American court hearing recordings and interviews - Season 2. Episode 9. November 29, 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: December 1, 2023

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Thank you. Please be seated. Mr. Landis. Good afternoon, Your Honor, and may it please the Court. Adam Landis from Landis, Rath, and Cobb, on behalf of FtX Trading Limited and its associated debtors. We have one matter on the agenda today, Your Honor, which may seem a little unusual, considering how we've come to court before. Item number one is the debtors' motion for entry of an order approving procedures

and subsequent sale in connection with those procedures, of certain trust assets. Ms. Cranesley from Sullivan and Cromo will present the motion in argument today, and I will yield the podium to her. Okay, thank you. Good afternoon, Your Honor. Your Honor, as Mr. Landis indicated,

there's only one item on the agenda, and that's the sale motion at docket number 3660 for entry of an order approving procedures for the sale of shares in certain third-party statutory trusts and the sale of these assets free and clear of means, interest, claims, and encumbrances. Your Honor, we had three declarations filed in support of the motion, two with the original motion, one from Mr. Ed Mosley attaches Exhibit B to the motion, and one for Mr. Stephen Kurz, attaches Exhibit C to the motion,

and a supplemental declaration from Mr. Mosley filed in connection with the debtor's reply at docket number 4108. Both Mr. Mosley and Mr. Kurz are in the courtroom today, and at this time the debtors request that the three declarations be moved into evidence. Is there any objection? Are there admitted without objection? Thank you, Your Honor. Your Honor, we received informal comments from the United States Trustee and two filed objections to the motion. We were able to consensually resolve both the informal comments from the United States

Trustee as well as the limited objection from Blockby. These consensual resolutions were reflected in the revised form of order filed as Exhibit A to the debtor's reply at docket number 4107. With respect to the U.S. trustees' comments, we added in additional reporting requirements with respect to these sales in paragraphs 2A and 2E. With respect to BlockFi, we agreed to include additional language in paragraph 6 to clarify that to the extent that BlockFi has a valid lien on the assets, then BlockFi will have a lien against the proceeds from the sale of the assets with the same validity, priority,

force, and effect subject to the party's rights, claims, and defenses. As the court's aware, the debtors contest the validity of block-by's lanes, and that dispute will be resolved in due course, but not in connection with this motion. This leaves the remaining objector, Mr. John Mallon. Your Honor, we reached out to Mr. Malin yesterday and had a discussion in advance of the hearing to attempt to resolve his objection, but unfortunately we were not able to do so. We anticipate that we will continue to discuss with Mr. Malin after this hearing to attempt to resolve the issues regarding his claim.

Your Honor, I set forth in the motion we're seeking to sell trust shares in five statutory trusts managed by Grayscale and one statutory trust managed by Bitwise investment. The debtors are seeking to monetize all of these trust assets in anticipation of making dollarized distributions in connection with the Chapter 11 plan. Mr. Malin's objection is that he, as a customer of the debtors, holds tokenized shares of the grayscale Bitcoin Trust and therefore has an interest in the debtors' grayscale Bitcoin Trust shares that the debtors are seeking to sell. He holds tokenized shares or spot tokens, but not the actual shares of the grayscale

Bitcoin Trust. Pre-petition, certain of the debtors' non-U.S. customers on the FTX Exchange were able to hold tokenized shares or spot tokens on their FTX Exchange accounts. These are tokens where the holder has an interest in the underlying stock, but hold the token and not the actual underlying stock themselves. The underlying stock would have been custody by a third party. In other words, Mr. Malin's digital asset that he holds on his FTCS exchange account is the tokenized share of grayscale Bitcoin Trust, not the grayscale Bitcoin Trust assets,

which are themselves not digital assets. Those digital assets that Mr. Malin holds entitle him to a claim for those tokenized shares. Mr. Malin, in his untimely reply filed today, acknowledges and agrees with these positions. His objection and further reply focus on the validity and the amount of his claim against the debtors. These are not issues for today. Mr. Malin has a claim on account of his tokenized shares and nothing in the debtor's request to sell the trust assets, affect his claim. The debtor's position is that this is a dollarized claim and Mr. Mallin will have the opportunity to object to and to respond to this position in connection with

allowance of his claim. Additionally, nothing in his claim prevents the debtors from selling these assets that are held in the debtor's name. Mr. Mallon does not have any entitlement to these particular assets. He references this point in his reply filed today. In paragraph 6 of his reply, he states that he has a claim against the debtor's assets regarding shares of gray-scale Bitcoin Trust and is not particular about which exact shares are used to satisfy the claim. The shares are fungible. As a result, Mr. Mallin has not provided any evidence of a property or security interest to the underlying trust shares the debtors are seeking authorization to sell. This is not a valid property or security interest on the trust themselves. His interest is in the value of the tokenized shares.

And, Your Honor, the debtors submit that Mr. Mallon is not prejudiced by the sale of the trust assets. To the extent that Mr. Mallon does have any specific interest or claim in the trust assets, paragraph six of the proposed form of order, provides that any such interest or claim on the trust assets would attach to the proceeds with the same. same priority force and effect subject to the debtors and all other parties' rights, claims, and defenses. Additionally, to the extent that Mr. Mallin does have any specific interest in the trust assets, which the debtors dispute, the debtors have satisfied Section 363F of the Bankruptcy

Code to sell these assets free and clear. To the extent that Mr. Malin has an interest, 363F4 is satisfied as his interest is subject to a bona fide dispute with the debtors. And finally, to address one of the points raised in Mr. Mallin's reply file today regarding his claim in a restart of operations, whether or not there is a future exchange is irrelevant for purposes of this sale motion. Regardless of whether customers will have the option to take distributions on any new exchange in connection with planned distributions, the Debtors Chapter 11 plan provides for

dollarized distributions to all customers. To the extent that Mr. Mallon disputes this, this is not an issue for this motion, and Mr. Mallon will have the opportunity to raise objections to this in connection with the plan at the appropriate time. Your Honor, I'm happy to address any questions that Your Honor has. We understand that both the creditors committee and the ad hoc committee support our requested relief today. No questions at this time. Let me see if the committee and the ad hoc committee want to be heard. Well, first let me ask if BlockFi and the U.S. trustee want to be heard on their resolution of their objections. Good afternoon, Your Honor, Jonathan Lipshey, U.S. trustee's office.

As Ms. Cranesley said, we worked at our issues with the debtor. Okay. Thank you. Anything from Blockfi? If not. Okay. All right, let me hear from committee. Good afternoon, Your Honor.

For the record, Robert Poppity from Young Connoe, Stargant, and Taylor. on behalf of the official committee on secure creditors. Ms. Cranesley is correct, Your Honor. The committee does support the relief that's requested in the motion and asked to the issues that have been raised in Mr. Malins' papers. We defer to the debtors on those, Your Honors. They're much closer to those, but we do support the relief requested and believe it's appropriate.

Okay, thank you. Good afternoon, Your Honor, and may it please the Court, Matthew Harvey from Morris Nichols-Artson-Tunnel on behalf of the Adhock Committee. We, too, support the relief as requested by the debtors. Okay, thank you, Your Honor. Mr. Malin, are you on the line? Mr. Malin? Yes, Your Honor, I am on the line.

Can you turn on your camera please? Malin, this is your opportunity to argue your objection. Well, Your Honor, the points that Ms. Cransley raised in her presentation, they're essentially affording the same courtesy to myself and others similarly situated that, you know, that but argue our point further down the line in terms of the proceeds of any sale is something that is, you know, good in terms of the points that were relying the objection. But I think the thing that needs to be resolved is that the value of proceeds, that's it, that's it, that is attached in sale, because obviously the argument goes to the fact that

token holders like myself pursuant to the documentation upon which we purchase the tokens, we would like to redeem the underlying share because as investors would like to kind of take our own destiny into our hands and deal with the asset that we were promised by the debtors companies before they file for protection in the court. And if the debtors are allowed to sell those assets, we don't kind of have that freedom to do what we want with with our shares and the argument there is that the debtors are kind of maximizing the value

of the shares in an elevated market, and dollarizing our claims or at least attempting to do so at much lower prices. And that's kind of inequitable from that perspective because we're allowed to essentially maximize the value of the estate from a dollarized basis, but essentially undermine legitimate claims in the underlying assets that they're selling to make that money. and dollarizing the claims at the petition date. So that's essentially the proof of the objection. But as I've communicated to the debtors in my communications, definitely open to discussing, however, that can be resolved in an equitable way.

But if the debtors want to sell GDPC at $3150 and pay us out at $8, and that just doesn't seem right, it doesn't seem appropriate, especially given the exact nature that the token product would purchase and the documentation that supported that they could be freely redeemed at any time, it doesn't seem equitable to allow that to proceed, but not going to profess that I am learned in bankruptcy procedure, but just from a from a from a from a lay perspective, if that could be resolved in a way that protects the interest that was prompted to token holders

and allows value to be returned to the estate. And that is something that could be discussed. And I hope as the left, Mr. Franzzi, sorry, pointed out then we would like to continue discussions. But the crux of the objection was the disposal of assets that may be owed to customers in a way that dollarization kind of doesn't do justice to. And I'm happy to add any more information if court requires it or if it hasn't, or if the court has any questions about this objection. but that would be about the totality of what I have to add at this point. Mr. Malin, how much, how many of these tokens do you hold? And what's the value of them?

If it pleased the court, I'd prefer not to submit that to open court, but happy to engage in discussions after the hearing about that. But it's pennies on the value of what the estate is trying to make from these sales. And I think in my reply today, I did request, that debtors make available to genuinely intracted customers the information essentially about what underlying shares FTX Europe and FTCSterland may have had, may currently have an opposition within the estate of shares may be, and also perhaps a total valuation of customer claims that are made up in part or in whole by tokens.

So we can get a fuller picture of what is the liability here because it's not a, It's not my intention to obstruct proceedings and prevent value being claimed at prices that these shares should be sold at in my non-professional viewpoint. So it's not my desire to prevent the whole of creditors in this FTX situation from getting as much as they need to. But the point of the objection is this is a separate customer class. This is a customer class that had to do KYC with FTX, which is a separate KYC process. It was a separate KYC process. You could not trade in these tokens

if you did not do this advanced KYC process to become a customer of the broker. And in my opinion, that has to count for something. If the shares are in the estate, this is the wholly owned subsidiary of the FDX trading group. If you look down the chain, it's completely controlled by the debtors. They made promises to customers that if you buy these tokens, they will be backed by the underlying asset.

And essentially, that doesn't seem to have been the case. And if it is the case, we would request information about what shares are whole are held in the estate. Because if it's the case that we can stop objecting to motions and stop interfering with the process like we are now, because we know that our small claims relative to the estate valuation, are being protected, then great. And we would happily welcome resolving it in that fashion such that we know that our interest can be protected because traders are patient and they can wait a long time

for things to play out. And it's just the, it will be the certainty of knowing that our claims will be protected in the way that they should be because of the way that the products were sold and marketed and held out customers and how customer funds were solicited in a particular way, the claims about the underlying.

mind being backed and the KYC procedures that can't be for nothing so that would be the the request at this time if the motion is to proceed would be that genuine discussions are hard to stand this unique customer class and maybe perhaps you know find the way to resolve this outside of the process because I don't have the numbers I can't imagine as a fraction of the 10 billion. This is a massive customer class. Thank you, Mr. Mellon. Thank you very much. I appreciate that.

Just a few points in response. We are happy to continue discussing with Mr. Malin and to resolve issues regarding his particular claim. But the debtor's view is that this is not a separate class. This is the same customer entitlement claim. He has a digital asset, which is in the fold of the tokenized share, and that's the claim against the debtors. There's no separate entitlement directly from his tokenized share to the actual shares we're looking to sell.

We're not trying to determine the amount of his claim today. We're happy to continue discussing that. To the extent that Mr. Mallon is correct, that it's at $31 instead of some lower amount, the debtors have lots of cash that is available for distribution to all creditors under the plan. Where are the tokenized shares held? They're currently held in the brokerage account. in brokerage accounts at EDF Mann and at Dell Tech. And those are not being liquidated pursuant to this plan?

Oh, sorry, the tokenized shares themselves, those are digital assets that I think are held in cold. The tokenized shares themselves are in cold storage. Those are not being sold. Those are not being sold. No, the tokenized shares are not being sold. So anything that Mr. Malin holds in tokenized shares are going to remain in the cold wallet?

That's correct. Okay. All right, thank you. Your Honor, could I make one more point? Go ahead, Mr. Malin. The tokenized shares are not really a cryptocurrency in the sense that they had no value outside of the FPX universe. It wasn't like a Bitcoin or an Ethereum that is fungible to the set to the point where it could be transferred and is held in coal storage. As far as I'm concerned, the tokenized shares, the GVTC token was GVTCUSD.

That was not something that could be withdrawn from FTS. It was very clear in the documentation that that was something that they were looking at facilitating between exchanges in future if the tokenized share market was to grow. For example, finance might have its own tokenized share market where you could get a better price for your token and you might transfer it there to kind of arbitrage a different price opportunity. opportunity. GBTUSD as a token didn't really exist. So it would be probably more appropriate to consider it as essentially just a claim, like a claim on the estate because I would question whether the GBTUSD token is held in full storage because I don't think that was possible under the architecture of the tokens

that existed. They were merely representations on a screen essentially, but the underlying point is that they were in the documentation promised and held out as being backed by the underlying shares, some or all of which are proposed to be sold in the motion today. I think that's an important distinction that token holders essentially just have a claim on the underlying slash a claim at whatever values to be determined in the future against the estate assets. They're not cryptocurrencies like Bitcoin that can be sent to any exchange and that would have any utility in any way other than just being a claim against the estate.

I think that's an important distinction to draw. Okay. All right, thank you, Mr. Melon. All right. I'm going to overrule the objection, Mr. Malin, because I think the debtors have presented evidence to show that they have the ownership interest and the assets that they are going to be proposing to sell.

At the best, you have established that there may be a bona fide dispute, dispute as to the ownership of the shares, but under the terms of the bankruptcy code 363F4 specifically, it allows for the debtor to dispose of property of the estate if it is subject to a bona fide dispute and the debtors can establish that in their business judgment the disposal of those assets is in the best interest of the estate overall. And the evidence submitted by the debtors supports that conclusion. that this is in the best interest of the estate,

and it is the bona fide business judgment of the debtors that disposal of these assets will benefit the estate as a whole. I take Ms. Cranz-a-Lead-Word. She will continue to talk to you about this issue and see if there are other ways to resolve your concerns. But at this point, I'm going to approve the motion and allow the debtors to proceed with the procedures that they have outlined for disposing of these assets. Questions. Mr. Mallon, just one other thing.

I know you talk about that you are speaking on behalf of other similarly situated parties, but because you are appearing pro se, and we have no class action at this point, I can only allow you to speak on behalf of yourself and nobody else. So I just want to make sure you understand that. You cannot speak for other people in connection with these proceedings. That's a good. Apologies for my miss speaking. Just to note that there are other people like this, and it's more to highlight that there's a customer class out there, but in future I will only speak about myself.

I understand. I would suggest if you can get other folks together that it would be in your best interest to try to retain counsel to help you through this process because it can be complicated and onerous and it certainly would be beneficial to you to have counsel to help walk you through these issues. It might also help with discussions with the debtors if they're dealing with knowledgeable counsel about the issues as well. Anything else before we can? Thank you all very much. We are adjourned, and everyone have a great weekend. You've finally broken loose from work. Three friends, one tea time, and then the text.

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