in March

to address the issues that Your Honor raised at that hearing. That is now agreed and executed as Your Honor saw. We will be submitting that, certainly in the FTCX case and the emergent case and Blocke, would be doing so in New Jersey in its case to get that formally approved by Your Honor as expeditiously as possible so that those stays can go into effect. I did see, I thought, correct me if I'm wrong, but I thought I had read that it's contingent on both courts approving it. It is, Your Honor. To be effective, both courts. So I probably need to call Judge Kaplan and find out when he's going to approve it before.

We're going to have to do it simultaneously, I guess. I know that, I believe the Block Fies Council, but yeah, I mean, I think from our point of view, we don't, and I think Blackfey is an agreement that there isn't any anticipated, certainly, issues there? I wouldn't think so. but yet we will we will submit an order to your honor with his stipulation asked that that be entered other than that I don't unless there's any other matters in the emerging case that your honor wanted to address I don't think there is anything from the parties today okay thank you

I saw you stand up I did your honor Garrett Abbott of Morris Nicholas here for Blockby your honor we're gonna submit it expeditiously I think all parties would like to see it approved by courts as quickly as possible so we'll do whatever we can to make that happen if it's submitted under COC I'll and I can enter it right away I'm not just see I have no problem with I've reviewed it I think it's appropriate and I would enter the order so once it's submitted to me under COC I'll do that we'll do your honor thank you very much okay thank you all very much we are adjourned

thank you thank you