Sam Bankman-Fried’s Alameda and Voyager Digital part ways in bankruptcy court

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Sam Bankman-Fried, co-founder and managing director of FTX, in Hong Kong, China on Tuesday, May 11, 2021.

Lam Yık | Bloomberg | Getty Images

Sam Bankman-Fried became a crypto billionaire and one of the most famous players in the industry by building the FTX cryptocurrency exchange into a premier site used by traders and investors.

His business was valued at $32 billion in January and currently has more than one million users, averaging nearly $10 billion in daily trading volume. But it’s still private, so the public doesn’t know how badly it’s been damaged by the “crypto winter” of the past few months. For reference, Coinbase, which is public, has lost about two-thirds of its value this year, and mining company Marathon Digital is down more than half.

While Bankman-Fried, who lives in the Bahamas, has the financial advantage of opacity, his exposure to the collapse of the wider industry became evident last week during a five-hour hearing on the Chapter 11 bankruptcy in the Southern District of New York for the embattled crypto brokerage. Digital traveler.

Voyager is among a growing number of crypto firms seeking bankruptcy protection amid a flood of customer withdrawals that followed the fall of bitcoin, ethereum and other digital currencies. Bankman-Fried’s role in the quagmire is further complicated, as he also controls quantitative trading firm Alameda Research, which borrowed hundreds of millions of dollars from Voyager and became a major equity investor before turning around and to offer a rescue plan to the company.

Meanwhile, Bankman-Fried is trying to play the role of industry consolidator, picking up troubled assets both to bet on their eventual recovery and to bolster its presence in the United States. In July, FTX agreed to an option to buy crypto lending firm BlockFi, and two months earlier Bankman-Fried disclosed a 7.6% stake in battered trading app Robinhood. Bloomberg even reported that FTX was trying to buy Robinhood, although Bankman-Fried denied that active talks were underway.

Outside the US, FTX has purchased Japanese crypto exchange Liquid and has been in talks to acquire the owner of South Korean crypto exchange Bithumb.

With its activity on hyperdrive, it has become abundantly clear that Bankman-Fried is not immune to the contagion that has infected the cryptocurrency industry.

Last week, lawyers for Alameda Research and Voyager argued in court over what turned out to be a deep and complex relationship between the two companies. Documents reviewed by CNBC show ties dating back to September 2021. In Voyager bankruptcy papers, the company disclosed that Alameda owed the company more than $370 million, but did not say how long. Alameda was a Voyager borrower.

Voyager filed for bankruptcy in early July after suffering huge losses from its exposure to crypto hedge fund Three Arrows Capital, also known as 3AC, which went bankrupt after defaulting on loans from a number of number of companies in the industry, including over $650 million from Voyager.

Court documents and Voyager’s financials show Alameda went from borrower to lender within weeks after the 3AC debacle left Voyager in dire straits. Bankman-Fried’s company provided a $500 million bailout to Voyager in late June.

Joshua Sussberg, a Kirkland & Ellis partner representing Voyager, said in court that Bankman-Fried “wore many hats” during Voyager’s rapid journey from prosperity to bankruptcy. In fact, weeks after Voyager filed for bankruptcy, FTX and Alameda jointly stepped in as a potential bidder for Voyager’s client accounts, with Bankman-Fried claiming that its priority was to offer them cash.

Bankman-Fried took to Twitter to make his point, turning a usually boring process into something of a circus. Voyager’s legal team were unhappy and suggested the billionaire was trying to build leverage in a potential transaction.

“The parties to our process have expressed their concerns to us specifically that FTX has a head start and is working behind the scenes to find its way,” he said. “I want to assure all parties, the court and our clients, that we will not tolerate this.”

Andrew Dietderich, Alameda’s attorney and partner at Sullivan & Cromwell, said the salvage deal offered a faster timeline than Voyager’s, but was “violently rejected”.

Michael Wiles, U.S. bankruptcy judge for the Southern District of New York, didn’t like the direction the arguments were taking.

Speaking to the lawyers, Wiles said he had no intention of turning the hearings into “some kind of cable news show with people throwing accusations at each other and making extremely racy descriptions. of their previous proposals or discussions”.

Voyager was first a loaner to Alameda

Alameda’s lawyers acknowledged that the business ties between Voyager and their client went deeper than just a loan relationship and that the firm had borrowed approximately $377 million from Voyager.

Voyager’s financial records, which are public because the company’s shares are traded in Canada, appear to show that Alameda originally borrowed significantly more than that. The company’s December 2021 books reference a $1.6 billion crypto asset loan, with rates of 1% to 11%, to a British Virgin Islands-based entity.

Alameda is registered in the British Virgin Islands, with headquarters in Tortola, and is the only counterpart therein. It was one of at least seven entities that borrowed heavily from Voyager. The same Voyager document that revealed 3AC’s default also lists a “Counterparty A”, a company registered in the British Virgin Islands, as owing Voyager $376.784 million. In the company’s bankruptcy submission, the company says Alameda owes Voyager $377 million. In another file, this loan amount is linked to a company with borrowing rates of 1% to 11.5%.

A representative for Voyager declined to comment. Alameda did not respond to a request for comment.

Loan balances at the British Virgin Islands-based fund fell to $728 million in March 2022, representing 36% of crypto assets loaned by Voyager, before dropping to around $377 million three months later. Disclosure data was provided by FactSet and is sourced from Canadian securities regulators.

Voyager’s relationship with Alameda would quickly go from lender to borrower, as 3AC’s default on the $654 million it owed Voyager caused the business to fail.

Alameda stepped in with a bailout on June 22, but with restrictions. The $500 million bailout — $200 million in cash and USDC and about $300 million in bitcoins, based on prevailing market prices — had a capped withdrawal rate, limiting the amount of funding to 75 million dollars over a 30-day period.

Alameda’s lawyers said in court Thursday that the loan was made “unsecured” at the specific request of Voyager management.

By this time, Bankman-Fried was already a major shareholder in Voyager thanks to two equity investments from Alameda.

At the end of 2021, Alameda completed a $75 million stock purchase, obtaining 7.72 million shares at $9.71 apiece, according to Voyager’s filing for the period ending Dec. 31. In May of this year, Alameda spent another $35 million on about 15 million shares as the stock price plunged to $2.34.

The combined purchases gave Alameda an 11.56% stake in Voyager and made it the largest shareholder. The following month, when Alameda completed the bailout, its $110 million equity investment was worth only about $17 million.

As the holder of at least 10% of the shares of Voyager, Alameda was required to file declarations with the Canadian securities authorities. But on June 22, the day of the bailout, Alameda divested a block of 4.5 million shares, reducing its stake to 9.49% and waiving reporting requirements, in accordance with Canadian regulations and Voyager’s own record. This same filing shows that the surrendered shares “were subsequently canceled by Voyager”.

The disclosure of the sale said that by bringing its ownership below the 10% threshold, Alameda was selling a 2.29% stake worth approximately $2.6 million.

The bankruptcy of Voyager

Neither Bankman-Fried’s capital injection nor rescue financing could stem the tide, as customer buyouts swallowed up Voyager’s money. Nine days after announcing the $500 million package, Voyager froze customer withdrawals and transactions. On July 6, Voyager filed for Chapter 11 bankruptcy.

To reassure the platform’s millions of users, Voyager CEO Stephen Ehrlich tweeted that after the company filed for bankruptcy, members with crypto in their account would potentially be eligible for a bag of things, including a combination of a certain amount of their holdings, common stock in the revamped Voyager, Voyager tokens, and any proceeds they might get from the now-defunct loan to 3AC.

None of this is guaranteed. Voyager customers won a small victory in bankruptcy court on Thursday, after the court granted them access to $270 million in cash Voyager was holding with the Metropolitan Commercial Bank. Users, however, are still out of luck with everything else.

Bankman-Fried says he’s here to help clients get back on their feet and recover what they can. Voyager’s attorneys, meanwhile, describe the FTX-Alameda offer as a discount sale.

Whatever happens, this could be Bankman-Fried’s latest best shot at extracting some value from his heavy financial commitment. In a July press release, he tried to spin his offer into a benefit for Voyager customers who suddenly found themselves in an “insolvent crypto firm.”

Bankman-Fried said in the statement that the deal would allow Voyager customers to “quickly obtain liquidity and recover some of their assets without requiring them to speculate on bankruptcy outcomes and take one-sided risks.” .

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