Good? And now you can hear me. Okay. One small change on the pre-trial order is you identified
me as the Chief Bankruptcy Judge at one point. I had to correct that.
Your Honor, no battlefield promotion. That was unintended.
I don't want it either. I'm sure your time will come.
So with that, Your Honor, I would see the podium to Ms. Sarkeesian, the movement, and
we'll proceed following her lead. Okay. And just a reminder for those on Zoom, this
is a formal court proceeding. You are participating in a formal manner, so you need to keep your
video off unless I call on you to speak and your audio should remain off at all times.
If any interruptions will not be tolerated, then you will be removed if you interrupt
the proceedings. So with that, Ms. Sarkeesian, go ahead.
Thank you, Your Honor. Good morning. For the record, Juliet Sarkeesian on behalf of the
U.S. Trustee. Are there microphones on there too? Okay.
Hopefully this is working. I can hear you now.
So, Your Honor, the Council for the Parties in Interest had discussed and we wanted to
present to you a proposal that we would each start with not more than a 10-minute opening
if it pleases the court, followed by evidence and then closing statements. Is that acceptable?
Yes, absolutely. Also, Your Honor, in the joint pretrial order,
the U.S. Trustee included two motions in limine. Would Your Honor, when would Your Honor like
to hear those? Well, before we start the evidence, so let's
do the openings and then we'll do the motions in limine.
Thank you, Your Honor. The U.S. Trustee has moved to appoint an examiner
in these cases under both 1104C1 and 1104C2. As the U.S. Trustee has argued in its motion
and reply, Section 1104C2 of the Bankruptcy Code mandates the appointment of an examiner
in a debtor's case if there is no trustee appointed, no Chapter 11 plan has been confirmed,
a party in interest or the U.S. Trustee has requested the appointment of an examiner,
and the debtor has fixed liquidated unsecured debts other than for debt,
the debts for goods, services or taxes for owing to an insider that exceed $5 million.
All of these elements have been made in this case. I think everybody can agree there's
no trustee and there's no Chapter 11 plan, and the U.S. Trustee has requested an examiner.
All of the objectors, the debtors, the committee and the Joint Provisional Liquidators,
have all stipulated that the $5 million threshold has been met under 1104C2 for three debtors,
West Realm Shires, Inc., FTX Trading LTD and Alameda Research LLC. As to the other debtors,
the objecting parties do not stipulate that the $5 million threshold has been met because
they are not currently in a position to make that determination. However, the objecting
parties stipulate they are not contesting the examiner motion on the basis that the
$5 million threshold has not been met for those other debtors. So based on the stipulated
facts alone, the U.S. Trustee believes that the code does mandate the appointment of an
examiner in these cases under 1104C2. The objectors argue that in addition to the elements
that I've just set forth, the code has an additional requirement, which is that the
court find the appointment of an examiner is appropriate in these cases. While the U.S.
Trustee believes that the evidence will establish that an examiner is appropriate in these
cases, the U.S. Trustee does not believe that the code requires a finding of appropriateness
for either C2 or C1 for the reasons set forth in the U.S. Trustee's reply brief, which I
will touch on. The objectors' reading of the statutes would mean that the only time that
C2 would be applicable is if the $5 million threshold was met and it was not in the best
interest of the creditors to have an examiner, because if it was, then it would go under
C1. But so that even though it was not in the best interest of the creditors, it was
nevertheless appropriate to appoint an examiner. So that, if appropriateness is a requirement,
that would be the only time that C2 would apply. It's not in the, the threshold's been
met, it's not in the best interest of the creditors, but it's somehow still appropriate.
That, it's rather difficult to imagine what that situation would be. In addition, the
wording of 1104C is that the court shall order the appointment of an examiner to conduct
such an investigation of the debtors as is appropriate. I will note that it does not
say if it is appropriate, which is different, and that's how the objectors are interpreting
it. The U.S. trustee along with the majority of the published opinions have addressed,
that have addressed that issue, do not interpret as is appropriate to mean if it is appropriate,
but rather as is appropriate to modify the term directly before it, which is an investigation.
So in other words, as is appropriate relates to the scope of the investigation, an appropriate
scope of the investigation, not whether an examiner shall be appointed if the requirements
of 1104C, 1 or C2 were met. And I think it's also important to note that 1104C2 does not
provide for the examiner, for an examiner in every case in which a debtor has debts that
exceed 5 million. It's much more narrow than that. To be counted to the 5 million, it has
to be unsecured, fixed, liquidated, and for debts other than goods, services, or taxes,
and not be owned to an insider. Not being for goods or services is a pretty significant
factor. So it's much more stringent than just having over 5 million dollars in debt.
That's my way, Your Honor, of saying that 1104C2 does not mandate that an examiner be
appointed in every case in which the debtor has more than 5 million dollars in debt in
anybody requested. That would be virtually every case that's before this court, I would
imagine. But it's much more narrow than that. And here, again, they've stipulated, there's
no question, that that 5 million dollar threshold with all of the qualifying terms have been
met, at least for the three, and they're not contesting for the others. So, Your Honor,
I would ask if the court is now prepared to make a ruling on whether 1104C2 mandates the
appointment of an examiner in these cases, because if the court so rules, then there
would be no need for an evidentiary hearing.
Well, I'm not going to make that ruling now, but I will give you the opportunity to argue
that in close.
Thank you, Your Honor. Your Honor, the U.S. Trustee also believes that the requirements
for 1104C1 have been met because the appointment of an examiner is in the best interest of
creditors and other parties in interest, as has been demonstrated by the testimony of
Mr. Ray, Mr. Mosley, by way of declaration, which we will be admitting, as well as Mr.
Ray's testimony before the House Financial Services Committee. The U.S. Trustee will
reserve the remainder of the argument for closing, unless Your Honor has any questions
at this time.
No, I'll save my questions for closing. Thank you.
Thank you, Your Honor.
Good morning, Your Honor. Jim Bromley of Sullivan.
I'm Jim Bromley of Sullivan and Cromwell on behalf of the FTX debtors, so may it please
the court.
Your Honor, the question that the United States Trustee has posited, whether or not we are
in a world of mandatory rulings, is one that unfortunately the U.S. Trustee mischaracterizes
in terms of both the statute, the statutory language, and the precedent that exists. If
you focus first on the statute, Your Honor, before you get to see one or see two, the
word appropriate is in the statute. As is appropriate is the phrase. And that phrase,
as is appropriate, has not been determined by the Revco decision in the Sixth Circuit,
the only circuit decision that the U.S. Trustee hangs so many hats on. In fact, if you go
to the Revco decision, it's about three pages long. The 20 minutes that the Sixth Circuit
spent on writing the Revco decision should not be controlling the decision as to whether
or not this court or any other court should be appointing an examiner as a mandatory matter
so long as a $5 million threshold is met. Notwithstanding the U.S. Trustee's most recent
comments, the $5 million threshold is but a peppercorn when we're dealing with super
mega cases like we have here. Good bless you.
So when we're talking about cases of this size and scope and magnitude, it's virtually
certain that a $5 million threshold is going to be met, and therefore, under the rule that
is proposed by the U.S. Trustee, it's virtually certain that an examiner is going to be appointed
in every case. And remember, Your Honor, we may be sitting here today with the U.S. Trustee,
but the statute is written in terms of any party in interest for the U.S. Trustee. The
vast majority of examiners are requested by parties in interest who have a particular
point to advocate, a particular act to grind. If we simply adopted the United States
Trustee's point that if you meet the $5 million threshold, an appointment of an examiner is
mandatory, then we're going to have an examiner in virtually every case. And indeed, the precedent
here in the District of Delaware is very instructive and virtually ignored by the U.S.
Trustee. Court after court and matter after matter, including Your Honor, has ruled that
1104 does not require the appointment of an examiner if the $5 million threshold has been met.
Judge Sanchi, Judge Walrath, Judge Gross, Judge Carey, yourself, Judge Silverstein,
this is not a happenstance, this is a rule in the District. The U.S. Trustee makes a
great deal of pay about the fact that there's not a written decision, a published decision.
That, with all due respect, ignores the practice that we all engage in, which is that we have
here in case after case situations where we ask bankruptcy judges to make rulings and
many of those rulings come from the bench and we consistently look at those rulings
as binding precedent. And it's not as if one decision came up or one comment came out,
but we have a consistency here over a 15-year period and longer, even back to Judge Walsh.
That is what the law is here in the District of Delaware. And we shouldn't lose sight
of what's happening here today. This isn't about FTX. This is about the United States
Trustee's Office out of Washington looking to make a matter of national policy.
No, no, I'm sorry, I'm going to object to that. It's opening. We'll see if he can sustain
it with evidence. He can make whatever comments he likes in opening.
So, Your Honor, what we are looking at here is not about FTX. Matter of fact, since we've
been in front of Your Honor since November 11, I would say 80 or 90 percent of the time
we have spent in court has been dealing with issues that have been raised by the United
States Trustee, whether it has to do with the creditor matrix, whether it has to do
with 2004 requests that we filed. We had an objection filed over the weekend to a 2004
request to take discovery from Sam Bank and Free. What the U.S. Trustee is doing here
in this case is seeking not simply to be a watchdog, but to be a participant in a manner
that effectively replaces the Official Committee of Unsecured Creditors that they themselves
have appointed. There is nothing in the statute that talks about a true neutral. There's
nothing in the statute that talks about there needing to be an independent party that is
standing outside of the four corners of the debtors when the facts will show that the
four corners of these debtors is controlled by an independent Chief Executive Officer,
an independent Board of Directors, both of whom were appointed after the petition date
or on the petition date and after. The facts are going to show, Your Honor, that it is
not appropriate in this case. It is not appropriate in this case to appoint an examiner. It's
not appropriate in this case to conduct any investigation at this moment in time. Mr.
Wray will testify that there are enormous efforts that have been made since the beginning
of the case to investigate the facts and circumstances that gave rise to these violence. Mr. Wray
is going to testify that the cybersecurity environment that characterizes these debtors
is unique, that to allow anyone else into that cybersecurity environment will jeopardize
the security of everything that has gone forward and everything that will go forward. With
all due respect, the U.S. Trustee's Office views this as if we have a warehouse full
of sacks of potatoes. We do not. We have a virtual environment that is filled with code,
and even looking at that code puts at risk everything about the cybersecurity environment.
The investigation is not simply a legal investigation. It's not simply an accounting investigation.
It is a technology investigation. The facts and circumstances here make it very clear,
Your Honor, that if there's a case where an examiner is not appropriate, it's this case.
Thank you.
Anyone else want to make an opening?
Good morning, Your Honor. Ken Pasquale from Paul Hastings with the Official Committee
of Unsecured Creditors. Let me just start by saying, and I'll save some time, I agree
with Mr. Bromley's comments with respect to the discretionary nature of the statute. Perhaps
talk some more about that in closing. I only wanted to make a couple of very brief points
in opening. We all recognize that this is a unique case, and it's unique in two particular
ways, I believe, with respect to the U.S. Trustee's motion for an examiner. First,
as Mr. Bromley just alluded to, and we will hear testimony regarding, the debtors are
controlled by entirely new management and boards of directors that were installed literally
on the eve of the bankruptcy cases. None of the alleged bad actors remain with the company.
The new management group's task is not only to investigate what happened pre-petition
as would an examiner, but also unlike an examiner, to act upon that investigation and with the
committee, evaluate and prosecute claims to maximize recoveries for all of the stakeholders
of these states. Secondly, unlike many other cases involving fraud in which an examiner
was found to be appropriate, here there's only one class of creditors, the unsecured
creditors. These debtors do not have any secured debt. It's the committee's statutory and
fiduciary obligation to investigate what occurred pre-petition for the benefit of those unsecured
creditors, customers and other creditors alike. And given the capital structure here, the
committee has no incentive or reason to use an investigation for a strategic advantage
in planned negotiations or otherwise, as the U.S. Trustee asserts in her motion, in its
motion, excuse me. The committee is perfectly positioned to investigate in these cases with
the debtors and as necessary individually. Accordingly, Your Honor, and as you'll hear
in closings and after the proof, we do not believe it is appropriate in the circumstances
of this case to appoint an examiner. And unless the Court has questions now, I'll reserve
further comments for closing.
Thank you. No questions.
Thank you, Your Honor.
Good morning, Your Honor. Chris Short, Moitin Case, on behalf of the Joint Provisional
Liquidators and the Bahamian Proceedings of FTX Digital Markets, we don't intend to put
on any evidence today and will reserve argument for closing.
Thank you. Anyone else? All right. Ms. Sarkisian.
Thank you, Your Honor. May I address the motions in limine at this time?
Yes.
Your Honor, the U.S. Trustee has two motions in limine. The first one relates to the scope
of the testimony of Mr. Ray. Based on information that the Debtors' Council has provided to
the U.S. Trustee concerning the scope, it appears that he will be testifying as a fact
witness about his opinion on the usefulness of examiners in bankruptcy cases in general
or perhaps just in the bankruptcy cases in which he's been involved. Now, such testimony
should not be admissible for the following reasons. First of all, this is really in the
nature of expert testimony, and Mr. Ray is not qualified. He's not been put forward as
an expert witness. I don't believe he's qualified as an expert witness on whether examiners
are helpful in bankruptcy cases. In addition, such testimony is also not relevant under
Federal Rule of Evidence 401 as to whether an examiner should be appointed in these cases.
Under 1104, the standard for appointment of examiner is not whether it's been helpful
in other cases. It is a legal issue as to whether the requirements of 1104C have been
met. The utility of examiners in general is a policy issue for Congress. It is not for
the trier of fact or the trier of law. It is not relevant to consider usefulness of
examiners in other bankruptcies because it does not inform the Court regarding the factors
to be considered here. And balancing under 403, the probative value of any of Mr. Ray's
testimony on this issue, it's outweighed by the danger of confusing the issues, undue
delay, and wasting time. He does not have an examiner report in this case. He's giving
a subjective opinion of examiner reports in other cases. That's my understanding of what
his testimony is to be. And it is not relevant to whether an examiner should be appointed
here. And then our other motion in Lumine relates to exhibits. And it's a related motion,
essentially, because I understand Mr. Ray's going to be testifying about the exhibits
to which we object. So, Your Honor, should I allow other parties to address this first
motion in Lumine?
Let's do the first one and then we'll go to the second one. Thank you.
Your Honor, Jim Braun with the Sullivan and Cromwell. I don't know that I would characterize
Mr. Kazian's comments as a motion in Lumine, more of an objection to particular testimony
that's not yet occurred. I can assure the Court we are not going to offer Mr. Ray as
an expert. So the idea that we have not submitted an expert report or we're seeking to elicit
some sort of expert opinion from Mr. Ray, I can assure the Court we're not going to
do either of those things.
With respect to Mr. Ray's prior experience, we believe it's absolutely relevant, critical,
not confusing, for Mr. Ray to talk about the two circumstances where he has run into examiner
reports. Mr. Ray is the former Chief Executive Officer of Enron and the former Chief Executive
of Residential Capital. Both of those matters involve the preparation and filing of substantial
expert reports at costs totaling nearly $200 million. Mr. Ray was responsible for prosecuting
claims. As you will hear in this testimony, he reviewed the reports and has views as to
and these aren't opinions, these are personal experiences as to whether or not the reports
were helpful or relevant to him in the exercise of his duties. So this goes directly to his
own experience. We're not talking about him looking at reports that he has not had experience
with. These are two matters, two very important matters, which frankly qualifies Mr. Ray himself
as a person with a great deal of experience in dealing with Chapter 11 and one of the
reasons he's here, right, one of the reasons he's in the role that he is. If there's any
particular questions about that experience that Ms. Sarcasing finds objectionable, then
I think she has the right to make objections at the time on whatever evidentiary basis
may exist at the time. But to right now simply prohibit him from testifying because they
are neither relevant nor or could potentially lead this court to confusion, we believe simply
is not justified. Thank you. All right, on this motion, it's difficult for me to make
a determination in a vacuum as to what the testimony is going to be that might be objectionable.
I would note that if Mr. Ray is going to be testifying about his experience in other cases
and how it might, his perception at least of what the efficacy or usefulness of examiners
are in these types of cases, I think it would fall under Rule 701, which is opinion testimony
by a lay witness based on his personal perception. And so therefore I would allow that testimony
to go forward. But Ms. Sarcasing, you're free to object during the course of the testimony
to any questions you think are inappropriate. Can I move on to my second motion? Yes, of
course. And Your Honor, just to again, Julia Sarcasing for the U.S. Trustee, I'll just
make sure to preserve all objections. We will be having a continuing objection to Mr. Ray
testifying about his experience in other cases or what his opinions are about the usefulness
of examiner reports in other cases. I just want to put that in the record. It's noted,
so you don't have to raise it every time he answers a question. I'll give you a continuing
objection. I may still object a few times, Your Honor. That's fine. That's fine. So the
second issue has to do with exhibits. So, Your Honor, we were able to stipulate to visit
23 joint exhibits, I believe. And I certainly appreciate all parties' efforts in that regard.
On Friday, the debtors filed a declaration of Mr. Bluckstein, an attorney with Sullivan
Cromwell, in further support of the debtor's objection to the motion of the U.S. Trustee
to appoint an examiner. It attached 3,855 pages. It's three binders, large binders.
And what's attached, the first exhibit we do not object to, the first exhibit is just
something that Mr. Sam Bankman Freed signed, a corporate authorization. It's actually part
of all of the petitions. I don't think it needs to be separately admitted. It's admitted
in exhibit 1A, B, and C. But apart from that, what Mr. Bluckstein attaches are the examiner
reports in Enron and residential capital. So, first of all, this filing was untimely.
The objections to the examiner report and all responding papers were due on January
25th. And this was filed February the 3rd, one business day before the hearing. And I
can assure your honor that I did not have an opportunity to review the 3,833 pages of
documents. These also were not identified in response to the debtor's, I'm sorry, in
the debtor's response to the U.S. Trustee's discovery. So one of the interrogatories the
U.S. Trustee had, there were very few, but one of them was please set forward all the
exhibits that you will use at trial. There was nothing about, they listed some things,
but there was nothing about anything from Enron or RezCap or anything of that nature.
In addition, these documents are hearsay. They don't fall under any hearsay exception.
We don't have the author of the document to lay a foundation for the documents, although
author is, excuse me, which would be the examiners. And they're also completely irrelevant to
the issue that is before this court, which is appointment of an examiner in these cases.
Of course, as your honor knows, we don't think any of this would be relevant under C2, but
even under C1, the best interest of the creditors, it's not relevant what an examiner in another
case put in his or her report. And I'd like to respond to, in the joint pretrial order,
the debtor set forth their statement about why they believe these examiner reports could
come in. So the first thing they indicated was that the judge can take, your honor can
take judicial notice of these reports. The US trustee agrees that your honor can take
judicial notice of the fact that examiners were appointed in these other cases and that
they issued reports that were filed with the court. We have no problem with that. But that
does not make them, that does not make the content of the reports admissible. They also
argue that these are admissible as business records of the relevant debtors. I assume
they mean Enron and residential capital under federal rule of evidence 8036. Now, 8036 is
a document that is kept in the ordinary course of regularly conducted activity of a business
organization, occupation or polling, and that making the record was a regular practice of
that activity and that all these conditions are shown by the testimony of a custodian
or other qualified witness or by certification that applies with federal rule of evidence
902.11 or 12. None of these elements are present. An example of a business record, I'm sure
your honor is very familiar, an invoice would be an example of a business record. Not a
report created by a court appointed examiner. That is not a business record and you also
don't have any person to lay the foundation, again I would assume it would be the examiner
to lay the foundation that this is somehow a business record. The last thing that the
debtor set forth is 807, which is the residual exception. The U.S. trustee does not believe
that the requirements for this exception have been met. And in order to meet this exception
you would also still need to lay a foundation. You would need to have the examiners and Enron
and residential capital who wrote these reports testify to establish the foundation to meet
807. Also 807B requires that the proponents give an adverse party reasonable notice of
the intent to offer the statement. And your honor, the U.S. trustee did not receive reasonable
notice here. So your honor, those are the reasons why we believe that the exhibits to
Mr. Glotstein's declaration that was called at Dock at 611 should not be admitted other
than the first exhibit, which again does not need to be separately admitted because it's
already part of exhibit 1A, B or C.
Thank you.
Your honor, I am happy that the U.S. trustee is willing to stipulate that your honor can
take judicial notice that examiner reports were prepared in the Enron and residential
capital matters. And in fact, if we had had that conversation on Friday maybe we could
have avoided some of this. But the fact is, your honor, these are business records of
Enron and the residential capital. Mr. Kaysing is absolutely incorrect that either 803 or
807 requires that the author of the document be present and able to testify. The basic
construct of records of regularly conducted activity are that the testimony that would
be necessary to admit such a document as an exception to hearsay would be sufficient if
it was provided by custodian of such document. Now, it is naive to think that in a case such
as residential capital or Enron or indeed FTX that the epitome of a business record
is an invoice. The business of those entities and the business of this entity is winding
down its business. The records of regularly conducted activity of Chapter 11 debtors include
by definition those matters that are prepared and filed on court dockets. In terms of the
custodian of that document or these documents, Mr. Ray is present in court and was the chief
executive of both of those entities and is qualified to testify that these documents
indeed were maintained by each of Enron and residential capital in the ordinary course
of their business, which at the time was liquidating and winding down. Now, that being said, your
honor, the purpose of the use of these examiner reports is not to point to page 532 and say
that on such and such a day such and such a thing happened. The reason these reports
are present in court and are sitting here in front of you is so that Mr. Ray can testify
that yes, these reports were something that he considered during the course of his work
in each of those entities and that among the obligations that he had was to maximize recovery
on assets and the use to which he put those reports. He is not going to be testifying
about any particular fact or assertion in any of the Enron or residential capital reports.
It's merely the fact that they existed and that he considered them. So he is not going
to be testifying in a manner that would require us to introduce either of the reports for
the truth of the matter asserted in those reports merely for the fact that Mr. Ray consulted
with, read, and considered those reports during the course of his obligations as the chief
executive of each of Enron and residential capital.
All right. On this one, I'm not going to allow the other than exhibit one, I'm not going
to allow the two reports to be admitted into evidence for a number of reasons. One, I don't
believe there was fair notice to the U.S. trustee that these exhibits were going to be
introduced. Two, I don't see how they're relevant to the issues before me today. Three, they
are hearsay. They certainly don't fit within the business record exception which requires
under rule 8.03 that they be a record of regularly conducted activities and certainly an examiner
report is not a regularly conducted activity of an entity. So for those reasons, I will
not allow them into evidence. But Mr. Ray can testify, obviously, I've already ruled,
he can testify about his work in other cases where there were examiner reports introduced
and he can testify about his experience in that regard without reference to the reports,
the specific information contained in those reports. Okay? All right. Ms. Arquita, are
we done with motion practice at this point? Are we moving on to the evidence?
Yes, Your Honor, at least from the U.S. trustee's standpoint.
Your Honor, our testimony witnesses will be coming in by way of declarations that have
been brought forth as exhibits. So that's Mr. Ray's declaration. That's at docket 24
and another one at docket 92 which are joint exhibits 2 and 3 as well as his testimony
before Congress which is joint exhibit 8 and is on the docket at 371. In addition, Mr.
Mosley of Alvarez and Marcell, Mr. Edgar Mosley by way of his deposition in support of first
day pleadings which is joint exhibit 4 and docket 93.
Any objection?
No objection.
Third middle without objection.
Your Honor, we did list Mr. Ray as a witness for us. So we're not going to be asking him
any questions initially but to the extent that I understand the debtors will be putting
him on, we reserve the right to cross examine and then to go beyond, if Your Honor permits,
to go beyond the scope of their direct and use him as our own witness which again we
did put in a, we did file the notice that he would be a witness and we did reserve that
right in our notice.
Is there any objection?
No, Your Honor.
Thank you.
Your Honor, my colleague reminded me I need to move for the admission of all the exhibits
1 through 23 and I'm not sure with respect to Mr. Bluckstein's declaration how they
want to handle that because it's only a piece of it that's coming in but we would move for
the admission of exhibits 1 through 23.
Any objection?
Your Honor, we have no objection to admission of exhibits 1 through 23.
And on behalf of the JPLs, there was a stipulation which was included in the pretrial order that
what was coming in today was for the purposes of this hearing only and was not going to
be coming in for all purposes in the case.
All right.
That's fine.
So with the exhibit, you want to mark that as debtor's exhibit then separately?
Debtor's exhibit number 1 as opposed to joint?
Any objection?
No, Your Honor.
I would just, right now it's attached to Mr. Bluckstein's declaration with the 3,800
pages so.
I don't know how to do that technically but I don't want that entire thing being coming
in as an exhibit.
No, I understand.
We'll just submit exhibit 1 to Mr. Bluckstein's declaration as a separate exhibit, as debtor's
exhibit number 1.
Thank you, Your Honor.
Any other evidence, Ms. Harkish?
I'm sorry, Your Honor.
Any other evidence?
No, no.
Thank you.
Mr. Rauhlin?
Your Honor, the debtors would like to call John Jay Reyes, the third for the stand.
Mr. Reyes, please come forward.
Take the stand and remain standing, please.
Please raise your right hand.
Please state your full name and spell your last name for the court record, please.
John Jay Reyes, the third, last name R-A-Y.
Do you affirm that you tell the truth, the whole truth and nothing but the truth to the
best of your knowledge and abilities?
Yes.
You may be seated, Your Honor.
Thank you.
If there's a problem, you may proceed.
Thank you, Your Honor.
Mr. Reyes, what's your current occupation?
I'm owner of an advisory firm called Owl Hill Partners, and I'm also chief executive officer
of FTX.
And could you please give a brief summary of your educational background?
Yes.
I graduated 1980 from the University of Massachusetts.
I graduated 1982, graduated from Drake University Law School, initially admitted in Iowa, Nebraska,
and still admitted in good standing in the state of Illinois.
And could you please give the court a short summary of, say, the first 10 years of your
professional career?
The first 10 years, I began at Touche Ross, an accounting firm, doing tax work as a lawyer.
Thereafter, I moved on to become an associate at Mayor Brown and Platt, now known as Mayor
Brown in Chicago, Illinois, practicing in initially the employee benefits and securities
area.
Practice included M&A work, primarily.
Thereafter, I departed private practice and became employed by a private company.
And what private company were you employed at?
Initially, it was Waste Management, now known as WMX.
I began there in 1988 and worked there either for Waste Management, Inc., or one of its
operating subsidiaries as general counsel of the various operating units, including
certain of their public subsidiaries, again, for approximately 10 years.
The practice included corporate governance, securities law matters, and then at the operational
level, a variety of managing complex litigation and other investigatory matters relative to
the company's operations.
And after Waste Management, what did you do?
After Waste Management, the company was sold.
I then became general counsel of a company called Fruit of the Loom, also based in Chicago,
Illinois.
I was general counsel and chief administrative officer of that company.
And when did you first come in contact with Chapter 11?
The company, unfortunately, shortly after I got to the company, the company went into
bankruptcy.
The company had a number of operational issues that led to the Chapter 11 and very quickly
became embroiled in issues relative to the chief executive officer of the company, who
at the time had loans that were guaranteed by the company prior to my joining the company,
and they became quickly issues in the Chapter 11.
And did you have any role in investigating anything with respect to the CEF?
I did.
I mean, ultimately, within days really of the filing, the chief executive officer was
dismissed by the board.
I then became the most senior officer of the company and ran the Chapter 11 for approximately
26 months after the case was confirmed out.
The creditors asked me to stay on to prosecute a variety of claims, including the claims
related to the chief executive officer, which I did.
We litigated those cases in a couple different jurisdictions, including the Federal District
Court in New York, to recover the monies that were loaned to the chief executive officer.
And what was the result of those efforts?
We got our money back.
And after Fruit of the Loom, what did you do?
After Fruit of the Loom, I took a liking to Chapter 11.
It sort of fit the essentially my business experience, my legal experience, and I took
on a variety of Chapter 11 cases, either as chief restructuring officer or in many cases
essentially the liquidating trustee of a post-confirmation trust, primarily to prosecute claims related
to the bankruptcy.
A number of those cases involved prosecuting claims against accountants and directors and
officers, and I certainly can take you through those cases.
Can you do that for us?
Yes, please.
The first case that, of course, of no notoriety, and you've heard many comments in the last
few months over, of course, was Enron.
I became chairman of the board of Enron and chief executive officer.
That began in 2004, from 2004 through 2008 was primarily the time period in which those
cases were prosecuted.
The company still was very, very complex in Chapter 11.
I wouldn't say that much was accomplished in the Chapter 11, but much was left over
in the Chapter 11.
We still owned a public utility in Oregon, the Portland Utility Company.
We still owned an international energy business.
We still had several thousand employees, and we still were plaintiff in over a thousand
cases.
Those cases were a wide variety.
Virtually every single bank, American, some outside North America, were defendants in
cases that were either fraud cases or avoidance actions.
Then there was cases against law firms, accounting firms, including Anderson, Vincent and Elkins
as a law firm that was sued in those cases.
But it's a massive list of cases where the company was a plaintiff recovering for various
misfeasance, malfeasance, fraud, negligence, really the waterfront of events that occurred
during the Chapter 11 that were ultimately prosecuted.
We recovered in litigation proceeds about-
I was waiting for the next question, but I'm going to object to this testimony based on
relevance.
I think he's giving his background off overall.
We recovered over $5 billion in litigation recoveries against just the banks alone.
The overall recoveries in the case were approximately $26 billion, which is double the planned recovery
that was estimated in the disclosure statement.
From there, I took on a number of other cases.
I was the litigation trustee in a company called Hayes-Lamers.
Hayes-Lamers was in bankruptcy a couple of times.
I was involved with Hayes-Lamers.
One, my sole role in that capacity was to sue the officers and directors for breach
of their fiduciary duty, ultimately settling with the directors related to that action.
We also sued the accounting firm related to Hayes-Lamers.
Other cases that I've been involved in, I was essentially the chief executive officer
of Nortel, which is a cross-border case where we had conflicts between the United States,
operations for Nortel, the Canadian operations, and the operations outside of the United States
and Canada that involved 19 separate subsidiaries.
A very complex case involving a myriad of intercompany transactions, somewhat complex,
that went on for an extended period of time due to the issues between the various silos
within that Nortel estate.
I also was an overseas shipping group CEO, CRO, about the same time from 2012 to 2015.
That case, another Chapter 11 case, the principal problem in that case was the company had
understated its tax liability by somewhere between $300 million and $500 million.
They had achieved that status by obtaining a legal opinion from a very prominent firm
in New York, and that legal opinion to which they relied on was the vehicle under which
they avoided those taxes.
Ultimately, our mission in an overseas shipping group beyond the Chapter 11 was to take on
the issues surrounding the tax opinions that were in the view of the company and ultimately
the creditors that involved malpractice by that law firm.
The case was somewhat unique in the sense that it has one sort of similarity with FTX
almost immediately upon filing the case, discovering of course the legal opinion and the faulty
nature of that legal opinion.
We went into the Internal Revenue Service.
I went in with counsel at the time, walked over to the offices over at the IRS on around
about 8th and 56th Street in New York, and we walked in and we self-reported that liability,
which was somewhat startling to the service, but it was my obligation as an officer of
the company to go in and report that.
Of course, the reactions from the Internal Revenue Service were unique.
There was no particular form for that.
Very startling for the IRS to see someone come in and self-report a liability that was
half a billion dollars.
Your Honor, I don't think this is relevant, but I would object to Mr. Ray testifying about
what was in the head of the IRS agents.
Are they surprised?
I'll sustain that.
Thank you.
Ultimately, after overseas shipping, I moved on to residential capital.
Residential capital was essentially a mortgage case.
It was the subsidiary of General Motors.
I was appointed as the litigation trustee for that case and prosecuted over 100 separate
legal actions related to indemnification and breach of contract related to the sale of
mortgages to residential capital in the tens of billions of dollars that ultimately were
faulty, in some cases fraudulent.
We litigated those for several years and I presided over that litigation.
Mr. Ray, to take you back a bit, in Enron, when you were the CEO, were you aware that
examiner reports had been prepared in connection with that case?
Yes, I was made very aware of those reports.
The reports, when I became affiliated with Enron, almost immediately I joined her.
We were in the middle of somewhat of a skirmish related to those reports because various
parties were attempting to use those reports, to get access to those reports.
There was essentially fights over whether or not they should be redacted.
There were effect on the criminal trials that were yet to have occurred, as well as the
use of those reports that the parties had substantial disputes over.
Your Honor, I have a continuing objection to the relevance of this testimony.
Overall.
Mr. Ray, do you have a sense of the cost to the Enron estate of those reports?
Again, I object as irrelevant.
The Enron report was $90 million.
Now, moving on to residential capital, was there an examiner report in residential capital?
There was.
Are you familiar with that report?
Yes, I am.
Do you know what the cost of that report was?
The cost of that report was approximately $100 million.
Did you use that report at all in your collection evidence?
Your Honor, again, I object as irrelevant.
Overreport.
Neither in Enron nor in residential funding and in residential capital did I make use of
that report for distinctly different reasons, but neither case did I use those reports.
What was the reason you didn't use it in Enron?
I'm sorry, Your Honor.
I have to object again based on relevance.
Overall.
Multiple reasons in Enron.
First, when you review the Enron report, which I believe is, in my experience, characteristics
of many of the reports, they're very topical, they're very general.
They're almost sort of a curated gathering of statements that failed to take real positions
relative to what occurred.
Your Honor, I have a different objection here.
I believe that the witness is testifying now not just about the Enron report, but more
generally.
In addition, he is testifying about the contents of the Enron report, and Your Honor has ruled
that those reports are not to be admitted, and therefore he cannot testify about the
contents.
Raman?
I would ask the witness to limit your comments with respect to the Enron report, not other
reports.
With respect to the contents, Mr. Ray is testifying as to not what the contents were, but how
he used those reports in the exercise of his duties.
Testify about how you use the reports, but don't talk about the contents of the reports.
I did not use the reports because they were very shallow, sort of a mile wide, inch deep,
and ultimately we had to... Your Honor, I think that relates to the contents of the
report.
Well, he can characterize, and you can't really talk about how he used them, I mean
I can't characterize how he perceived those reports, so I'll overrule that.
Thank you.
Ultimately, the information that was in the report didn't go far enough relative to what
I needed to do to prosecute the actions.
The reports are somewhat ambivalent in their conclusory sense, and ultimately the evidence...
Objection, Your Honor, he's testifying about the contents again, what the conclusions were.
He's not telling me what the conclusions were, he's saying that he did not find the
conclusions helpful to him.
I think that's appropriate, and I'll overrule the objection.
But ultimately I had to spend all of the time to investigate and ultimately prosecute those
actions, and the reports themselves did not aid in that investigation.
Relative to residential capital, somewhat of a different story there.
Residential capital largely was focused on inter-company transactions involving the parent
company GMC, who still owned the equity in the company.
So the shareholder was still present during the Chapter 11, and there was an investigation
related to that existence.
The rest camp is notable, frankly, for what it didn't cover.
When you read that report, a very, very extensive report, you can take an eyeful over there.
It's a very deep report.
But ultimately the tens of billions of dollars' worth of mortgage fraud in terms of the
mortgages that were sold to the company that I prosecuted, that yielded over a billion
three in recoveries, which included over 100 cases, two trials, a jury trial and a bench trial.
There's not a single word in that report related to those actions.
I don't object.
He's talking about the content of the documents again.
Now you're getting into the content of the documents.
I'll sustain you, Jack.
Mr. Ray, I'd like to just touch on it based on a couple of the other matters that you
mentioned just briefly.
In connection with the Nortel case, did you have a cooperative relationship with the
Creditor's Committee in that matter?
I don't object on relevance, Your Honor.
I'm sorry to keep making the same objection, but I feel it's necessary.
Overruled.
Yes, a very cooperative relationship.
We worked hand in glove.
And was that including investigating and prosecuting claims?
Yes, we did that really on a joint basis.
At the end of the day, we're debtors there for the benefit of creditors, and so we worked
very cooperatively.
What was the ultimate recovery to the Nortel creditors?
Sorry, Your Honor, I'm going to object for the record on relevance.
Overruled.
It was capped at 100%.
It certainly could have been higher.
Mr. Ray, I'd like to turn your attention now to FTX.
Yes.
Prior to your appointment and your current position, did you have any connections to FTX?
No, I did not.
Did you have any connections to Sam Bankman Fried?
No, I did not.
Or Gary Wang?
No.
Carolyn Ellison?
No.
Nishant Singh?
No.
Ryan Salami?
No.
Did you have any connection with any of the executives at FTX?
No.
Did you have any connection with Mr. Bankman Fried's parents?
No.
Can you tell me how you chose the members of the boards of directors?
Each of the members of the board of directors was somewhat curated.
Each of them have their independent.
First of all, they had no involvement with FTX, similar to my position.
We needed an independent board in place immediately.
So really within hours of my appointment, I saw the need to have an independent board.
So I contacted several individuals who I knew that had diverse experiences,
who collectively as a group would form the ideal board to govern the situation.
Mr. Ray, in your first day declaration, you described generally the state of FTX when you arrived.
Could you just summarize that for the court today?
The company was really unlike any other I've ever seen, not a single list of anything.
Normally you come in and there's a bank account list, but there's personnel who you speak to about these things.
There's lists of assets, there's balance sheets, there's income statements, there's professionals, there's insurance.
There's just nobody to turn to really in the company, just a complete void, massive scramble for information.
Fortunately, we had the services of firms at my disposal who ultimately could become what I've described as an army of soldiers,
of women and men who have been dedicated to putting this together.
Your Honor, I'd like to put up on the screen a demonstrative.
Do you have that in front of you, Mr. Ray?
Yes, I do.
Now, Mr. Ray, could you just help walk us through this, starting first with the debtors' advisors?
Your Honor, I'm just again going to put on the record my objection to this testimony as not being relevant.
I'm not even sure what the testimony is yet.
Let me hear the testimony first.
Mr. Ray, with respect to the group that's debtors' advisors, are they participating at your direction in an investigation, a series of investigations with respect to FTS?
Yes. I mean, the first thing, obviously, to observe here is the center of this wheel, and I, along with the directors, are empowered to deal with this sort of circle of different advisors and different fiduciaries, as well as other parties here.
But to your bottom left, to answer your question, are the debtors' advisors, and it's really a multiple set of advisors because of the technical, highly technical nature of this case.
It's also driven by the lack of professionals that were ongoing and that I could rely on that existed on a pre-petition basis, so either there was an absence of consultants or professionals, or those professionals were not reliable such that we had to replace those.
So obviously, starting at the top, at the top of the hour, Sullivan and Cromwell was our main bankruptcy lawyers. Immediately at the time of the filing, with haste, we employed Quinn Emanuel, and we did that for purposes of not only their bankruptcy expertise, but they had one of the more renowned lawyers in the country in investigatory work,
Mr. Bill Burke, who's in this courtroom. Yeah, we brought on Ernst & Young because the company, on a worldwide basis, did not have reliable accounting professionals. In some cases, we didn't have income statements and balance sheets at all.
All of this had to be recreated, and as you'll see in a moment, to the far right of me, you know, sits the IRS who's investigating various tax positions taken by the company, and Ernst & Young was brought in to do that.
So we really needed those sort of books and records. Down below, of course, is the Landis firm, who's counsel here in Delaware and also available for other purposes relative to the debtors' cases.
Down below is Pirello Weinstein Partners, the investment bankers to sell the portfolio. This is the portfolio of roughly $5 billion of approximately 400 investments that were made over a myriad of industries in a relatively short time period from October of 2021, primarily to the petition date.
Then below that is Alvarez & Marcel restructuring professionals that are really sort of the backbone, along with Sullivan & Cromwell, relative to almost everything that has to be achieved in these cases.
We also brought on Alex Partners, Alex Partners, you know, another well-redowned firm that had a particular expertise related to investigations and tracing and certain skill sets that were essential given what had happened in the company.
And their particular expertise was essential relative to the underlying investigations that have led to not only our future prosecution of the avoidance actions, but they've aided immensely the investigation in replying to the regulatory authorities that I'll get into in a moment.
And then last but not least is Cigna. Cigna is a highly technical cybersecurity firm.
This case, you know, is about cybersecurity or the failure of cybersecurity. This firm was needed to protect what was a crumbling shell of securities around assets that are highly vulnerable.
And their services were critical, as we saw in the waking hours of the morning of the 11th, as these petitions were being filed, you know, hacking was occurring.
And so this firm, you know, is not only instrumental in stopping that, but also rebuilding an environment that's highly sensitive to this day because of the nature of crypto assets and the vulnerability of crypto assets.
You know, over last year, there's been something Worldwide reported about $4 billion worth of crypto that's been hacked. And so these folks are essential for us to have some integrity in our systems to allow us to preserve assets and to repair what was a dangerous, dangerous environment relative to the storage of
hot wallets and other wallets related to the company's crypto.
Now, Mr.
What steps have been taken to replace prior management?
I'm sorry. Now that his testimony is over, I would like to remove my objection.
Obviously under 1104C2, the U.S. trustee does not believe any of Mr. Ray's testimony is relevant, but even under C1 as to whether this is in the best interest of the creditors.
The fact that the debtors have a lot of retained professionals and they're working together is not relevant to the issue as to whether an examiner should be appointed even under C1.
Overrule.
I'm sorry, could you repeat the question?
Sure. What steps have been taken to replace prior management?
Prior management has been terminated. There's no one that was in a control position that today is in a control position whatsoever. That was eliminated immediately on my taking control.
Now, when you took control, the omnibus corporate authority, which is debtors exhibit one, referenced a request for Mr. Bagman to consult with his counsel at Paul Weiss regarding director appointments. Did you ever consult with Paul Weiss?
No, I did not.
And why not?
I didn't think it was in the best interest of the estate to consult with lawyers for someone who we now know has been charged with crimes.
Now, Mr. Ray, I'd like to draw your attention on the on the demonstrative to the lower right hand corner. Federal criminal and regulatory authorities.
Yes, I do.
Are you familiar with criminal and regulatory investigations that are ongoing?
Yes, I am.
And what have you directed the company and your advisors to do with respect to those investigations?
I made it very, very clear from from the beginning of my taking control on virtually the day of the control that that we would do whatever the government requests relative to cooperation.
We believe that ultimately, not only is that, you know, required, but we believe that, you know, it's in the best interest of creditors to allow these regulatory authorities to get full access to the information on a real time basis as we're learning about what happened in the company.
They're virtually getting information again, real time, and we believe that was sort of fundamental to our mission here, which is to maximize value for the creditors.
And do you receive regular reports on the materials and cooperation that's been given to the investigative authorities?
Yeah, virtually daily.
I'd like to come back to this slide in a moment, but I'd like to turn to the next one.
You familiar with this slide?
Very much so.
Your Honor, I'm going to again object on relevance.
Oh, good.
And Mr. Ray, what is this slide?
The first part of it talks really about speaks to the volume, the massive amount of data that we have produced. As you can see, we've collected 10 terabytes of data, over 27 million documents.
We provided an analysis of several hundred thousand documents.
We've interviewed and received pro offers of 24 current and former employees.
And then we've also provided analysis relative to the transactions inside the company's databases.
The company's databases include a couple of different databases, the primary databases, the AWS system, which is Amazon Web Services, where we housed some of the wallets, the hot wallets.
And the database itself is in the millions of terabytes of data, so it's a vast resource of information, unfortunately, in a somewhat unconstructed environment, which requires the assistance of people like Alvarez and people like Alex Partners to sift through these terabytes to ultimately provide useful data to the regulatory authorities.
Are you familiar with the cooperation that's been given to the U.S. Attorney's Office for the Southern District of New York and the Department of Justice's National Cryptocurrency Enforcement Team?
Yes, our teams have been involved with virtually daily requests. As you can see, we've had over 150 requests from the Southern District, produced substantial amounts of information, and provided substantial cooperation relative to instances where they wanted specific information related to certain actions, prehistoric actions for the company.
So it's virtually an ongoing exercise, but the last, you know, roughly 90 days have been an extremely intense effort to provide the information that the government has requested, which obviously, you know, yielded substantial results in record time.
Now, Mr. Ray, are you familiar how these requests come in from the Department of Justice?
Yes, I am. I'm familiar with how they contact the company. They do that through Sullivan and Cromwell, primarily.
And have you ever, are you aware of any instances where full cooperation was not given immediately?
That wouldn't be tolerated.
I'd like you to turn your attention to the next slide.
Now, in addition to the Southern District of New York, U.S. Attorney's Office, are you familiar with other U.S. Attorney's Offices that have submitted information or requests?
We've had full participation. You know, we've had numerous requests have shown by this chart from other prosecutors around the country.
The Securities and Exchange Commission has had a number of requests, again, all cooperative presentations that have been provided.
The CFTC has been extremely active here in connection with their investigation and have submitted those, you know, over 150 requests on a state basis. Now, shown in this chart, but we have entered into dozens of cease and desist orders with respect to licenses around the world, the money transaction sector, licenses that were maintained by the company.
So this chart really doesn't show the full gambit of the things that we've done to cooperate on a state and local basis, as well as these particular federal agencies.
If I can draw your attention to the next slide.
Yes, this is really what I'm referring to.
We self-reported to 26 state regulators. We produced a mountain of documents there as well.
We've been in regular contact with these agencies, not leaving it to the agencies to come to us.
We've taken a proactive effort to work with them.
We've hosted update calls with these agencies.
They're almost treating these agencies in effect like their own committee, if you will, and giving them real-time information.
No objection, Your Honor.
Now, in addition to the various states and state authorities, have you, are you aware of additional requests that have come from Congress and non-U.S. authorities?
Yes, I've been very, very active and personally involved in these requests.
As everyone has reported, testified in front of Congress, but leading up to that congressional testimony, we've had 100 requests from the Financial Services Committee.
We've had requests from the Senate as well, and follow-up testimony that has been provided to the House Financial Services Committee.
And then we've also been involved in regulatory requests from outside the United States.
They're listed here in pretty extensive requests that stem from our international operations.
And we have exchanges that, for example, are in Japan and Singapore, Cyprus.
We have European operations where we host the European exchange.
So all of these agencies relate to the operations outside the United States, and they've been very active in terms of requests as well as us responding to those requests.
And since you're aware of the appointment of the Creditors Committee in these cases?
Yes, I am.
And so what has been the level of cooperation with the Creditors Committee since its appointment?
Well, I'd like to think it's a model of how a company should work with the Creditors Committee.
My approach really is sort of a partnership approach with the Creditors Committee.
We've had numerous requests from the Committee.
They've been in place, I think, for less than probably a full 45 days, something to that effect.
So we had a head start, if you will, which was helpful.
That head start allowed us then to really put the Committee in a position right away where they could be a true partner with us in this whole process, this journey we're on to figure out where we're going with the assets and the recoveries here.
So we've had, you know, we have lots of calls, almost hourly contact between the professionals and the Committee and the debtors.
I've personally had a call with members of the Creditor Committee.
I've also given my contact information on a personal level to the co-chairs of the Committee with a full invite for them to call me at any time related to any requests that they might have or any views that they might have that they'd like to share with me on a personal basis.
So we really have a, I think, hopefully what I think should be a model for cooperation in this important mission.
Let's go back for a moment to the directors that were appointed.
Did you appoint the directors with any keeping in mind potential for any conflicts between silos?
Yes.
It's no coincidence that the way we established the director positions, it is not one board.
They often function to get information at the same time, just for efficiencies and clarity as to the information, but each director is a director of a separate silo.
So they have duties as a director, for example, of the Almeida silo.
The other directors do not.
There's a director, for example, for West Rome Shires.
So each of the directors, there is, you know, one silo where there's two directors on a silo, but each of these directors essentially have their own silo and their own responsibilities related to their silo in the subsidiaries beneath it.
There's also a subsidiary director for those silos who's separate as well.
And do you have separate board meetings for the directors in the separate silos?
We have joint meetings, which are informational for all the directors, and then we have separate meetings for the directors related to their unique silos.
So we actually put presentations together that only deal with that director and that director's unique silo information.
And we do that for a few reasons. One is that we want to really give in-depth information related to that silo to that particular director.
But we also want to create an environment under which that director can raise any issue whatsoever with respect to their silo versus any other silo or any other issue that exists in the FTX environment.
So we want to create an efficient process which allows all the directors to share ideas and share their experiences, ensure access to the host of professionals we have.
But we also have a very sterile environment where each director gets to spend, you know, quality time relative to the specific information that relates to that particular silo.
For example, if there are assets that are in that silo and not in another silo, or if there are intercompany claims, for example, that directors want to discuss in their silo vis-a-vis other silos,
they've got the environment in the forum to do that outside of the presence of the other directors. So that's really the model we created.
Now, Mr. Ray, I'd like to go back to the cybersecurity environment that you mentioned a few minutes ago.
Now, when – is there a physical location right now where FTX is located, the company?
No, there is not. The company was described, and I think we referred to it in the first day petitions, as it's located in the meta universe. But we have no physical location whatsoever.
So the investigations work that's been taking place so far, how does that take place in the metaverse? How does that investigation take place?
Carefully, because all of our data is stored in the cloud. It's stored electronically. This isn't a case where, for example, like in Rhino, where we owned a 100,000-square-foot facility,
and we owned a forklift, and we hired a forklift operator to go get the documents, and someone required them. This requires someone to go into our data environment to do their day job.
Now, on the first day of the case, we received relief that provided indemnities for certain individuals who were accessing that environment. Do you recall that?
Yes, I do. And why was that indemnity required?
The reason for that, and it's very extensive, and I'll try to keep it focused and brief, but you're allowing and requiring, more importantly, professionals to enter into a highly fragile computerized database
where things can happen and go wrong pretty quickly. If you open up that database, you're subjecting yourself to third-party hacks. You're subjecting yourself to inadvertent errors.
I guess the word sometimes that might come to mind is sort of, you know, thick fingers or whatever. You literally could hit the wrong key in this environment and destroy hundreds of millions of dollars' worth of value
because you've misquoted letters to a code, a key, if you will, a password that allows you to open up a wallet. This is an environment that has to be very cleansed, very clinical.
This is not something for people to bounce around in without creating tremendous amounts of risks, external risks, internal risks. So it's really a laboratory that you have to work in very, very carefully.
I'd like to show you another demonstrative. You're familiar with this slide? Yes, unfortunately. Could you please describe what this is depicting?
Well, this depicts a couple of few different things. As you can see, the bricks around this wall shows the state of what our AWS environment was at the time of the petition. A very loose environment, one that is probably a case study for how not to have a controlled environment for crypto.
Very vulnerable. We had hot wallets in a system where people, multiple people had access to passwords, wallets that, you know, sitting in a system that are accessible virtually by anyone who could access that data system.
So these, there's multiple access points into an environment that literally held billions of dollars worth of the company's assets. And as you can see to the right, there's a few different, you know, words set out in red print there.
Pre-petition, this environment allowed insiders to freely transfer assets of the company with no accountability and no tracing. Literally, one of the founders could come into this environment, download half a billion dollars worth of wallets onto a thumb drive, and walk off with them and there'd be no accounting for that whatsoever.
Virtually unthinkable, really, in a controlled environment.
What you'll see down below is that, you know, while we were securing this, this environment, you know, the petition date, we signed the power that gave me the right to advise on the filing of this.
That was done at 424 a.m. in the morning on the 11th. By seven o'clock in the morning I was reviewing petitions. By 10 o'clock we were filing the first positions, or first petitions by early afternoon.
We had, I think, achieved most of the filings of the petitions. And then throughout that day, those early hours, or within six, seven hours, you know, we were doing the normal first day petition filing.
And one of our team, one of our advisors, not someone inside the company, one of our advisors that we had hired, detected movement of crypto off of our wallets.
And so immediately, effectively, on the filing, we had, you know, an issue with the crypto being stolen from the company. At the same time, you know, there were efforts.
At the time, we didn't fully realize what was transpiring, but there was efforts by the provisional liquidators to also secure assets for the protection of customers.
This was all happening simultaneously. So your normal first day petition is chaotic as it sometimes can be.
This was something that I have never experienced. And it all stems from the failure of this system and the lack of integrity related to this system.
And we were fortunate enough, because of the professionals we had, to stop these, the cryptos being stolen.
We were fortunate, of course, that the provisional liquidators were also able to capture some of this value and held in custody in the Bahamas that presumably could have been also stolen in this time period.
And those hacks went on virtually all night long. I think that they somehow ceased around 4 to 5 a.m. the following day.
We had over 100 people on the phone trying to stop these hacks, because at that point you have no passwords.
You don't know where the wallets are in this environment. Someone described the wallets sort of in this AWS system as sort of needles in a haystack of needles.
And we don't have the wallets. We don't have the passwords. Obviously, some people did have passwords that were accessing these.
So it was really 48 hours of what I can only describe as pure hell.
Mr. Bromley, before you continue, how much longer do you think you have?
I'd say another 15 minutes.
Okay, we'll go ahead and finish up in that moment. Take a recess before we cross.
Okay, thank you.
Now, Mr. Ray, take a look at the next slide.
Sorry.
So, Mr. Ray, could you describe the computing environment at FTX today?
We have created the environment as it should be.
We've hired experts in computer science and cryptography.
I mentioned the Signia Group, as well as the Albrez and Marcello Group that have been essential to rebuilding the brick walls around these wallets to give them some security.
We have gotten access to the code and controls and the data to prevent any further loss by way of hacking.
We've moved hot wallets into what's called cold storage to secure those.
We have also gone off to exchanges where wallets are contained and moved those wallets over to a controlled environment.
So, this first exercise with the assistance of computer experts is to provide integrity to the environment, increase the security, move those wallets into cold storage and secure the assets for the benefit of customers and creditors.
That, of course, involves the analytics that these experts use to find wallets.
Also, what's key here is we're doing a tracing analysis, if you will, to look at unauthorized transfers of crypto that either were in wallets or in the environment itself.
All with the goal, this isn't sort of a study for study's sake.
There's a purpose here to what this is beyond just the integrity of the system and maintaining it and securing the assets.
This is effectively to also recoup those assets to investigate who moved assets and for what purpose, the source of the funds for those assets.
Whether that's external or on an inter-company basis, when we're investigating who did that, the potential misconduct, the wrong doers, the clawback opportunities related to that, and of course, in the process of that.
All of the evidentiary work that we're doing to cooperate with the government is not an exercise for exercise's sake.
There is no sort of billing code that just says cooperate with the government.
We look at all of our cooperation really on an end-use basis.
What do we do with that information?
What's the byproduct of that investigation?
The byproduct is always with an asset in mind or a recovery in mind.
It's not sharing for sharing's sake.
It's how we use that information that we've provided to ourselves and to regulatory authorities to then synthesize it in a way that provides us with the tools that we need to recover on avoidance actions, to inevitably file actions related to misfeasance or metal feasance against insiders, for example.
Then obviously, there's the compliance with our Chapter 11 obligations and disclosure.
That's an ongoing obligation that we have, and that's fulfilled through this very exercise.
Lastly, as I mentioned, our byproduct of that leads to sharing evidence and cooperating with the authorities.
But this is an ongoing circular effort, right?
The answer is we get questions, we provide information, that information gets synthesized.
That turns into new inquiries, new questions, and we're continuing to evolve in the process.
We've been at it 90 days.
It's night and day.
When you see this environment today, it's a very simple chart.
But to get from where we were 90 days ago, which is what I would describe as pure hell, to where we are today is pretty satisfying.
Mr. Ray, do you think that there would be a danger of introducing a new party into the environment?
Objection.
His opinion on this issue is not relevant to the court's determination to buy into the examinee.
Overruled.
There is a danger, and beyond the, we have a lot of seats at the table.
We're happy to feed all those people at the table.
But what's unique about this is this controlled environment.
This isn't some lawyer exercise where we bring in a well-heeled professional who observes misconduct by people.
Literally, you have to operate in this laboratory to investigate, to secure these assets,
and to develop a process of translating this data into recoverable assets for customers.
This is just too fragile of an environment for me to accept yet another seat at the table with someone who just bounces into this environment and puts ourselves at risk.
We've come too far to allow that to happen in my mind.
That's all I have for this witness at the moment, Your Honor.
We have time for redirect.
All right. Thank you.
All right. Let's go ahead and take a 15-minute recess. We'll reconvene at 1125.
Thank you.
I have this here.
I don't know what's in this one.
Thank you.
Thank you, everybody.
Thank you.
That's correct.
Thank you.
What type of actions were you prosecuting?
Virtually all types.
There was accounting malpractice, legal malpractice, breach of fiduciary duty, crime.
There was actions against insurance carriers for failure to pay.
There was avoidance actions.
There was no evidence of any kind of affirmative recovery that one could think of.
Now you testified something to the effect that you did not feel that the examiner reports in Enron or RezCap were particularly useful to you in your walls.
That's correct.
So do you know whether the courts in those cases viewed the examiner reports as being helpful?
No, I don't.
You don't know either way.
I don't know either way.
Your Honor, since Mr. ordinarily I would not do this, but since Mr. Ray testified about his opinion as to whether these examiner reports in these other cases were helpful, I would like to bring to the courts attention what the courts stated in the confirmation order in Enron as well as a transcript in the RezCap case.
Objection, that's not evidence.
It's not evidence, Your Honor, but he testified about his opinion and these orders and transcripts are part of the court record and the court can take judicial notice of them.
Well, I think you argued earlier I can take judicial notice that they were filed but not the content of those documents.
That is true, but at least with respect to an order, an order says what it says.
Well, if it's an order, I will take judicial notice of the order.
If it's in a transcript, I will not take judicial notice of the transcript.
So the order that we have is in, that one is Enron.
It's the findings of fact and conclusions of law.
I'm sorry, I'm sorry.
Can I also ask are you done with the witness? No.
I'm sorry, I apologize. I was actually going to ask the witness about it, but he's right.
Since the witness didn't know, I can.
I can do this later? You can do this later, yes.
Mr. Ray, you talked about appointing directors, correct? Yes, I did.
And your power to appoint directors came from the omnibus corporate authority that was signed by Mr. Sam Bankman-Creed, is that correct?
In part. What's the other part?
At that point, I was the only officer of the company, and pursuant to that power, I was able to, I had the power to nominate directors and elect them.
So when you say the power, you mean the omnibus corporate authority? Yes.
And that's debtors exhibit one.
Do you have exhibit one?
Or you know what, we can look at, do you have a binder up there?
I do.
If you could turn to exhibit one A, please.
And that is the petition of West Realm Shires, Inc.
Is he here?
I'm sorry?
Whoever that was kicking off.
If you look at the top of the page, it has the ECF page numbers.
So if you could turn to page 11 of 20, please.
Okay, and does that say omnibus corporate authority at the top?
Yes, it does.
Is that the omnibus corporate authority that gave you the authority to appoint directors for the debtors?
Yes.
Now, you had, I'm sorry, let me rephrase.
If an examiner is appointed, if the court appoints an examiner in this case, would you cooperate with that examiner?
I will follow whatever orders are issued by this court.
Assuming that you were directed to cooperate with the examiner, would you do so?
Can you explain what you mean by cooperation?
If the examiner needs documents, for example, that the debtors have, would you provide those documents to the examiner?
I think there might be some caveats to that, but yes.
Are there other things that you would not provide to the examiner if he or she asked?
You had testified that, I believe you had testified that all, I don't want to misstate your words.
Did you testify that all former management has been terminated?
I said that any former management that was in a controlled position has been terminated.
But there still are some officers currently at the debtors that were present prior to the petition date, correct?
There are employees that are employed who were also employed prior to the petition, they're not officers of the company.
I would point to we have a stipulated fact that there are certain officers that still remain. Are you saying that's inaccurate?
I'm saying that you may be confusing titles with officer positions, which are different in a corporate context and sometimes get confused.
For example, the general counsel of the company is the title.
I've not stripped that person of their title, but they don't function as general counsel and I'm not an officer of the company.
I certainly haven't appointed them as officer post-petition.
So you're saying that there are some individuals who hold officer titles at the debtor that were there pre-petition?
That are not in controlled positions in the company.
What do you mean by controlled position?
Positions of control.
Could you elaborate a little further?
Controlling the actions of the company, making decisions related to the company's business or operations.
Is that sufficient?
Yes, thank you.
Are you aware that you had given some testimony regarding cooperating with various state attorney general's offices and the like, is that correct?
Yes.
And are you aware that certain state attorney general's offices or other state agencies have in fact joined in the U.S. trustee's motion to appoint an examiner?
I believe there was two jointers, I think Wisconsin and one other state.
You don't recall there was a third one more recently?
If you say so.
It attached a bunch of letters from other state agencies, you didn't see that?
I'm saying, did you see that, that attached letters from other state agencies supporting the jointer?
I don't know which ones you're referring to, I did review two of them, if there's a third, I'll take your word for it.
I did read the two that were filed.
There's a third, I may not have read it.
Jointer of the Texas State Securities Board, you didn't see that?
Can I just ask the relevance of this, we're happy to stipulate that the Texas jointer was filed.
I've seen it too.
He testified about how he's assisting them and I think it's relevant that they are joining in the motion.
I get that point, but I don't know what else he can elaborate on that.
Thank you, your honor.
I just wanted to make sure if I said Texas, you might have said, oh yes, now I remember.
Are you aware of any state agencies that have objected to the motion to appoint an examiner?
I think, didn't you just say that two states, three states had objected?
No, joined.
Oh, joined.
I'm asking are you aware of any that objected?
No, I am not.
Now, your firm is called Outhill Advisory, correct?
That's correct.
And are you the only employee at Outhill?
Yes.
So you are, among your services, some of the services you're doing relate to ongoing investigations of various pre-petition actions?
I'm sorry, what case are you referring to?
Oh, I'm sorry, FTX.
FTX is one of the services you are currently performing is investigating certain actions that took place pre-petition?
Is that something you're doing?
Well, in my capacity as CEO of the company, I am overseeing every aspect of the company's business operations,
including investigations related to pre-petition conduct.
But you're not personally conducting any of that yourself?
That depends on the topic of matters, but in some cases I am.
Are there other employees at the debtor that are performing those functions?
Yes.
And are you overseeing them?
Yes.
And you're billing on an hourly rate in this case, is that correct?
That's correct.
Do you know approximately how many, the amount of fees that your firm has incurred to date in connection with the services you perform for the debtors?
Through what date?
Through any date today, or the end of last year, or whatever date you might have information on?
The most recent date I would have information on is the period from November 11, which is the start of the engagement, through December 31.
And that approximate amount, excluding expenses, is $690,000.
Which is simply the number of hours spent, times the hourly rate.
Have you looked at the examiner's report in Celsius Network?
Yes, I have.
Are you aware of how many times that report references FTX?
I did not do a word count.
But you did notice there were references?
I'm sure there was the word FTX, I didn't do a word count.
Did you look at the examiner's report in the CRED case?
No, I did not.
Have you ever been an examiner?
No, I have not.
Have you ever represented an examiner's council?
No, I have not.
I'm sorry, Your Honor, could I have a moment please?
Your Honor, my cross is completed.
I can wait until after to deal with the order in the Enron case.
Let's see if there's any redirects.
No redirects, Your Honor.
Thank you.
Mr. Wright, thank you.
You may step down.
Your Honor, may I approach?
Yes.
Yes, effectively, yes.
So this is the findings of fact and conclusions of law,
confirming the supplemental, modified,
fifth amended joint plan of affiliated debtors,
pursuant to chapter 11 of the United States Bankruptcy Code
and related relief in Enron,
the Southern District of New York,
case number 01-16034.
And the date is,
I don't have the docket number on this,
I apologize, I don't know why.
I notice at the top it says not for publication.
Yes.
What's the effect of that on my ability
to take judicial notice at this time?
I understand,
I said I,
Mr.
Oh, my colleague tells me it is available
on the Bank of Secrets website,
I notice it's not for publication.
It is available on the Bank of Secrets website.
But not on the docket?
It's on the docket, is it not on the docket?
It predates, the problem is the date, apparently.
It's from 2004.
I think that's what the issue was, Your Honor.
Okay.
I mean, it's obviously not a written decision,
but again, Mr. Ray was allowed to testify
as to his opinion as to whether
the examiner report was useful.
And it would seem to me that the judge's opinion
on that matter is at least equally relevant.
Your Honor, we're not,
I don't know that this is the judge's opinion.
Says not for publication.
I don't even know what part of it's 130 pages.
Oh, I can, yes, yes, I would point that out.
So I would first,
I would first point out on page 101,
from the first full paragraph, fifth line down,
the court states the ENA examiner has provided
valuable services to the estates of ENA
and its subsidiaries in satisfaction
with his duties imposed by the court.
Personally, Your Honor, the report,
examiner reports, this references one examiner.
It doesn't say the report was helpful.
It just says the examiner's provided services.
We don't have it wrote this.
The post-finding's effect of the judicial law
generally is drafted by counsel.
We haven't had a chance to look at it.
We object to the use of this,
and we're not even sure what the use of it is for.
If it doesn't impeach Mr. Ray,
he said he hadn't seen it.
Your Honor, I mean, the US Justice's position
is that all of Mr. Ray's testimony is completely irrelevant,
but, and we objected obviously repeatedly
to him giving his opinion about whether he thought
the examiner reports were useful.
In the two cases he was involved in,
in Enron, it was after the fact.
It came in after the reports were filed.
So, again, if he's allowed to provide that testimony,
we think the court can take judicial notice
of an order of the court,
findings, facts, and conclusions of the law
that was signed by the judge with these findings.
And there are some other provisions I would read
about some of the other examiners.
I started with that one.
Mr. Ray's testimony was a criminal testimony.
It's his own experience as to whether or not
these reports would help to put him in a job
that he conducted and an effort that he was supervising.
I'm sure that there are people who think
that the examiner report was helpful.
I think Mr. Bassin, who earned $90 million writing it,
probably thought it was helpful.
But none of that's relevant to this case.
I agree that none of this is relevant to this case.
Mr. Ray is the Chief Executive Officer of FTS.
All right, hold on.
Well, the problem I have is, one, it says not for publication.
I have no idea where this came from.
I have no testimony where it came from.
So it's not authenticated.
It has an electronic signature,
but that doesn't tell me much.
Unless I have something,
usually there's a web address that is identified on it,
or it comes from the docket,
and there's a docket entry identified on the document.
And frankly, I mean, what you just read to me is not...
I'll take it for what it is, what you just read to me,
but I don't think I can take judicial notice of this
given the way it's being presented.
I need to have some authentication of the document.
I don't have any.
Your Honor, could I just speak to my colleagues for one minute?
Sure.
Your Honor, we do have the web address where it came from.
Would it be helpful if we forwarded this to you?
I think, unfortunately, the only way to do this
is to have your colleague take the statement.
Unfortunately, this colleague did not personally download
the document.
Another colleague did that's not present in the courtroom
and is in another state.
That's a problem.
Okay, Your Honor.
So, there's nothing further to be done by this.
I understand that Your Honor's ruling,
and again, normally, I would never do anything
with these types of documents.
I think it is completely irrelevant to the issues
before the court, but again, because of Mr. Ray's testimony,
and I agree, I think there's a little bit different
to say, well, other people might have thought
that the report was helpful, but the court's opinion
is more important than other people's opinions.
I understand your point.
Thank you.
Are we moving on to final arguments?
Yes, do you have any other evidence?
I guess you are done with your evidence.
Do you have any other evidence, Mr. Brown?
No, Your Honor.
Any?
No, just one clarification before the evidence close.
Again, Chris Shore for the Joint Provisional Liquidators.
It's unclear whether to what extent the presentation
that was given is coming into evidence or not,
and normally, I wouldn't care since it would just be
coming in for this proceeding, but there was,
on that global, or the, I guess it was the first page
of the chart, which showed all the corporate logos
and the admin burn that's going on.
There was a line that went out that said,
other fiduciaries enlisted the JPLs,
and I want the record to be very clear.
I don't think the implication was being made,
but the chart shows it that the JPLs are fiduciaries
for the debtors, they're fiduciaries
for the Chapter 15 debtor, that's all.
Well, those were demonstrators, they weren't.
They admitted it to evidence, so they're not,
they're not part of the record.
Councilman Squalley for the Committee, Your Honor.
We have no additional questions.
Thank you.
Any rebuttal?
Ms. Sarkisian?
Oh, I'm sorry.
I'm sorry, Your Honor, I didn't hear you.
Any rebuttal, evidence?
No, no rebuttal.
All right, so we can go to the closing.
Thank you, Your Honor, again for the record,
Juliet Sarkisian on behalf of the U.S. Trustee.
Your Honor, I am going to make sure
I'm not repeating my opening argument,
but I think that we've had some evidence today,
and I'll speak about that in a minute,
but of course, U.S. Trustee's position,
as I did indicate, I am repeating my opening,
under 11, the departments for 1104C2 have been met,
and in fact, the only facts that could have been disputed
were stipulated by the debtors and the other objectors,
and therefore, the U.S. Trustee believes
that an examiner is mandated.
Of course, the scope of such examination will be decided.
If Your Honor was to appoint an examiner,
the scope would be dealt with after that.
Don't I need to do that before he?
How do I determine as is appropriate,
if I don't know what the proposed scope of the examination is?
Well, of course, Your Honor, the U.S. Trustee
does not believe that the as is appropriate
relates actually to the scope of the examination,
and not to whether an examiner should be appointed,
and the number of cases.
Well, it has to point to one,
it has to apply to one or the other, doesn't it?
I mean, yeah.
Yes, it's a scope, yes,
it applies to the scope of the investigation.
So that's my question.
I don't know what scope you're asking me to grant.
How would I know how to do that?
I can't just say I'm gonna appoint an examiner,
and do what?
Your Honor, I understand that in other cases,
I believe that included residential capital.
The court said that will be appointing the examiner,
and that residential capital did actually think
that the as is appropriate was a requirement
that had to be found, and they found it was appropriate,
but the court nevertheless said,
hey, the scope will be dealt with.
Now the parties get together, the U.S. Trustee appoints,
and nominates, and they go, appoints an examiner,
and then the examiner meets with the parties,
and they talk about the scope,
and then they come back to the court.
But, Your Honor, I am happy to give you,
I circulated last night to all the other parties,
because we've had a number of questions about scope.
So last night we said, all right, here are some examples.
Can't say that this is ever,
here are some examples of the types of things
that would, excuse me, an examiner could investigate.
So number one, the facts and circumstances
surrounding the misuse of customer funds, pre-petition,
identifying the individuals and entities
that were involved in that, or who knew about it,
or should have known about it,
and determining whether any of those individuals
remain employed at the debtors,
or otherwise have some continuing involvement
in the debtors' affairs.
Also, investigating any actions taken by the debtors,
their officers, directors, employees, or others
to conceal the misuse of customer funds,
including by way of software.
That was something that Mr. Rafe,
in his first day declaration,
talked about the use of software to hide,
to conceal the misuse of customer funds.
And then again, whether such individuals
remain employed at the debtors.
Also, investigating who was responsible for the debtors'
corporate controls and governance,
the gathering and maintaining of financial information,
systems integrity, the control of the debtors' cash,
maintaining the security of the debtors' digital assets,
maintaining the security of customer cash
and customer digital assets,
and what actions were taken or not taken by the debtors,
their directors, officers, employees,
or others in that regard,
and determining whether any individuals or entities
who were responsible for such failures
remain employed by the debtor or have continuing involvement
in the debtors' affairs.
And again, this is picking up on Mr. Rafe's
first day declaration when he talked about
just a complete, I believe,
complete lack of these various controls
and financial information,
and all of these issues that he said
was the worst thing he'd ever seen, even worse than online.
So that would be when, who was responsible for that?
Who turned a blind eye?
So that would be another area.
Also, just I think more generally,
investigating all allegations of fraud, dishonesty,
incompetence, misconduct, mismanagement of the debtors
by their officers, directors, employees, or others,
determining whether any individuals or entities
who committed fraud, dishonesty,
incompetence, misconduct, said remain at the debtors
or have continuing involvement with the debtors' affairs,
and then also investigating the facts and circumstances
revolving around all of the hacks of the debtors' exchanges
that occurred both before the petition date
and after the petition date,
determining what individuals or entities
were responsible for those hacks,
and separate issue, what individuals or entities
on behalf of the debtors were responsible
for preventing such hacks,
whether those persons, whether they were negligent
in the performance of their duties,
and whether those individuals were responsible
to remain employed by the debtors,
and then finally shedding transparency
into the relationship between the FTX entities
and the Celsius entities.
Again, this is not meant to be a comprehensive list,
but I'm providing it as I did provide
to the other parties yesterday evening.
These are the types of things that we could see
an examiner looking into in these particular cases.
So pretty much anything and everything
that happened before the petition,
that's what you're asking for.
Your Honor is the final determiner
of the scope of the examiner, not the US trustee.
These are just things that we think would make sense,
but scope could be different.
And I will also point out, Your Honor,
that there was testimony by Mr. Ray
about securing, having secured wallets,
and that having an examiner could, I guess,
create some type of a security risk,
I think was what he was saying.
Number one, I certainly hope there wouldn't be
a security risk with any examiner.
Obviously, you would point an appropriate person.
But a lot of these issues, I don't think,
would even involve having to look into,
I really don't understand a whole lot about the system,
Your Honor, I'll have to admit,
but looking into cold wallets, hot wallets,
any of the...
Well, you wanted him to investigate what happened
with the customer funds, which would require investigating
what happened with the cold wallets, the hot wallets,
and the entire computerized system of the debtors,
wouldn't it?
I'm not a technology expert, Your Honor.
I think that some of it could be done.
I also don't know what type of documentation there is of that.
I think some of that could be done
without actually getting into wallets.
Because there will be transfers,
once the money's taken from the wallets,
it was then transferred to Alameda, is my understanding.
I don't mean to be testifying, but that's my understanding.
And it may be that there's things that could be traced
as to how it got to Alameda that would not require
actually going into the wallets themselves.
But I am very...
I am not the type of person that could really clarify that.
I'm sorry, Your Honor.
I don't understand how that works well enough.
Obviously, any examiner appointed would have to be somebody
that was very knowledgeable about that area,
about cryptocurrency.
And we think certainly that would be appropriate
to have somebody as very knowledgeable of cryptocurrency.
But to the degree that that type of investigation is needed,
I feel very confident that the debtors
and all of their professionals will take every step
to make sure that there's no compromise in any system,
that all security that's needed is there and protected,
and that they would hopefully cooperate with the examiner
as much as possible.
The examiner can't get access to this
unless the debtors give the examiner access.
There's no other way for the examiner to do it.
So the debtors would be supervising this.
There should not be any type of a security risk
under these circumstances.
Let's talk about your view on the mandatory nature
of 1104.
So 1104 says that if I don't appoint a trustee,
that an examiner under C can be appointed.
And I should take into account an investigation of the debtor
as is appropriate.
So what does that mean, as is appropriate?
I know you say that doesn't mean if appropriate.
But doesn't as is appropriate also mean as is necessary?
Is it the same?
Well, that would relate to the scope.
Well, I guess, Your Honor, I think
what Your Honor is getting to, and please correct me
if I'm wrong, is that there are other parties here that
are conducting investigations.
And we're well aware of that.
The debtor's conducting investigation
with its professionals.
Presumably, I understand that the committee is doing the same.
And I think in that regard, what's relevant
is that the code talks about if these elements are met,
an examiner shall be appointed.
It doesn't say an examiner shall be appointed
unless the debtor is investigating itself,
or unless there's new management with the debtor,
unless there's a committee that can undertake that process.
My understanding is, Your Honor, in PRED,
there was a committee, and there was new management,
and Your Honor still appointed an examiner.
And there were other cases that we cited in our reply papers,
and probably our moving papers as well,
where there's creditors committees in most cases.
Clearly, the Congress was aware that the creditor committee
has the ability, under the code, to conduct investigations.
But they nevertheless approved 1104C1 and 2 and said,
under this circumstance, it's an examiner that has to do it.
It's not good enough to have a committee do it.
It's not good enough to have a debtor,
even if it has new management to do it.
Well, in PRED, I indicated first that I
didn't think it was a mandatory obligation under 1104.
And two, there were still the two main founders of that company
were still in charge.
They had appointed an independent director,
but they were still there and running things,
which informed my decision on whether or not
I should appoint an examiner in that case.
So let me ask you hypothetically, say a debtor meets the debt
threshold under 1104C2, and a week before the confirmation
hearing, a creditor comes in and says,
we want you judged to appoint an examiner,
because we think there was something happened at the firm.
We don't know exactly what it was,
but we think there's something wrong,
and we want an examiner.
Am I obligated to appoint an examiner
in that circumstance and put off confirmation
of the plan for however long it takes examiner
to do a report?
Your Honor, I think, first of all,
I don't think that the co-provision requires
that confirmation not go forward.
It doesn't say that if an examiner is,
but I understand why it would make sense to do that,
but I don't think that that's a requirement.
How could I confirm a plan if I've appointed an examiner
to let me know whether there was insiders who did something
wrong?
Well, so I think UAL Corp, which is a bankruptcy,
Northern District, Illinois, back in 2004, actually, I think,
addressed that issue.
They said that if you have a situation in which the case
with a debt exceeds the threshold,
and a party sought an appointment of an examiner
to investigate a private dispute,
that's how we put a private dispute, with the debtor,
it does not raise issues as to the quality of the debtor's
management.
The court could limit the scope of the investigation
to, quote, whether there is good cause
to engage in the inquiry suggested by the move-in,
close quote.
So, and that's three O's.
Well, that would be an inquiry into whether I
should have appointed an examiner.
No.
I think I thought what the court was saying
is you do appoint an examiner.
An examiner looks to see.
If somebody comes in and makes allegations
that seem to be motivated by a litigation tactic,
or something doesn't seem to be in good faith,
then the code provision does state
that an examiner still has to be appointed
if that threshold is met.
But the examiner can look into, are there
any grounds for these allegations?
Is there anything?
And of course, if it's found that there are, then
presumably, the scope would be, the court
would expand the scope to look into those allegations
that the examiner found that there might be something there.
What if the creditor comes in and says,
we think there was a $10,000 fraudulent transfer
to an insider accountant?
We want an examiner to investigate that.
But the debtor is on the verge of administrative insolvency.
And if I appoint an examiner, it's
going to push him over the edge.
Do I still have to appoint an examiner then, too?
And Your Honor, under the code provision, that
would appear to be the case.
We don't have that situation here, obviously.
Well, I'm trying to get at is, are there exceptions?
Which means that there is some discretion that
has to be applied.
And determining when and how to apply that discretion
should be on the court, should it not?
Not on an examiner appointed, who then tells me
whether or not he thinks I should appoint an examiner
further to investigate?
Well, the court does have discretion
if it falls under C1 of 1104.
And again, remember, Your Honor, the threshold is not $5 million
in debt.
It's $5 million in very particular kind of debt,
which is not every case.
But if that occurs.
There will be quite a few of them in this court.
If that occurs, if that threshold is met
and the other thing is that there's not a confirmed plan,
there's not a trustee, there is no discretion in the statute.
That is the US trustee's view.
That is the view of the only circuit court that
ruled on this and the few district courts that have
ruled, have reversed the bankruptcy court under the same,
there is no discretion.
They must be appointed.
Now, I certainly understand the court's concern
that someone might be, again, acting in an abusive manner,
acting for wrongful purpose.
Again, that's certainly not the situation.
I think that's one of the things that, well, wrongful purpose
or that they're not really asking for an examiner.
I mean, there's nothing to examine.
Like some of these cases in this district
where it was part of the plan confirmation
and a party was trying to get an examiner appointed
basically with legal issues, like in Malancrot
where there were allegations that counsel representing
certain tort claimants had done things that were improper
because that was not the debtor.
It has to be action by the debtor.
And so we do have some, it has to actually fit.
Somebody actually has to be asking for an examiner
to actually investigate the debtors,
the action of the debtors, not something else,
not a legal issue.
But if it does fall, if they meet all of the requirements
of 1104C2, the US trustee believes
that there is no discretion by the court,
that that's what Congress intended.
We cite and we go through the legislative history
in our reply brief.
That was what this was a compromise
where there were certain parties that wanted to have trustees
appointed automatically on all large cases.
That didn't happen.
This was the compromise.
That an examiner would have to be appointed
under these circumstances.
Let's talk about kind of the overall scheme of 1104.
Because 1104 says you don't even get to 1104C
unless the court decides not to appoint a trustee.
So why would the appointment of a trustee
obviate the need for an examiner?
Well, the trustee has the ability
to conduct all sorts of investigations.
I mean, that's part of what a trustee does.
And a trustee is someone who is appointed
who is independent, no connection with the company
before they file for bankruptcy.
All of the attributes that we have with Mr. Ray
and the independent directors who've been appointed
in this case.
But Your Honor, there is a difference between a trustee
and new management.
I mean, again, the code doesn't, 1104C doesn't say,
unless there's new management,
or unless there's a committee that can conduct
the investigation.
And I think that it's very important that a,
the difference is an examiner or a trustee,
certainly, let's stick with an examiner.
I mean, examiner has to prepare a report.
And that is a public facing report.
Is independent and does not represent any constituency.
Yes, Mr. Ray does not have a prior connection
with the debtors.
He was appointed by Mr. Sam Bankman-Fried.
And he is the CEO of the debtors.
He does represent a constituency.
That is the debtors.
He is not independent, not like an examiner.
And even though a committee,
I mean, a committee also represents a constituency.
But again, Congress was aware,
gave committees the ability to do investigations.
They don't file reports with the courts.
They're different than an examiner.
They can settle, so can the debtor.
The debtor can investigate things,
investigate claims, and settle
without that investigation ever becoming public.
Well, they'd have to file a 90-19 motion.
They do have to file a 90-19 motion,
but it is not the same.
And I've seen many a 90-19 motion.
That is not the same thing as an examiner's report.
This is, again, this is what Congress decided
needed to be done under these circumstances.
And even, Your Honor, honestly,
even if you say, all right,
you're reading as is appropriate to mean if appropriate,
this is a case where,
it's hard to imagine that it's not appropriate.
I mean, I will use, for example, Judge Sanchi
in, I'm sorry, in this, in this case, in this case,
thank you, Judge Sanchi, in there,
he did not believe that C-2 was mandatory.
And there he said that, he also, I think, he didn't,
it seemed unclear as to what actually was being asked
of the examiner to do.
And I believe this was also, if it wasn't at confirmation,
it was close to it.
But Judge Sanchi said, quote,
"'At some point, there has to be a level of smoke,
"'if you will.'
"'Not a lot, but more than none,
"'more than just a whiff of smoke.'"
And let's compare that to what Mr. Ray said
in his declaration that's being admitted
as Exhibit 20, paragraph nine,
saying that FTX's situation is a dumpster fire.
So we don't have a situation where there doesn't really
seem to have been any wrongdoing,
that somebody's coming in and asking for an examiner
for an improper purpose.
Again, this is assuming, I'm for a moment assuming,
which of course, United States trustees does not agree to,
but if as is appropriate means it has to be appropriate,
we think it's very appropriate here.
And of course, we think for the same reasons
that it's in the best interest of the creditors.
We understand that Mr. Ray was not prior management,
but again, 1104C, no where, whether it's under C1 or C2,
it doesn't say, unless you have no management,
unless there's a committee,
unless you have federal and state agencies
doing their own investigation, none of that's in there.
None of those elements are relevant
to whether or not an examiner should be appointed.
And again, because an examiner, it is a public facing,
does do an, he or she does do a report.
I'd like to talk a little bit about,
hold on, just one moment, Your Honor.
I don't wanna go out of order and confuse things.
Right, so again, residential capital,
which again, is one of the cases that the objectors do rely
on is one of the written opinions
that says it's not mandatory.
But even there, the court said,
when it did appoint an examiner,
it said it must be appointed, quote,
not withstanding the ability of any other party
to effectively and expeditiously investigate the data,
close quote.
So we're not the, the fact that there is a committee
or are other people that can do it is not relevant
once the elements have been,
the elements below 1104C have been met.
And again, an examiner is required to publish a report.
A committee, the committee has discretionary ability
to investigate, it's not required,
and they are not, certainly not required to file any report.
And conducting an investigation is specifically removed
from the list of the debtors
and possession duties under 1107A.
So again, the fact that there's new management,
none of that is relevant.
And it's not novel to appoint an examiner
in situations in which you have governmental,
law enforcement or regulatory agencies
conducting their own investigation,
that happens all the time.
Those agencies will not be filing a report with this court
as to the results of their investigation.
It's a set, it's a completely separate function
that they are performing.
The debtors also talk about, again,
talk about the law of this district.
He cited a third circuit opinion,
say there is no such thing as law of the district,
that just doesn't exist.
He also said the bench rulings are binding precedent.
They're not binding precedent.
In fact, I mean, Judge Warrath won't even let you
quote back her own bench rulings to her.
I'm not saying that that,
I'm not saying that all the judges are like that,
but it's not binding precedents, certainly.
I wanna talk a little bit about the cost issue.
Cost is not mentioned anywhere in 1104.
This is not a case like Duane LeBouf,
in which, I mean, Your Honor asked about
converting to Chapter 7.
That was a case in which the court indicated
that the cost of an examiner would result in the case,
the debtor's case is being converted to a Chapter 7
and most likely becoming administratively insolvent.
That is absolutely not this case.
In fact, Exhibit 15, which is the Debtors
Interim Financial Update as of December 31st of last year,
which is, I wanna quote, is,
they haven't filed any monthly operating reports.
It was their way of filing something along those lines,
although it doesn't comply with the monthly operating report.
But on page 11, it shows the debtors having unrestricted
cash of over 1.2 billion.
That's apart from custodial cash,
that's apart from restricted cash.
So this is not a situation in which these debtor's cases
are gonna be converted or they're gonna become
administratively insolvent because there's an examiner.
That doesn't mean that there's no budget for the examiner.
Of course there's going to be a budget for the examiner.
But there's no reason to believe that the cost
of the examiner doing an investigation
is going to be more than the debtor's professionals
conducting an investigation.
And I point to Exhibit 10, which is a supplemental
declaration to Mr. Diderick of Sullivan and Cromwell.
It attaches the list of professionals that worked on,
as bill time, they haven't filed the application yet,
but bill time on the matter.
There were over 150 individuals of which 30
have billing rates of over $2,000 an hour.
So to the extent that an examiner is doing
certain investigations, to prevent duplication,
that should mean that the debtor's professionals
can cut back on what they're doing in that regard.
I will also say that the debtor's arguments
regarding the cost of an examiner should not be given weight
because the US trustee in one of its discovery requests
asked for documents reflecting any budget or estimate
of the cost of an investigation to be performed
by the debtor's professionals of any of the events
leading up to the debtors of Chapter 11 filing,
fraud, bad acts, et cetera.
The response to that was an objection to say
they did not provide the information,
and it said, quote, on the grounds that it is irrelevant
to the examiner motion.
Well, we agree, but the debtors can't have it both ways.
They can't say, oh, it's gonna be so costly
to have an examiner based on examiners in other cases,
but at the same time, not be willing to produce
their budget or estimate for what it's going to cost
for the debtor's professionals to do
the same kind of investigation.
Well, I can take my own experience and say,
given the scope of what you laid out earlier,
the proposed examiner investigation,
I can give you a ballpark of what it's gonna cost,
and it's gonna be in the tens of millions,
if not hundreds of millions of dollars
to do that investigation,
because they're gonna have to hire all the same types
of experts, financial advisors, cybersecurity advisors,
crypto advisors, who are all gonna have to do
the same thing that the debtor's already started to do,
and the committee has already started to do,
and the government has already started to do.
So it's going to be, if it's the scope
that you're asking me for, it's gonna be expensive,
or the alternative is, I have complete discretion, right?
I mean, I could say, okay, I'll point an examiner,
your budget is $10,000.
Are you gonna find somebody to take the job?
No, no, no, but I think that's effectively
the same thing as not appointing an examiner.
Doesn't that show why 1104C really doesn't make any sense
to be a mandatory obligation by the court,
that it's not subject to discretion?
It's kind of the same as Rule 65 injunctions.
There's a, I think it's 65D says,
if a court imposes an injunction,
it's different for, a little different for debtor
in Chapter 11, but if a court imposes an injunction
in Rule 65, if you read the language of Rule 65,
I think it's D, says you have to impose a bond,
but courts have almost universally said,
I can set the bond at whatever.
If I can set the bond at a dollar,
then certainly I can say you don't need to set a bond at all,
especially if you have a case where you have an individual
suing a major corporation, and the individual is successful
in getting an injunction, and you're gonna impose
a billion dollar bond on that party who can't do it,
and then they lose their case, no, you can't do that.
So courts have universally said that's not
a mandatory obligation, even though the language,
if you read it the way you propose it here,
would make it mandatory.
So there's always discretion by the court, right?
Your Honor, we would not agree.
And again, other cases, the district courts,
the few, there have not been a lot,
but the few district courts and the one circuit court
that ruled on this disagree, the district courts
were reversing, or the circuit court as well, I believe,
were reversing the determinations by the bankruptcy court
that there was discretion under 1104C2.
And I said, no, there's not.
It says what it says, shall mean shall.
This is what Congress wanted.
But I can set the budget of whatever I want.
Wow.
If it's set to the point is the equivalent
of not having an examiner, then the statute
really hasn't been complied with.
I mean, I.
All it says is I have to appoint an examiner.
It doesn't say I have to give them
a $100 million budget.
We would hope that Your Honor would not provide
no budget for the examiner if Your Honor
was to appoint an examiner.
That's again, effectively not appointing an examiner.
But I understand the point Your Honor's making.
A few other things I'd like to mention.
Again, if Your Honor was looking under,
if we look for a minute under C1,
the best interest of the creditors,
or another way to say, whether, again,
if one was to use the as is appropriate
as meaning if appropriate, we do believe
that there's plenty here.
And I think part of this shows the jointers
that were filed to the US trustees motion
to appoint an examiner, there were jointers filed.
It was one by Texas State Securities Board
and Department of Banking, that's at 600 on the docket.
And they attached letters from state agencies
or attorney general's office from 15 other states,
NDC, supporting the jointer.
It's a total, when you add the other jointers
that were filed before 18 states
and the District of Columbia.
And what the Texas jointer said was that
Texas is currently undertaking an investigation
of the debtors for violations in connections
with transactions of business in Texas
and with Texas account holders.
And then they say, this will require constant access
to information and documentation
in connection with its investigation.
And it would benefit from working with
and gaining this information
from a neutral third party investigator
who focuses on investigating the debtors
as opposed to running the debtor's business.
And Mr. Ray has a lot of jobs here.
And we have a situation where the debtor's schedules
and statements have yet to be filed.
They filed the cases on November 11th.
We have no scheduled statements.
We have no monthly operating reports.
We have this, I wanna call it a faux monthly
operating report that they filed.
We have no 2015.3 rule statements.
They have not been filed.
So we're missing a lot of very basic documents
in this case.
And my hope would be that Mr. Ray could focus on doing that
and have the examiner focus on doing an investigation
as to what happened pre-petition.
They also examine also the hacks that happened
post-petition as well when Mr.,
shortly after Mr. Ray came on board.
But that I think is what these joiners are saying.
Let him focus on that.
Doing is a great idea.
Let the examiner focus on doing examination
and investigation.
Another thing that, I'm sorry,
I think I already mentioned that in the,
and I do wanna clarify, the list that I gave your honor
about possible things for the examiner to investigate
was simply that, it was simply examples.
We have not taken a position,
we don't feel that this is the right time.
We haven't taken a position, oh yes,
they have to do all of these things.
But because we were asked repeatedly by other counsel,
what is the scope, what do you have in mind,
these were some examples.
And your honor is the ultimate,
will ultimately determine that.
I do not wanna say that we're insisting
that each one of these things be investigated
or that these are the only things.
This was what we came up with to give your honor
and to give other folks an idea about what,
could be appropriate for an examiner to look into.
Your honor, I believe that is my argument,
unless your honor has any further questions.
No more questions, thank you very much.
Thank you.
Good afternoon, your honor, Jim Bromley of Selma and Colmell.
Your honor, the USTRI makes a very clear policy-driven
argument that the court has zero discretion
in the way that the examiner is looking at it.
And I think that's a very clear argument.
I think that's a very clear argument.
That the court has zero discretion
under section 1104 C2.
If the $5 million threshold is met,
which is going to be met in virtually every large case,
certainly in every mega case,
certainly in every super mega case.
The import of the USTRI's argument is that this court
and no other court has discretion to determine
whether or not an examiner should be appointed.
That is simply not a realistic or accurate reading
of the statute or the pressing.
And it is frankly, your honor, disconcerting
because there are two places where discretion,
we believe, matters.
One is with your honor.
And that 1104 and the language which phrase,
and particularly the phrase as appropriate,
provides you with discretion.
But frankly, your honor, in the discretion
to have brought this motion to begin with,
and that resides with the Office of the US Trustee.
There is zero evidence that's been put on
before your honor today about whether or not C1
has been satisfied by the movement who bears the burden.
Nothing but conclusory statements
that because Mr. Ray had put in a declaration
that said that there's some sort of fraud
that has occurred here, period, full stop.
It is in the best interests of creditors under C1
for an examiner to be appointed.
And keep in mind, the US Trustee moves
under both C1 and C2.
We believe there's zero evidence under C1.
Mr. Ray testified for over an hour, an hour and a half,
an hour and hour and a half.
The grovelment of his testimony is that it is not
in the best interest of creditors, stakeholders,
or the estate for an examiner to be appointed.
Mr. Ray testified that he is independent,
that his directors are independent,
that he has at his direction commanded a group
of highly sophisticated professionals
to take care of a highly technical and dangerous environment.
That environment was so dangerous
that on the day that these cases were commenced,
that over $400 million were stolen
because of the condition that the prior management left
the company and that security environment.
If it was not for the immediate action of Mr. Ray
and those advisors under his direction,
this company would have simply faded away,
been stolen, bled dry.
And yet the US Trustee stands here and says,
I don't really understand these technical things.
It's gonna be okay.
I'm sure they'll work on it.
I'm sure it'll be fine.
And then the US Trustee stands up today and says,
well, I haven't said anything about scope.
Now I'm going to read to you what the scope is.
And it's everything, everywhere all at once.
We have in front of you, your honor,
two sets of examiner reports
from two other mega, super mega cases.
Those binders represent $200 million.
That's it, $200 million.
And the US Trustee says, well,
you have $1.2 billion of unrestricted cash
on your balance sheet.
You should spend some, a lot of that
to completely replace everything that's being done
with a new set of professionals
who are going to do the exact same thing.
With no evidence that any of those professionals
or this examiner to be appointed
would be any more independent, any more qualified,
any more able to secure these assets.
It's simply going to be a duplication of effort
and an enormous amount of expense.
The fact that we may have $1.2 billion
of unrestricted cash is not the point.
We need $8 billion of unrestricted cash.
We do not have enough money to pay back all of our creditors.
And the US Trustee, for pure purposes of public policy,
because bleach and sunshine is a public policy
that we need here, says that we should spend tens
or even hundreds of millions of dollars
to provide some guidance to states
that have written one paragraph that said,
we agree with what they said before.
And the evidence that Mr. Ray has put on
and is uncontradicted is that we have done nothing
over the past 90 days other than cooperate
and provide massive amounts of information
to regulators all around the world.
Well, let me ask you a question.
You mentioned bleach and sunshine.
So let me ask you about one issue that US Trustee raises,
which is that under 1106, if I pointed an examiner,
there'd be a public report file.
And what is the view of the debtors in this case
of the need to provide the creditors in this case
with something that shows them what's been done,
what investigations have been undertaken,
how they were undertaken,
and what the results of those investigations are?
Because under 1107, a debtor in possession
doesn't have that obligation.
Well, there are two things, Your Honor.
One is what we've already done and will continue to do.
And then there's what the Bankruptcy Code provides
in other sections.
So what we have already done is one of the exhibits,
which we have agreed to jointly,
is a very extensive presentation
that the debtors made to the Creditors Committee.
It is not normal course in a case of this size or substance
that when you meet with the Creditors Committee
that you publish the same day for the public
the complete contents of the presentation that we made.
We did that.
We will continue to do things like that.
It is the view of Mr. A and the management of the directors
that this is a different case.
We need to approach that in a different way.
Do we have a specific schedule of things
that we're going to say and at what point?
No.
But are we going to continue to follow in those footsteps
that we've already set forth?
Yes, we will.
In addition, Your Honor, we have an obligation
to put together a disclosure statement.
That disclosure statement in a case like this
is going to be a recitation of everything
that has taken place.
And it will be up to you, Your Honor, to determine
whether the information set forth in that disclosure
statement is adequate under the circumstance.
We believe that in order for us to confirm a plan,
we're going to have to put together a disclosure statement
that brings that bleach and sunshine to this situation.
So we believe that, well, and I will note,
1106 and 1107 and 1104 do not require in every circumstance
that there be a public report.
When we talk about the debtors furthering public policy,
we have spent literally tens of millions of dollars
complying with public policy by reporting to the Congress,
to the House, to the Senate, to the U.S. Attorney's Office
in the Southern District of New York
and three other districts.
It has led to the indictment of three individuals
who led the company in record time.
There have been lawsuits already filed
by the SEC and the CFTC.
When you talk about the debtors dedicating assets
to transparency to the public process,
I don't think you can find a case where debtors
have done anything matching what these debtors have done
in the first 90 days of this.
And will we continue to do that?
Yes, we will.
What Mr. Ray testified to is that on a daily basis,
we receive emails that in substance say,
we would like you to look at these transactions,
these individuals, and get us this information in 24 hours.
And what that requires, your honor,
is us to actually go in, and when I say us,
it's the entirety of the investigations team,
to go into this virtual environment
and track down the information that's being requested
by the authorities.
It's not simply going into a warehouse
and picking things off of a shelf.
It is interpreting code.
It's making sure that when the code is discovered
and accessed, it doesn't trigger things
that Mr. Ray was talking about that might damage assets.
We don't have, there are no wallets.
There are no keys.
There are no buildings.
Everything we have is a series of zeros and ones.
And any time that environment is accessed,
it creates risk and damage, that damage will occur.
And so every time we're going into that environment,
the investigation exercise is also securing assets.
It's also figuring out whether there are claims
as to whether or not the issues that we're finding
in the environment have some explanation
that's other than a mistake or incompetence or inexperience.
Maybe it's fraud.
You don't know that.
When we talk about fraud in court,
we often talk about badges of fraud.
You don't have badges of fraud in the same way
when you're sitting there and having digital experts
in Israel and in the United States trying to figure out
why the code was changed from X to Y, by whom,
who had the right to change it, who had access to it.
All of that is a consolidated exercise
that takes place every single day.
So quite honestly, the idea that we are able
to simply hand over that environment
to an examiner is naive.
Mr. Ray said he will comply with any order of this court
and I know he will.
And I know we all will.
But the idea that there's going to be some ability
to find somebody else out there, put together a team,
and have that team operate as independently
and as effectively as the team that's in place,
and then write a report, simply means that we're going
to add on top of this months, if not years,
of additional time, and tens of millions,
if not hundreds of millions of additional cost.
And who bears that cost?
The creditors.
Mr. Capasquale's clients.
We should not be sitting here duplicating the same thing
that is happening every single day,
because the US trustee believes that there's a policy
point of view that 1104 says that it's mandatory
no matter what.
And the slippery slope of that mandatory argument
is not in this courtroom.
It's not because the US trustee is going to be an advocate
or pushing a particular agenda.
I don't believe that.
But 1104 doesn't stop at the US trustee.
It says party and interest for the US trustee.
Any case law that is established in this case
that says mandatory means mandatory,
means that every single chapter 11 case
with more than $5 million worth of debt
is going to be at risk of being held hostage
at confirmation, at the first disclosure statement hearing.
At any point in time, it will just become a weapon
in the arsenal of every party and interest.
Because if you take the discretion away from the courts,
the weapon's only in the hands of those
who are in the courtroom.
And the idea that we will then be reduced to saying
the only choice that the courts have is to say
no, I'm not gonna give the examiner a budget.
Well, I think that's, and as the courts
have continually ruled here in Delaware,
that's a silly decision to make.
Because the point is, it's not as if 1104
doesn't provide the language.
It does.
And the history of 1104, the legislative history
that was cited, I think, incorrectly by the US trustee
illustrates that point.
There's not a court that's really gone into this
in any level of detail.
The Revco case, with all due respect, 1990,
the drug store case, there's two and a half pages,
not much analysis, they don't mention the words
as is appropriate, and they don't go into
the legislative history.
That's not much of a circuit decision in my mind.
What happens in that situation, if you read 1104,
1104C says that the trustee hasn't been appointed.
1104E says the US trustee shall move
for a trustee in certain circumstances.
They haven't done that.
They have to move under 1104A.
No one's moved for a trustee under 1104A.
Why is 1104 even there?
Why does it bounce back and forth
between trustee and examiner?
Because the precode rule was trustees were appointed.
And the United States decided, to our credit,
that debtors in possession were a better way
of reorganizing companies than putting them in the hands
of the Securities and Exchange Commission and trustees.
1104 is a backstop in case things don't work out.
I actually think 1104 might be a leftover from the days
when we used to have a chapter 10 and a chapter 11.
I think that's right, your honor.
The point being is, notwithstanding the fact
that I think that's the legacy,
the introductory language, as is appropriate,
is not irrelevant.
US trustee reads shall and ignores as is appropriate.
Whether as is appropriate modifies investigation,
appoint, or examiner, this court has the discretion
to determine whether it's appropriate.
In our view, an examiner is not appropriate.
In our view, a report is not appropriate.
Thank you, your honor.
Mr. Pasquale?
Thank you.
Excuse me.
Thank you, your honor.
Ken Pasquale again for the committee.
Mr. Bromley really hit on all the key points,
and we couldn't agree more with all of his arguments.
But I do think there are a few particularly important points
that I'd like to reemphasize if I may.
Be as brief as I can.
The US trustee first of all concedes,
we heard Ms. Sarcassian in her closing say,
that she recognizes the committee's statutory authority
to do an investigation under 1103C2 of the Banker C code.
And as you heard Mr. Ray testify,
the committee has been doing that.
The committee was appointed on December 15th.
It's not even been two months yet.
And in that time, as Mr. Ray testified to some extent,
the committee has been working lockstep with the debtors
to understand what happened pre-petition.
And more importantly, perhaps, and it all ties together,
and it's one of the points I really want to make to the court
is the investigation doesn't stand alone.
It fits in with the rest of what this case will need to be.
And ultimately, what do distributions look like
to the creditors of these states?
And so the investigation informs the next steps in this case,
including whether there'll be what we have been calling
a 2.0, some type of reorganization,
or whether it will just be monetizing
the assets of this company.
That's all to be determined.
And the investigation, again, informs all of that.
So what have we done as a committee
in the less than two months
since the US trustee appointed the group?
As you heard Mr. Ray say,
we served extensive discovery requests on the debtor.
We did it informally.
We still don't see a need
to have to come to the court for that.
We've been working cooperatively.
And we have been prioritizing our requests with the debtors
and receiving prompt responses to what we ask.
Over 70,000 pages, or 70,000 documents, excuse me,
have been produced, as you heard Mr. Ray testify,
that have previously been produced to the regulators.
We are efficiently reviewing those documents,
doing targeted searches on any number of issues
that we become aware of or know
from Mr. Ray's prior testimony before Congress
and first day here.
We are evaluating with the debtors
their pre-petition relationships with their professionals.
And by that I mean their attorneys, their accountants,
their auditors, that were in the process
of coordinating with the debtors council
on the next steps there,
which will be pursuing discovery
and ultimately evaluating potential claims.
We have filed a joint 2004 motion
for authority to serve subpoenas on insiders
and related parties, I think that's on for Wednesday
of this week to be heard,
as an obvious avenue necessary for investigation.
And these are just some of the things of course,
Your Honor, but I think the last,
and I think this is really important,
and Mr. Ray testified,
is with respect to the cybersecurity environment.
The committee does not have access to the AWS
in the system for the very reasons Mr. Ray testified.
However, we have had excellent coordination
and cooperation from the debtors cybersecurity experts.
And our committee members of course,
are very knowledgeable in this area
as customers of the debtors,
and this is their business so to speak,
and are consistently bringing issues to us
that we bring to the debtors.
And we're very quickly getting answers to those inquiries.
And so the system is working,
the investigation process is working,
and there's in our view and as you've heard argument,
would not be appropriate in these circumstances
to appoint an examiner.
When things are proceeding the way the code
has designed them to proceed,
with the committee exercising its statutory authority.
Now I do wanna touch, Your Honor, on the cost.
The United States trustee said there's no evidence
that the cost will be more if an examiner is appointed.
But I think it's obvious that it would.
So the debtors and the committee
would not just sit idly by if an examiner
would to perform its own examination.
At a minimum, we'd have to work with that examiner,
we'd have to provide information to the examiner,
we'd have to coordinate with the examiner.
And there's obviously incremental cost
that would be incurred in that process.
There's no other way that they could proceed.
And I think I did mention this in the opening, Your Honor,
but I do wanna mention it again.
Given the capital structure here,
where there is no other creditor group
that our unsecured creditors would be competing with,
there's no incentive for our committee
to do anything but what I will call it,
an unbiased investigation.
The investigation is not going to be used
for any adversarial purpose,
which again was argued by the US trustee in the motion.
Continuing with the issue of the cost, Your Honor,
we do think it's entirely inappropriate
for an examiner to be appointed in order to,
for the purpose of issuing a report
that satisfies some public interest outside of these cases.
For the very simple reason, as Mr. Brownlee mentioned,
the cost of an examiner will come out
of the unsecured creditor's recoveries.
There's no denying that the work that we're doing
is that there is a significant cost to that work,
but it's necessary work.
And the exam, excuse me, an examiner's investigation
would just be over and above what is already being done
and those costs that are being incurred.
I think Judge Walrath in the Washington Mutual case
said it well on that particular point,
not only acknowledging that the committee
was well positioned to do the investigation,
but quote, excuse me, not quote yet,
that it would not be, and here's the quote,
it would not be fair to the creditors in this case
to be saddled with the cost of an investigation
into systematic problems that would only benefit
future parties but not benefit the parties in this case.
And that's exhibit D to our objection,
it's the transcript, page 98, starting at line 12.
That's exactly the situation here.
Given the investigations already going on
by the congressional committees, CFTC, SEC, the prosecutors,
the public interest is being well served
in all of those ways.
Our purpose here is to investigate for the benefit
of the stakeholders in these estates.
I think the only other thing I really wanted to mention,
Your Honor, if I may, is just with respect
to Your Honor's question about the report.
Mr. Bromley mentioned entirely correctly,
there will be a disclosure statement in this case.
That disclosure statement will detail
the results of the investigation.
We, as the creditors committee, have an obligation
in that context to make a recommendation to creditors
as to the provisions of the plan
that that disclosure statement will describe.
And we, of course, take that obligation seriously.
That document will explain the results of the investigation.
I'll mention also, of course,
as is the committee's obligation,
to the extent that we're able, subject to confidentiality
and other privileges and the like,
the committee will be providing information on its website,
which is now up and running,
and to the extent practicable on social media as well.
So we will take all necessary steps
to inform creditors of what's transpiring,
again, with the obvious limitations
around confidentiality and keeping in mind work product
and the fact that this investigation will be used
to evaluate claims going forward
to maximize recoveries to creditors.
I think that's all I have, Your Honor, for now,
unless you have any questions.
No questions, thank you.
Thank you.
Mr. Schor.
Thank you, Your Honor.
Chris Schor from Whiten Case for the JPL.
I'll try not to be duplicative here.
At the end of the day, what's before the court?
Questions of law and questions of fact,
but it's kind of hard to ignore that,
based upon the U.S. Trustee's brief
in the first half of Mr. Ray's testimony,
that the policy implications of this
are coming to the fore in what we do about examiners
in big cases.
I'm gonna start with a simple proposition.
There is, in fact, zero policy reason
to support the U.S. Trustee's interpretation of the statute.
According to the U.S. Trustee,
you get outside of C-1.
The court's already determined
that it is not in the best interest of the estate
to have an examiner.
We move into C-2 land.
In every case with $5 million of funded debt,
a party in interest, including the U.S. Trustee,
who would have no economic stake in the outcome of the case,
needs to file a motion,
and everybody in the case
must have an evidentiary hearing like this.
This is not free.
And there must be an examiner appointed,
and we'll all figure it out later.
In fact, none of the case law supports that.
All the cases dispose of that issue,
the way your honor was asking questions,
in one of two ways.
They use the word as is appropriate to modify must appoint,
or they say as is appropriate modifies investigation.
On the mandatory point,
I'm not gonna repeat what Councilor Murray said on that,
except to say in the reply brief,
the U.S. Trustee charges that the JPL's
wrongly quote the legislative history in HR 95-595.
That's not accurate.
We, in fact, wrote down exactly what it said there.
I think their point is
that it's not binding legislative history,
which again is wrong.
If you look at 92 STAT 2688,
which lists the legislative history,
HR 595 is listed there.
I think what the U.S. Trustee is arguing is
that because of the debates on the floor
after the initial bill,
somehow that's the binding legislative history here,
but I'll make very clear,
no legislative history at all
that addresses the point that they're trying to make.
That whether you call it weaponizing
or empowering parties in interest
or someone with no economic stake in a case,
to bring a case to a halt, nobody,
none of these senators or representatives
were saying that on the floor.
So there is no support for this kind of policy idea
that shall mean shall.
It's gonna have to come down to the text of the statute,
and I'll focus on the, an examination as is appropriate.
U.S. Trustee bears the burden of showing
what a examination is,
and an investigation is appropriately.
Give you the contours of what's gonna go on,
and we can have a debate about
whether or not that is appropriate.
In fact, the motion, as we point out in our papers,
just says I want it to the fullest extent
of the statute as written.
Now courts have not accepted that.
Courts generally look to what I list as five things
when they're trying to figure out
what an appropriate examination is.
They ask first, is there really a need
for an examination here?
I'll get to the smoke point in a bit.
What is the scope of what the examiner's gonna be doing?
What is the cost of the examination on the estate?
What is the appropriate duration of it?
And then ultimately we get to a report,
how are we gonna be using it in the case?
And how do we deal with issues like privilege,
and whether it's hearsay or not,
all those kind of issues get resolved.
Again, the US trustee is silent on that.
And of course I got some problems.
First of all, it seems easy to say in this case,
we need an examiner report.
There's a dumpster fire.
No, we're all standing around right now
in a building that is burnt to the ground,
and two of the three principals of the company
have pleaded guilty to arson.
So do we really need to spend $100 million
for an examiner to come in and say the building burned down?
We know it burned down.
We know there were no corporate controls.
We know based upon the pleas of two of the three principals
that frauds occurred here.
So the US trustee has done nothing
other than posit that there is smoke
without really answering the question, so who cares?
Obviously there needs to be an investigation
to determine who's responsible for that,
and I trust that the US trustee and the debtors
are working on that, and if monies need to be clawed back,
they'll be clawed back,
but we don't need to really know the why here.
Second, appropriate scope.
I agree with you, Your Honor.
How can you appoint an examiner,
especially on the topics we're talking about,
unless we know what the scope is,
or how can the US trustee do it?
Should there be an accountant?
Should it be a cryptocurrency guru?
Should it be a cyber crimes investigator?
Should it be a corporate controls expert?
How do you get to the issue of an appointment
without knowing what the scope's gonna be?
I don't think I've ever seen a blank check case
with basically being posited here,
where the court directed the US trustee
just point somebody who's examinary,
and then we'll figure out what he or she's gonna be doing.
There has to be real context around this,
particularly when we're talking about the next point,
which is cost and duration.
There are cases, I was in ResCap,
where Judge Glenn kicked the can down the road,
and there were reasons for that.
There are three reasons why you can't kick the can
down the road here.
Without giving the examiner what you said.
If it's gonna be a $10,000 investigation,
an examiner needs to know that
when picking up the charge first,
with respect to the $1.2 billion in cash.
I think that's a little misleading.
As the US trustee points out in the reply,
or actually in the moving papers,
there is an issue as to what this is customer funds,
and where the customers are, and everything else.
So it's not fair to say that the debtors
have in fact free access to use all the cash
their listing is unrestricted.
Second on this, assume it is $1.2 billion of cash
that can pay admin claims.
That first chart is breathtaking.
The number of individuals who are already involved,
that didn't list the committee advisors, right?
This case is burning super hot.
We'll find out just how super hot
when the fee apps start coming in.
But the comfort that there's going to be
$1.2 billion in available cash
doesn't answer the question of how much
distributable value is there going to be in this case,
and how is $100 million examination
going to relate to that.
Third, and I agree with Mr. Pasquale,
the concept of deduping,
we'll just point an examiner
and everybody else is going to sit.
That never happens.
The committees continue to work,
the debtors continue to work,
and actually if you focused on Mr. Ray's testimony
about that second and third demonstrative
where he lists all the work they're doing
to coordinate with the requests,
that's what's going to happen with an examiner too.
The request is going to come in, Mr. Bromley,
I need 70,000 documents.
They're going to go through and say,
what do we do with the privilege?
What do we do with these documents?
How do we control the data so that it's secure?
And it's just all going to continue to build.
In other words, the $100 million is additive,
not subtractive from other work that goes on.
And finally, appropriate form and use.
There is, in my experience,
no evidentiary value to an examiner's report.
It just kind of comes out,
and whether your honor would feel
that that was important or not,
I don't know how important it is
when we're not dealing with a case with insiders in situ,
and rather we have a whole new group coming in.
Sometimes it helps courts with doing things
like has the plan been proposed and good fit,
but things like that.
I just haven't heard anything articulated
by the United States Trustee that would go to that issue.
It's not going to, as the US Trustee seemed to posit,
going to lead to an indictment.
The court can't indict anybody here,
nor can an examiner indict anybody here,
so the government authorities
who are doing their investigations
aren't going to get any help out of the report.
And then finally, on this point
of important public interest in looking at this,
this is not a case in which governments are sitting behind.
In other words, there's not somebody out there
protecting the public, as seen,
the Congress is looking at it,
the CFTC, the SEC, the IRS, all the state governments.
They don't need to outsource their work
to the creditors of the debtor,
because the irony of the position here
is that the creditors who are just gonna want
to get their fiat currency and crypto back
are gonna be forced to bear the cost of an examination
that's only going to tell them the who, when, where,
and why they lost money,
but not actually give them money back.
You can't tax them to answer questions
that no creditor is coming forward
and saying we want answers to.
We're willing to pay as customers for an investigation
into this work.
If the US trustee or other government agencies
want work, it looks like, or want answers,
it looks like they're getting the participation
they need from the debtors,
and I'm sure that will continue.
So from the perspective of the JPLs,
whether you look at it mandatory
or an appropriate investigation,
I don't think the US trustee has met their burden here
to really explain why we should all be paying for that.
Thank you.
Mr. Key, rebut.
Is this your code?
I think that was actually my code.
Called it, too.
Thank you, your honor.
Again, for the record, Julian Sarkis,
on behalf of the US trustee,
I have a few points to reply to.
I think they're all mostly comments
that the debtors council made.
So winding back the clock a few minutes.
So one thing that debtors council indicated
was that the US trustee had put in no evidence
to show that we comply with 1104C1.
So our evidence is the declarations of Mr. Ray.
Now, we didn't put him on the stand
and have him go through and make those statements,
but those are in evidence.
And paragraph five of his first day declaration says,
quote, never in my career have I seen
such a complete failure of corporate controls
and such a complete absence
of trustworthy financial information as occurred here.
From compromised systems integrity,
faulty regulatory oversight abroad,
to the concentration of control
in the hands of a very small group of inexperienced,
unsophisticated, and potentially compromised individuals,
this situation is unprecedented, close quote.
And that's just one piece of what he says
in this one declaration.
And it also of course is testimony before Congress.
So that is all in evidence,
even if we didn't put on a live witness today.
And that goes to the best interest of the creditors.
And again, if one is looking at the as is appropriate,
the way that certain cases have looked at it
and your honor has looked at it in the past,
it also establishes that it is appropriate
to have an examiner.
This is not a case where, you know,
there's not a whip of smoke about wrongdoing.
There's, as Mr. Ray said, a dumpster fire.
Debtors' Council also mentioned this report
that they gave to the creditors
that was then filed on the court docket,
which is our joint exhibit nine.
And yes, they are correct that they did file it
on the docket.
It's 20 pages, it's a PowerPoint.
There is a lot of charts and pictures.
I'm not saying there's no information in it,
but it doesn't compare to something
like an examiner's report.
So the debtor, both the debtor and I believe
some other counsel are referring to, you know,
$5 million worth of debt.
Any case, you know, the US trustee going to be required
to file a motion for an examiner in any case
with $5 million worth of debt.
It's not just $5 million worth of debt.
There's a lot of restrictions,
and that is not every case with $5 million worth of debt.
But in addition, I just wanna be clear.
The US trustee is not required to file a motion
for an examiner.
It is under 1104E, there are certain situations
in which the US trustee would be required
to file a motion for a trustee,
but there is nothing requiring it.
The code says we can, we can file a motion,
but we're not required to.
And I think that, you know, one could see
throughout the years, the US trustee is not filing
examiner motions in every case in which the debt
is over $5 million.
Again, any debt or specific debt.
It is discretionary, the US trustee does,
when it feels it's the right thing to do.
One counsel cited to Washington Mutual Transcript
of page 98.
In that case, Judge Walrath said that the debtors
had been quote, investigated to death, close quote,
and that she could not imagine in any examiner
finding one unturned stone.
That's page nine, excuse me, Transcript 98,
lines 12 to 17.
That is not where we are in this case.
The debtors just, you know, filed a few months ago,
US trustee filed a motion to appoint an examiner
11 days after the first day hearing,
20 days after the petition date.
The debtors, even at this point, are nowhere near
being investigated to death.
Also, the debtors counsel and some other counsels
brought up that there will be a disclosure statement filed
at some point, possibly, depending on what happens.
A disclosure statement is not a report
of an independent examiner.
I mean, there's no comparison to those two things.
Clearly, Congress knew that in Chapter 11 cases,
debtors filed disclosure statements.
Again, 1104, C doesn't say, unless the debtor has
or may file a disclosure statement, what it says is,
after the plan is confirmed, you can't make the motion.
I mean, well, it wouldn't meet the requirements.
But there isn't a disclosure statement here,
and it's irrelevant to 1104C.
And, Your Honor, there's two other things
I wanna point out.
At the end of Mr. Romley's argument,
he said, the debtor's view is a report is not appropriate.
We just want that to be very clear
that the debtors have no intention of filing any report
as to whatever investigation they may be doing,
whereas, of course, an examiner is required to do that.
And finally, Your Honor, it is, U.S. Trustee agrees
that Your Honor has the discretion to set the scope
and a budget for any examiner,
if you were to appoint an examiner.
But the court should not abuse discretion
in such a way that it completely eviscerates 1104C2
as it's been approved by Congress.
Thank you, Your Honor.
Thank you.
All right, I'm gonna take a recess here,
and I'd like to see counsel for the four parties
and chambers in the conference room over here,
and then I'll come back on the record after that.
Thank you.
All right.
Thank you.
Move it to the other side.
There's still company.
And now, we have a recess here.
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Nazis are present.
Show us your cards, please.
Thank you, Your Honor.
Thank you.
Now, we have a few more changes of the agenda sorry,
I think we're missing a few folks still.
Back on the record, Jermaine?
Okay. Back on the record.
So, I requested to see the parties in chambers just to have a brief discussion about whether there was a way to find a path towards a consensual resolution of this motion.
And the parties have indicated they want to discuss that and come back to me later.
So, I'm encouraging them to do that. In the meantime, I'm going to take the matter under advisement and we'll wait to hear from the parties.
I think we have another hearing scheduled on Wednesday, and maybe by then the parties can give me a status report on where this issue is.
And I've told them to ensure that there's no concern about my being upset about somebody who holds up the process.
I've told them if anybody objects to resolving it, I will rule on it.
They should contact chambers, let my judicial assistant or my courtroom deputy know that there has been an objection.
Better counsel can do that. Don't tell me who's objected. Just tell me there's been an objection and then I will go forward with ruling on the underlying motion.
So, with that, do we have, I think we have some other housekeeping issues before we adjourn.
Just to make sure. Retention apps that need to be moved, potentially moved.
Your Honor, we will, Adam Landis for the record, we will file an amended agenda for the hearing on Wednesday, but we believe it's only one matter that we need to go forward.
Okay. That's the objection to the 2004 amendment?
That's correct, Your Honor.
And that's, I assume there's no witnesses for that?
There are none. We would ask the court's indulgence to do that virtually.
Yes, that can be done virtually. There's no witnesses. It can be done virtually.
Anything else then before we adjourn?
All right. Well, thank you all very much. I appreciate the arguments. It was an interesting argument. Thank you.