The fallout from the collapse of major crypto exchange FTX continues, as the liquidator attempts to recover nearly $4 billion for creditors from another bankrupt crypto firm, Genesis Global Capital (GGC).
According to Wired, the court in the Southern District of New York will decide on June 15 whether to allow FTX to pursue GGC over payments made shortly before the exchange’s collapse, amid allegations of fraud.
GGC filed for bankruptcy in January, after being caught in the blowback from FTX’s implosion. However, the firm only has about $5 billion in assets, meaning that if the court allows FTX to go ahead, a zero-sum legal battle will ensue. This will result in very low recoveries for Genesis creditors, according to Ram Ahluwalia, CEO of wealth management firm Lumida Wealth.
Crypto Bankruptcies Spark Zero-Sum Legal Battles
The basis of FTX’s claim against GGC is provisioned in US bankruptcy laws designed to ensure that everyone owed money by a failed business receives a fair share. The law gives liquidators the right to recall any payments made by a stricken company in the 90 days before the bankruptcy, to prevent creditors who pull their money out quickest from getting the biggest share of the pot.
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GGC and FTX had a substantial business relationship, with GGC providing loans to Alameda Research, FTX’s sister company, to fund its capital-intensive crypto bets. GGC used FTX for its crypto trading activity, which FTX’s liquidator describes GGC as “one of the main feeder funds” to FTX and therefore “instrumental to its fraudulent business model.”
To fund its loans, GGC borrowed from individuals and institutions that owned large quantities of crypto, who received a cut of the profits in return. But this arrangement, combined with its close ties to FTX, made GGC vulnerable to trouble at the exchange.
Furthermore, GGC had $175 million locked up on the FTX platform at the time of the bankruptcy, and the ensuing panic led to a surge in attempts by customers to redeem crypto from GGC. Unable to meet the influx, GGC was forced to suspend withdrawals as it sought an emergency cash injection, and ultimately, to file for bankruptcy itself.
FTX’s liquidator alleges that Alameda paid GGC $1.8 billion in loan repayments and $270 million in collateral pledges and that the lender and non-bankrupt affiliate GGC International Limited withdrew $1.8 billion from FTX’s trading platform, all in the 90 days before the exchange filed for bankruptcy. FTX now claims that each of these transactions should be reversed.
Legal Experts Skeptical Of FTX’s Chances In Clawback Claim
The Wired report noted that legal experts are skeptical of FTX’s chances in its attempt to claim nearly $4 billion from bankrupt crypto firm Genesis.
Marc Powers, adjunct professor of law at Florida International University, who acted as counsel in the liquidation of Bernie Madoff’s Ponzi scheme, questions why FTX should be more important than any other creditor in the GGC bankruptcy. He believes that the size of FTX’s claim would be extremely disruptive if granted.
The largest of the other GGC creditors is Gemini, the crypto exchange founded by Cameron and Tyler Winklevoss. Gemini’s yield farming service, Gemini Earn, fed into GGC’s loan book, with $900 million of Gemini customers’ assets locked inside when GGC filed for bankruptcy. Gemini has already liquidated $280 million worth of collateral posted by GGC to try to recover funds lost.
If FTX’s clawback claim is successful, the 340,000 Gemini Earn customers will be left significantly out of pocket. However, even if the New York judge allows FTX’s claim to continue, the dispute may never get to court, with clawback cases almost always ending in settlement.
Featured image from Unsplash, chart from TradingView.com
