Legal fight escalates around 'collusion' between Bankman-Fried and Bahamian government

A federal bankruptcy judge will hear evidence about the potentially criminal movement of assets out of FTX and its affiliated companies, in what is the latest escalation of a heated legal struggle between the failed crypto firm new leadership and federally indicted former CEO Sam Bankman-Fried.

New FTX CEO John Ray III and lawyers from the firm Sullivan and Cromwell, who represent the company in the Chapter 11 bankruptcy process, have alleged that Bankman-Fried, FTX co-founder Gary Wang and the Bahamian government have colluded to shield hundreds of millions of dollars worth of assets from U.S. court proceedings.

Because of that, they want to block ongoing access for lawyers representing FTX Digital Markets, the Bahamian operation that handled much of the failed corporate empire’s digital asset trades, to computer systems of that subsidiary. FTX DM was the branch of the company that lost hundreds of millions of dollars in assets hours after Bankman-Fried moved his companies into bankruptcy protection; the Bahamian Securities Commission, a financial regulator, said days later that it now held a large portion of those assets in a cold wallet.

“We believe that any dynamic access will be provided immediately to the government of the Bahamas and, particularly, the Securities Commission,” argued James Bromley, a Sullivan and Cromwell partner representing FTX, to Judge John Dorsey of the U.S. Bankruptcy Court, District of Delaware.

Bromley noted that previous access given to the commission has led to the movement of hundreds of millions of dollars worth of assets out of FTX and into the control of the Bahamian regulator. This was done in a way that may violate U.S. bankruptcy law meant to maintain assets in place to eventually recoup funds for anyone who lost money in the failure of companies. The Sullivan and Cromwell partner suggested providing "static access" from the systems rather than "dynamic," ongoing access.

Chris Shore, a lawyer hired to liquidate the Bahamian operation, took issue with Bromley’s characterization while asking the judge for continuous access to FTX DM’s systems. The bar should not be set where the liquidators, “must prove that there was no collusion between the commission and SBF,” before getting access to the computer systems.

The full hearing on the subject, scheduled for Jan. 6, adds another item to Bankman-Fried’s long list of legal concerns, while accusations of operating in bad faith have also been made against lawyers he hired for the Bahamian operation, and the Bahamian government itself. The Jan. 6 hearing could include witnesses, possibly including Bankman-Fried, depending on the status of his other legal proceedings. The scandal-ridden crypto mogul was arrested by Bahamian authorities and denied bail last night.

But Judge Dorsey asked lawyers representing FTX, the lawyers hired by Sam Bankman-Fried to liquidate FTX DM, and representatives of the Bahamian government to try to resolve the issue

Lawyers representing FTX in bankruptcy filed documents on Monday showing emails between Bankman-Fried and Bahamian Attorney General Ryan Pinder in which Bankman-Fried offers to make Bahamian customers whole before those from other countries. The company’s lawyers connect that correspondence to the movement of hundreds of millions of dollars worth of assets, and say that Bankman-Fried and Wang minted new tokens and included them in the assets that they transferred to the Bahamian government after filing for U.S. bankruptcy, which requires the freezing of assets.

Pinder and the Securities Commission have said they do not recognize the bankruptcy process that the majority of companies that fall under the FTX corporate umbrella have entered, and maintain their own jurisdiction over the Bahamian operation.

The judge is also delaying arguments around making public the names of some of the entities that FTX and its affiliates owe money to. The company has objected, saying that its lists of customers are a valuable asset that can be sold to then repay money for those affected by the collapse, and that there are privacy concerns related to a public listing, especially for individuals. Lawyers for the U.S. government have argued that the businesses FTX and its affiliates owe the most money should be made public as part of standard bankruptcy practice.

Those arguments will now take place after a committee of customers affected by FTX’s collapse, known as a creditor committee, can be established. A representative for the U.S. government said that forming a committee has been difficult due to the geographical dispersion of the failed company's customers. 

But Judge Dorsey kept a hearing in the case scheduled for Friday at 10 a.m. EST in case lawyers to hear further arguments around the computer access issue if a resolution can't be reached outside of court.