FTX U.S. judge expresses doubts about parallel Bahamian bankruptcy

By Dietrich Knauth

NEW YORK (Reuters) – The judge overseeing FTX’s U.S. bankruptcy said Thursday that he would not defer to a Bahamian court about key issues like which FTX entity should collect assets and repay customers of the bankrupt crypto exchange.

Liquidators for FTX Digital Markets, the exchange’s Bahamas-based subsidiary, have asked U.S. Bankruptcy Judge John Dorsey to let them seek a ruling from the Bahamas Supreme Court that their company controlled FTX.com’s crypto exchange for international customers.

FTX’s U.S. bankruptcy team seeks to block the Bahamas litigation, calling it a power grab that would derail the company’s ongoing efforts to repay customers.

Dorsey questioned the value of a Bahamian court ruling during a Thursday court hearing in Wilmington, Delaware, saying that he would retain authority over the $7 billion in assets recovered by the U.S. debtors no matter what the Bahamian court rules. Both courts would have to sign off before any assets transfer from the U.S. to the Bahamas, Dorsey said.

It doesn’t go to FTX Digital until I say it goes to FTX Digital,” Dorsey said. So what are we gaining by having two parallel proceedings in two separate courts?”

Chris Shore, an attorney for the Bahamian liquidators, said that a Bahamas court ruling would clarify each side’s responsibilities and provide a framework for cooperation between the U.S. bankruptcy case and involuntary insolvency proceedings in the Bahamas.

The Bahamian insolvency case began one day before FTX Trading and more than 100 affiliates filed for bankruptcy protection in Delaware to address claims that the company misused and lost billions in customers’ crypto deposits.

Dorsey said he would make a final ruling Friday, and he encouraged the two sides to try to reach an agreement on the dispute overnight.

The sides offered very different descriptions of how important FTX Digital was to the crypto exchange’s operations.

The Bahamian liquidators argue that FTX Digital took on a central role when the FTX companies moved their headquarters to the Bahamas from Hong Kong in 2021, ultimately taking responsibility for all of FTX’s non-U.S. customers. A court ruling in their favor could place the Bahamian company, and not the U.S. debtors, in charge of collecting assets and deciding how to distribute them to FTX customers.

FTX’s U.S.-based bankruptcy team argues that the Bahamian affiliate was a “corporate shell” and the “centerpiece” of founder Sam Bankman-Fried’s effort to funnel FTX customer deposits “out of the reach of American regulators and courts.

FTX founder Bankman-Fried and several company insiders have been indicted on fraud charges for their role in the company’s collapse. In contrast to Bankman-Fried’s not-guilty plea, the former members of his inner circle have pleaded guilty and agreed to cooperate with prosecutors.

The case is FTX Trading, U.S. Bankruptcy Court for the District of Delaware, No. 22-11068.

For FTX: Andy Dietderich, Brian Glueckstein and James Bromley of Sullivan & Cromwell

For the Bahamian liquidators: Chris Shore of White & Case

(Reporting by Dietrich Knauth)