Good afternoon, Your Honor, and may it please the Court.
Adam Landis from Landis, Rath and Cobb, counsel to FTX Trading, Limited, and the Associated
Debtors.
Your Honor, we filed an amended agenda in the case today noting that items 1 through
5 are adjourned.
Items 6 through 8, 11, 12, and 13 have been resolved with orders entered, for which we
thank Your Honor for taking care of that.
We only have three matters going forward.
Number 9, with respect to the debtors' request for extension of their exclusive periods to
file and solicit plan of realization.
Number 10, the stable-leak motion, and number 14 is the status conference with respect to
emergent.
Before we head into the agenda proper, Mr. Diederich would like to address the Court
with an update as to matters since we last appeared at an omnibus hearing.
Okay, thank you.
Mr. Diederich.
Thank you.
Good afternoon, Your Honor.
Andy Diederich with the Debtors, with me as my partner, Brian Gluckstein.
I think we have a presentation.
Does it?
Do I press it forward?
Thank you.
Can we bring up that for everybody in the courtroom?
There it is.
Good.
So thank you.
Your Honor, it's been three months since we were before you at an omnibus hearing.
We'd like to thank Your Honor for the efficient manner in which the cases have been conducted
so far.
The Court has issued more than 38 orders on certification of counsel, including 30 orders
that reflected negotiated solutions with stakeholders.
As a result, the debtors have been able to focus on the
business of the case rather than court appearances.
The first months of the case have been extraordinarily busy and productive.
There's an overwhelming number of ongoing work streams and novel issues in every discipline.
Today, the situation has been stabilized and the dumpster fire is out.
And as I will explain in a moment, we anticipate filing a plan of reorganization in July.
I would like to spend some time on a case update for the Court.
First, and perhaps most important, are assets available for stakeholder recovery.
Our estate consists of many investments, businesses, and causes of action that have not yet been
monetized.
Valuing these now is impossible.
However, we are tracking distributable assets, cash, Class A, or Category A cryptocurrency,
which we defined in previous submissions, and securities.
Here's a chart of these assets at petition date value, including cash receivables from
the settlements and transactions recently approved by the Court.
We now stand at $6.2 billion, an increase of $800 million from my update to the Court
in January.
This increase in value is more significant if we take into account current asset pricing.
On this next slide, at current prices, our distributable assets have increased to $7.3
billion, a $1.9 billion increase from my January briefing.
What goes up can go down.
Prices will fluctuate during these cases.
As we will discuss in a moment, one of the important tasks of the debtors is being a
good and prudent custodian of $7.3 billion of asset value.
We will be increasing distributable assets, hopefully dramatically, as the case progresses,
but it's also important for us not to lose what we have now.
Next, Your Honor, I'd like to review some significant events by subject matter.
The first is our investigative work.
In addition to everything else, the debtors are conducting an extraordinarily complicated
forensic investigation in coordination with multiple law enforcement agencies in the United
States and around the world.
Early on in this case, the Board of Directors decided it was in the interests of the estate
to expend the resources necessary to create a centralized collection of information under
the debtors' control and to make this information available to law enforcement agencies in a
transparent and reliable manner.
The debtors believe that this cooperation has and will continue to benefit the estates
economically, especially as we approach the formation of a plan and the coordination of
the distribution of estate property with the distribution of property subject to criminal
forfeiture.
Government cooperation is in our financial interest.
The investment has been substantial.
Over 1.3 terabytes of data has been collected and compiled.
Much of the information has been provided only to government authorities, sometimes
directly and sometimes in summary presentations.
The debtor is limited in what it can say publicly and provide to certain parties an interest
because of the pending government investigations.
However, the debtors were able to publish earlier this week the first interim report
of Mr. Raid of the Independent Directors, a report that focuses on control failures
at the FTX Group prior to filing.
The gist of this report is clear.
Mr. Bankman-Fried repeatedly, pervasively, and often persuasively lied to stakeholders
and the customers and creditors in order to maintain a digital con game.
The FTX exchanges appear to the user as legitimate.
In fact, superficially, they appear to process trades and information more quickly and conveniently
than competitors.
The app worked beautifully, but in truth, it was a facade, a digital Potemkin village,
or perhaps more apt, a video game.
Behind the user interface, there was no correspondingly sophisticated reality, no equivalent process
for segregating assets or reconciling trades, no reliable relationship between positions
reflected in the online game and the underlying positions held in the real world.
The debtors are working on a second report that will focus on the violation of basic
principles of asset segregation.
The debtors will endeavor to make these reports available on a rolling basis and hope they
will facilitate the common understanding necessary for productive plan discussions.
Other developments include the guilty pleas of Mr. Singh joining Mr. Wang and Ms. Ellison.
Those who have pled guilty also have agreed to provide assistance to the government, and
Mr. Wang in particular has provided material assistance to the debtors as well, helping
us locate additional assets.
And we've seen additional charges against Sam Bankman-Fried.
We also appreciate the U.S. criminal authorities working in parallel with us to secure assets.
This includes approximately $100 million of cash in the name of FTX digital markets, as
well as the often discussed hood stock.
From the debtors' perspective, Your Honor, we see no tension between the debtors and
the U.S. attorney as to whether particular assets are recovered by the U.S. attorney
or by the debtors.
In this case, we believe victims entitled to restitution and creditors entitled to a distribution
in Chapter 11 are functionally equivalent.
We will continue to work with the U.S. attorney on this basis.
Operationally, we've reconciled customer balances across an incredible 10 million accounts.
We have a considerable cost and expense fortified the AWS security environment.
We've retained a core team of continuing employees, and Your Honor has approved a CURP.
We've rationalized our use of office space and our footprint.
And importantly, we have returned cryptocurrency to customers in Japan by opening full withdrawals.
Japan has a cryptocurrency regulatory environment that was responsive to the Mt. Gox insolvency.
Cryptocurrency generally must be kept in segregated cold storage, and customers have a clear ownership
right in the cryptocurrency under Japanese law.
As a result, Japan is the only place in the world where cryptocurrency was actually kept
segregated by FTX, and the segregation was never broken.
The debtors also have been working very hard to open withdrawals of segregated cash in
Cyprus, where there are different but also effective customer protections with respect
to cash deposits.
These jurisdictions, however, are notable exceptions.
Everywhere else, the situation as to customer rights and asset segregation is unclear.
Paying and tax are things normally taken for granted by lawyers, but the debtors now are
not reviewing balance sheets because there are no reliable balance sheets.
Instead, the debtors have been building balance sheets from primary source material.
That material includes banking records, AWS, the cloud environment, QuickBooks, and a category
of unstructured data, which is accountantspeak, for emails, text, and even chatroom entries.
The initial fruits of this effort were the reports the debtors made public on customer
shortfalls on the exchanges, and the schedules and statements filed only last month.
Efforts now underway include recreation of inter-silo and inter-debtor transactions,
led by our financial advisor, Alvarez and Marsal, the development of historical financial
statements, led by a team of forensic accountants and ALEKS partners, and efforts to put the
debtors in a position to file accurate tax returns, led by Ernst & Muell.
As I mentioned previously, one of the important tasks of the debtors is managing $7.3 billion
in effectively liquid assets.
Over 75% of our cash is in 345 compliant accounts, which in the current banking environment,
the protections of 345 seem especially prudent.
About $500 million of our cash is held outside of 345A compliant accounts pursuant to our
cash management order.
We continue to examine whether or not we can move more of that cash into 345A accounts.
Our cryptocurrency.
The debtors hold $1.6 billion in cryptocurrency at current market values and cold storage
controlled by the debtors.
The remaining category A cryptocurrency is staked or on third-party exchanges, and we
may migrate that into cold storage over time, but it's impractical to do it at the current
moment.
The board is monitoring all of these exposures, taking expert advice on cryptocurrency custody
and security risks, and discussing the risks involved and potential alternatives with the
committee and other stakeholders.
These assets will continue to grow.
Avoidance actions and other outbound litigation will be an important source of recovery for
creditors.
Actions so far include our $460 million settlement with Modulo, a $53 million cash settlement
with DelTec, avoidance actions against three other Chapter 11 debtors.
These include a $445 million administrative preference claim into the Voyager bankruptcy,
and substantial claims against BlockFi and Genesis.
These early avoidance actions are the tips of the icebergs.
We have reviewed substantially all the historical off-change transactions by the debtors at
this point.
All the transactions that we believe may be avoidable, and the facts of these suggest
compelling causes of action relating to several billion dollars of lost value.
We also are advancing our work to review preferential transactions on the exchanges themselves.
Finally, in addition to the grayscale litigation, which we've commenced, and then finally turnover
actions.
One of the most difficult issues that we've faced is that we continue to discover assets
of the debtors that were held by nominee owners on behalf of Alameda and FTX.
One example is the court's recent authorization of the turnover of an account at OKCoin, including
over $150 million of cryptocurrency held in the name of an individual, but belonging to
Alameda.
We'd like to thank the dozens of exchanges and other parties that have been cooperating
with us in these activities.
We also have many valuable assets to sell.
The court has approved the $96 million sale of our position in Miston Labs, and the $45
million sale of a position in certain Sequoia funds.
We received, we've continued, we have a, as we've said before, a very substantial set
of venture book investments.
We have now reviewed substantially all of those investments and are trying to decide
the path forward on a venture investment by venture investment basis.
The de minimis asset sale procedures that have been approved by the court, we've used
for $5 million of proceeds so far, although there's dozens of transactions under discussion.
And then finally, we have ongoing sale processes as announced that have yet to reach their
conclusion.
These include the transactions that we've noticed, that we've mentioned before, as well
as token investments and other stray investments of various sorts.
So where is all this going?
We standard a day in the middle of April.
In the second quarter, the debtors complete the 90-day review period we set for internal
discussions concerning the continued operation of the exchanges, discussions which the committee
has been an active participant.
We'll be discussing next steps and alternatives for the potential restart or recapitalization
of the exchange, conventional ideas and novel ideas with the committee and other stakeholders
over the coming weeks.
We also are going to start plan discussions later this quarter.
Our goal is to file with the court a preliminary plan of reorganization in July.
We would like to set a bar date promptly.
Our current expectation is that we will set a non-customer bar date at the end of July.
Our customer bar date requires the creation of a bespoke claims portal and raises a number
of complicated issues.
We're preparing the portal in consultation again with the committee and want to have
an operating demo to run through prior to launch.
So we anticipate the customer bar date, like the government bar date, will be at the end
of September.
That's a bifurcated bar date process, but it allows us at least to get the information
that we're going to yield, that the non-customer bar date will yield.
This is in part because the level of information we have about non-customer claims is, let's
just say it will be benefited by the bar date process as we start to decide we have a pretty
good idea now of the nature of customer claims against the estate, but the nature of non-customer
claims we have a lot less certainty.
And so we bifurcated the bar date so we can approach the plan process having a better
sense of how significant are non-customer claims, in particular loan counterparting
other claims into Alameda.
We're aiming to have a disclosure statement filed in the fourth quarter, a disclosure
statement hearing in the first quarter of 2024, a planned solicitation that bridges
the quarters, and finally, plan confirmation in the second quarter of 2024.
Now these are of course an aspirational calendar, but we believe it's a sensible calendar,
and we believe the filing of a plan early is important given the nature of the case.
So far in the case we've avoided serious litigation with economic parties.
As we've considered internally at great length the central legal issues in the cases, such
as the nature of customer entitlements, the distinction or lack of distinction between
legal entities, they all raise significant equitable as well as legal questions.
The same is true for stakeholder assertions of constructive trust, a phrase that we've
heard, Your Honor, from dozens of different stakeholders all across the capital structure
seeking to elevate their own claim.
The debtors believe that discussion, settlement, and if necessary, litigation of all of these
issues will be easier if we first table a plan of reorganization that shows all stakeholders
and potential litigants the big picture of how they and others will be treated.
We need to show stakeholders that plan first and resolve disputes about the plan second,
given our facts.
Throughout this process, asset recovery efforts will continue.
That's all I have, Your Honor, but we wanted to make sure that we at least were able to
tell Your Honor and stakeholders not just something about the history of what's accomplished,
but a roadmap going forward.
So absent questions from Your Honor.
I'll turn to today's agenda.
Let me just ask a question about the exchange restart.
What does that entail?
How will it work?
Do customers, will they be able to withdraw a fund or their coin?
What's the anticipation of how that's going to play out?
The short answer is we don't know yet.
So there's two exchanges, of course.
There's actually more than two exchanges.
There's two primary exchanges, DOTCOM and the U.S. exchange.
The options being considered include a restart of the exchange from an operational and a
functional perspective.
It is likely that requires the raising of significant capital.
There's a question posed whether the estate's capital should be used for that or whether
it should be third party capital.
There are some people that look at it as an M&A transaction.
Can we dispose of the assets, including the going concern value of the estate, for proceeds
to the estate and distribute those proceeds?
There are possibilities that customers could have an option to take part of their proceeds
in that they would otherwise receive in cash from the estate and receive from some kind
of an interest in the exchange going forward.
There are as many opinions on this, I think, as there are professionals involved in the
case, and that's a lot.
So it's a very, you know, I don't think we have an answer at this time.
What we have committed to do, as we spent the last about 90 days, the 90-day period
we gave to kind of the initial consideration of this is expiring, and we're going to sit
down with the committee and other stakeholders and think about it.
There's also a sequence and a timing question.
So there are some that believe that if there's anything to be done with the exchange, it
should be done quicker, as quickly as possible, which might imply some kind of 363 or other
things, and others that believe perhaps the exchange should be coupled with other assets,
as opposed to just being the exchange itself.
So a long-winded way to say, Your Honor, that all options are on the table, but we don't
have any particular path forward at this time.
Does there need to be a resolution of the—I know there's litigation pending about whether
the point that's being held in the exchange is property of the state or is it customers'
property?
Does that need to be resolved before we can reopen the exchange?
No, I don't think so.
I think that it depends on the nature and the structure of that transaction, right?
And that's again one of the things we're thinking about, is if we want to do something
with the exchange in advance of what I think is already an aggressive timeline for the
plan, as opposed to waiting to resolve when we resolve the plan, then I think we're all
going to have to get together and come up with a way to monetize, if you will, the estate's
investment in the—the value the estate has in the exchange in a way that is without prejudice
to the plan issues.
But there's obviously a relationship.
Thank you.
So on the agenda today, Your Honor, we only have three items, as I think Mr. Landis mentioned.
The first item, Agenda 9, is exclusivity.
Then we have Mr. Bickman-Freed's motion for relief from the automatic stay, and then a
status conference discussion in the emerging case, Agenda 14.
So Your Honor, I'll turn to the exclusivity motion, file the docket 846.
The debtor's request to extend the exclusivity period by six months is unopposed.
The Committee did file a statement to which we responded.
An absent question from the Court, we'd ask the motion be entered.
If we don't have any questions, did the Committee want to be heard on that?
We would like to, Your Honor.
Yes, thank you.
Your Honor, Chris Hanson with Paul Hastings on behalf of the Official Committee.
I'll try to make this brief, Your Honor.
The Committee's statement that was filed in connection with exclusivity was accurate
and not misleading.
It was direct and aimed at helping the Court to try to understand the Committee's frustrations
to date.
It was also aimed at holding the debtors to their newly minted timeline and their commitment
to be more transparent with Committee members than they have been to date.
Unfortunately, the debtors filed a surprisingly insecure response that the Committee believes
is disingenuous in some ways, and we have no choice but to correct the record.
As we noted in our statement, the primary issue the Committee has had with the debtors
is their lack of trust and engagement at the Committee member level.
The debtor's own exhibit highlights their concern.
Of the 1,636 documents provided to the Committee as listed on the exhibit, only 21 of them,
1.3% of the total, were seen by the members of the Committee as designated as non-professionalized
only.
Of those 21, two were the so-called UCC reports that the debtors referred to a few times in
their response.
To be clear, those are not really UCC reports.
They were debtor documents that were shared with the members of the Committee on the same
day that they were released to the public and accompanied by two of the three meetings
that were listed on the debtor's exhibit, which were walk-throughs of the documents
hours before they were publicly released on January 17th and March 2nd.
Obviously, if the Committee members have been given advanced access to the decks, they could
have asked more intelligent questions, made the calls more productive, and provided valuable
input on those presentations, but they were not provided with that opportunity despite
the requests of the Committee professionals to do so.
The only other meeting of the three that are referenced in the deck happened on March 30th,
after the Committee delivered the debtors a draft reservation of rights on exclusivity
that was far more strident than the one that it ultimately filed.
At the time of the delivery of the draft document, the Committee requested a case timeline and
a meeting with Mr. Wray.
The debtors did not disclose a case timeline to the Committee professionals at that point,
but they did, however, provide a high-level timeline when the call with Mr. Wray took
place a week later.
The debtor's reply would have the Court believe that both its detailed timeline and the call
with Mr. Wray were products of the debtor's own volition, but they simply were not.
They were prompted by the Committee, and we are pleased with Mr. Dietrich's disclosure
of the timeline today.
That's the kind of information that we believe the Court deserves and that we believe the
public deserves, and that we believe all the creditors and the customers deserve as well.
However, as an example of how the Committee members have been helpful to the debtors,
which is not referenced in any of the briefings, is the situation that unfolded over the weekend
after the Silicon Valley bank failure.
That weekend, Mr. Wray reached out to the Committee professionals and the Committee
members, and a productive dialogue occurred where the expertise of the Committee members
was helpful to the debtors in navigating a unique situation that confronted them with
respect to certain stablecoins.
It was and remains the Committee's hope that similar, interactive, roll-up-of-sleeves
and get-to-work meetings like those will continue.
The Committee also takes issue with what the debtors seem to be trying to convey in their
reply as to the Committee's role, which is simply one of administrative oversight.
As the Court knows, that is definitively not what a creditors' committee is limited to.
Section 1103 of the Code provides for the non-exclusive and expansive list of topics
that are appropriate for a Committee, including the investigation of the acts, conduct, assets,
liabilities, and financial condition of the debtors, the operation of the debtor's business,
and any other matter relevant to the case or the formulation of a plan in order to carry
out its role as a fiduciary for all creditors in a Chapter 11 case.
Similarly, Section 1109 of the Code permits committees to be heard on any issue in the
case.
In the end, Your Honor, the Committee believes that its members have real-world, digital
asset and cryptocurrency trading knowledge and expertise that can prove helpful to the
debtors in addressing the many issues in these cases and to expedite their conclusion.
The Committee looks forward to the forthcoming plan negotiations and the hard work to be
done and the many other tasks that are necessary to achieve its goal.
One note on the restart of the Exchange, Your Honor, the Committee does have a subcommittee
that is focused exclusively on the restart.
It incorporates many of the concepts that Mr. Dietrich discussed, and yesterday we were
happy to deliver to the debtors a term sheet on that basis, and we look forward to working
with them going forward.
Thank you.
Thank you, Your Honor.
Mr. Dietrich, any response?
Obviously, I expect the debtors and the Committee to cooperate fully, and there'd be a free
flow of information between the two.
I did not appoint an examiner because we have an independent board of directors and independent
CEO running the debtors, so I expect that there will be an open and free flow of information.
And we believe we have, and we will continue to try our best on that front.
The U.S. Trustee, Your Honor, made, I think, a wise choice, appointed a single committee
in this case, and we are, despite our growing asset value, far away from an equity district,
meaning that there should be alignment at a fundamental level between the debtors and
the Committee, and certainly in our relationship with the professionals.
We have had what I think is really an open, transparent, from our end, very productive
working relationship, but we take the feedback into account that we should do a better job
of, maybe, perhaps now that the case is established and some of the security and other informational
worries are fading in importance, we can continue to push in involving Committee members directly,
not just the professionals, in some of the decisions that we're making.
Thank you.
Anyone else wish to be heard on the exclusivity motion?
I'm satisfied that the requested relief is appropriate.
I will enter the order.
Has an informed order been uploaded?
Your Honor, I believe it has to the extent it has not.
I will get it uploaded.
Okay, thank you.
Thank you, Your Honor.
So I believe the next motion, Your Honor, is from Mr. Bainman Freed's counsel.
Yes.
Good afternoon, Your Honor.
Gregory Donnelly, Montgomery McCracken, on behalf of Samuel Bainman Freed.
I'm joined by my colleague, Edward Schnitzer, who has been admitted per OPJ.
In this case, he will be handling item number 10 on the agenda.
Thank you.
Thank you, Your Honor.
Next up.
Good afternoon, Your Honor.
For the record, Edward Schnitzer from Montgomery McCracken, Walker and Rhodes, on behalf of
Samuel Bainman Freed.
We're here today on Mr. Bainman Freed's motion for relief from the automatic stay to the
extent applicable to permit insurers to advance and to reimburse defense costs and fees under
Director and Officer's insurance policies.
The relief saw it as quite customary, as we highlight in paragraph 30 of our motion, including
orders entered by this Court in other cases.
To be clear, Your Honor, Mr. Bainman Freed is only seeking an order permitting the insurers
to advance or reimburse costs.
He's not seeking an order determining coverage or an order awarding him $10 million.
Specifically, Your Honor, paragraph two of our proposed order states, the automatic stay
imposed under section 362A of the Bankruptcy Code does not apply or to the extent it does
apply, the automatic stay is lifted and modified solely to the extent necessary to permit and
authorize Realm and Beasley to evaluate coverage and to make payments under and in accordance
with the terms of the DNAO policies to or for the benefit of Mr. Bainman Freed for the
reimbursement and payment of any covered defense costs incurred in connection with the pending
claims.
Your Honor, also contrary to what some of the objecting parties have claimed, Mr. Bainman
Freed is also not seeking an order to the exclusion of any other insurers who might
have coverage.
Far from it.
Mr. Bainman Freed simply sought coverage since he had no choice after the debtors refused
to indemnify him and refused to stipulate to stay with him.
It was not his right or place to seek coverage or stay relief on behalf of any other party
other than himself.
They are certainly free to do so as long as they comply with the Bankruptcy Code and the
policies.
Your Honor, why does Mr. Bainman Freed need this coverage?
Because he has been named as a defendant or is otherwise involved in criminal, regulatory,
civil, and other actions and proceedings that have resulted in and can be expected to continue
to result in significant unreversed, unreimbursed legal fees and other expenses.
We identified those actions and proceedings in paragraph 16 of our moving paper and I
will not repeat them here.
Your Honor, Mr. Bainman Freed is covered by insurance policies designed to protect against
exactly this circumstance.
The policies are structured to provide coverage for defense costs in these circumstances so
that individual insurers like Mr. Bainman Freed can mount an effective defense.
There are two policies relative to this motion.
The first is the Realm Insurance Policy, Realm Insurance Private Company Management Liability
Policy, which was attached to the motion's Exhibit B, and the second policy is the Excess
Claims Made Directors and Officers Liability Insurance Policy, which was attached to the
motion's Exhibit C. Your Honor, there are five important parts of those policies that
I would like to highlight for the court, which were highlighted in the opening paragraph
of our reply papers.
First, the policies contractually mandate reimbursement by the debtors of expenses incurred
by individual insured as the debtors agreed to indemnify all individual insured persons.
Second, the policies require the insurers to advance defense costs if the debtors refuse
so that the insurers can mount the defense.
Third, the policies prioritize payment as to the individual insured, not the debtors
if, quote, the loss due and owing by the insurer under a liability coverage part exceeds the
then remaining limit of liability applicable to such loss.
Four, the policies provide that a bankruptcy of the company shall not relieve the insurer
of its obligations under this policy.
And five, the policies require the company, in this case the debtors, to waive and release
the automatic stay with respect to the policy or its proceeds and agree not to oppose or
object to any efforts by any insurer to obtain relief from the stay.
Why are we here, Your Honor?
We're here because Mr. Banker and Freed asked the debtors to indemnify him as they were
required to do under the insurance policies, but the debtors refused to do so.
After being denied this right, Mr. Banker and Freed, through counsel, asked debtors
counsel to stipulate to relief from the stay, which is also customary in this court as well
as other courts, and again the debtors refused to do so.
So it was in light of that that we had no choice but to file this motion.
Whether the court concludes that the proceeds of the policies are property of the state
or not, sorry, Your Honor, whether this court concludes that the proceeds of the policies
are not property of the state because coverage is likely to be exhausted by side A claims,
or if this court concludes that the proceeds of the policies are potentially property of
the state, stay release should be granted so that the policies can be used for the purposes
that they were obtained to provide coverage to individual insured like Mr. Banker and Freed.
Your Honor, as the Eastern District of New York Bankruptcy Court explained in the first
central financial case, quote, DNO policies are obtained for the protection of individual
directors and officers. In essence and at its core, a DNO policy remains a safeguard
of officer and director's interests. Your Honor, let me address the elephant in the room.
Yes, Mr. Banker and Freed has been indicted and is a defendant in multiple lawsuits, but
Mr. Banker and Freed has not been convicted of a crime or found civilly liable, contrary
to what the objecting parties may have stated in their papers. He is subject to an indictment
and only that. As this court isn't aware, an indictment is not a conviction. It's merely
an accusation, no different than a complaint. Mr. Banker and Freed, like any other person,
is and must be presumed innocent unless and until found guilty of any criminal wrong.
He is like any other former director or officer of a company that seeks access to a DNO insurance
policy to pay for legal fees. Coverage under those policies for those legal fees does not
change simply because some people hope or believe that Mr. Banker and Freed is guilty.
I'd like to address the three responses that were filed, Your Honor. First, the committee
objection. As we noted in our reply, we submit that the committee's objection should be rejected
as they seek relief on behalf of the debtor, relief that the debtor is contractually barred
from seeking something that the debtor is recognized in their papers.
Well, let me ask you about that first because I question whether or not that provision is
even enforceable in bankruptcy. Isn't a void as a public policy issue? How can a debtor,
how can a company say pre-petition, we're going to agree that if we have property of
the estate, we're going to agree to waive our right to seek a stay, to live, or we're
going to waive our right to object to someone who wants to live the estate, to pursue those
assets? It seems to be counterintuitive to the whole purpose of the bankruptcy code.
I understand, Your Honor, it's like how I believe agreements to make a debt non-dechargeable
are not necessarily enforceable in a bankruptcy. Your Honor, it's possible, I will admit we
did not look into it. The debtors in their papers agreed. It was the only thing that
they agreed with us on in their papers. Your Honor, it may not be enforceable. We do not
rely upon that. We rely upon reasons for why stay relief should be granted here. But I
did want to note that the debtors, like I said, did apparently agree with it. So they
apparently were comfortable with it. And maybe it's because the policy is going forward post-petition.
And so you could get into questions there. But honestly, Your Honor, I don't know, we're
not relying upon that. We're not asking you to strike all the opposition because of that
and grant our relief as effectively unimposed.
Okay. Well, let me ask you another fundamental question. It has been the rule in this court,
at least, and I've ruled the same way, that where a debtor is a co-insured under a policy,
it is property of the debtors of state. And the debtor here is a co-insured under these
policies, correct?
Yes, correct, Your Honor.
So they would be under precedent in this court. It is property of the debtors of state, right?
Your Honor, as we set forth in our paper, we believe because of the priority of payments
that side A will come first, that there will not be anything left likely for the debtors.
And we believe because of that, and there's ample case law to support it, that it's not
property of the state. But as we put in our papers, should this court conclude otherwise,
that is why we also sought relief from the state to the extent that proceeds of the policies
are fine to be property of the state. They do have a potential interest. We believe it
is contingent and it is less than individual insurers, which includes Mr. Bank entry, but
does include other members. But Your Honor, to the extent you conclude that because of
that contingent interest, it is property of the state, that is why we also seek state
relief, Your Honor, as our alternative ground.
Well, doesn't that also contradict your position that you're taking that the priority of payments,
you're saying, you're saying that Mr. Fried, Banker Fried is not seeking to deplete the
$10 million. He doesn't think he, apparently he's going to deplete the $10 million. So
the priority of payment provision hasn't kicked in yet.
Correct. It has not.
Which means anybody can file a claim, including the debtors.
Correct. Anybody who is permitted to under the policies and under any bankruptcy code
provisions that are applicable is permitted to submit a claim. And I would expect that
the insurance companies will abide by the policy and review the claims, determine which
are appropriate or not, and pay them out as they would do as if there was no bankruptcy
proceeding. If that means Mr. Bankman Fried receives reimbursement, obviously that would
be great from my client's perspective. If it means others also receive reimbursement,
I'm sure that is great from their perspective. If it means the debtors receive some type
of reimbursement for some type of cost that they incur, that is also possible. The insurer
will follow the policies, which is all that we're asking. We're asking for the right to
submit the claim and allow them to go forward because the insurers have specifically told
us, and we understand why as sure as court, they have told us they will not look at our
claims until stay relief is obtained.
Okay, go ahead.
Your Honor, you touched on the fact that there are potential other parties that was a point
that the committee made in their objection. Once again, we don't believe that's a basis
to deny the motion. If there are other parties that would like access to the policy, they
merely need to comply with the policy and comply with any applicable code provision.
What I mean by that is if they are individuals and they are not being somehow covered by
an ordinary course professional, I suppose they would need to file a motion for relief
and say, be before this court and if it's granted, then they can do, assuming this court
grants the motion we filed, they would have a right to do it. But our point, Your Honor,
is nothing in relief that we've sought prevents those other parties from doing so and Mr.
Bankman Fried shouldn't be penalized simply because he filed a motion and others have
chosen not to. It honestly surprises us, Your Honor, we filed this motion a while ago. If
there were these other parties, I don't understand why they haven't filed something, but that
is their choice. What you heard, Your Honor, or what you read, Your Honor, I should say,
in the debtors and the committee's papers is there are these other employees who the
debtors have chosen to, it looks like, effectively indemnify and they're going to indemnify them
by providing them counsel from Covington and Berlin as an ordinary course professional.
And they've chosen to do that. They've chosen not to indemnify Mr. Bankman Fried and to
challenge his right to get reimbursement, but they've now told you that they're going
to seek reimbursement under the policies for at least perhaps some of Covington-Berlin
expenses. Why do I point this out, Your Honor? Because it shows the reason why this instant
motion should be granted. I don't think it would be appropriate to have one set of former
employees getting legal counsel effectively for free from their perspective, whereas another
set of employees, or in this case, another set of one employee receiving, having to pay
for his own legal counsel and having no right to seek reimbursement. Given this unequal
treatment, Your Honor, we believe stay release should be granted so that Mr. Bankman Fried
is certainly not worse off than these other employees who are getting this benefit of
the legal fee.
Well, can I just list a stay for everybody? Say, go follow your claim against the insurance
policy.
Your Honor, I suppose you could. I would submit that I believe generally speaking a
motion needs to be filed to seek relief. A motion was not filed for that. I believe it's
up to those individuals or entities to file that relief. We did go to the trouble. Again,
we went to the trouble because the debtors refused to stipulate to it. Had they told
us in response to a request for a stipulation, yes, Mr. Spencer, we think stay relief makes
sense. How about we make it for all individual insurers? I would have said yes. I unquestionably
would have said yes. I tell you today, I know I would have said yes. They didn't say that.
They just said no. Go ahead and file your motion. So I did. If this somehow wants to
be converted, and I would be more than happy for this to be one of the, I believe you said
there were 30 things maybe that they resolved contentially, I'd be more than happy for this
to be 31 if I'm counting right. It wasn't yet. If we can make it number 31 today, tell
me where to sign, Your Honor. I would do so.
Well, maybe I need to send everybody out in the hallway for a little bit so you're going
to resolve this motion. Go ahead. Finish your argument. Go ahead. Your Honor, bizarrely
the committee suggests that Mr. Bankman Fried will suffer, the quote is, will suffer no real
prejudice if the stay is not lifted. It's hard to respond to that claim because I don't
even understand how it could be made given that Mr. Bankman Fried is a defendant in multiple
civil actions, a defendant in various governmental action, and he has to pay for all that legal
litigation out of his own pocket and have no access to insurance proceeds of a policy
that's specifically applied to his current predicament. The hardship is clear, and multiple
courts have recognized that. By way of example, Your Honor, in Downey Financial Court, Judge
Shanxi stated, quote, the insureds would suffer a very real and easily identifiable hardship
if the stay is not lifted. Specifically, the insureds would have to pay 880,000 defense
costs as well as any defense costs incurred subsequent to the filing of this motion out
of their own pockets. Your Honor, if I can next move on to the objection filed by the
class action plaintiff, the onus objection. As we state in our reply, Your Honor, we submit
that objections should be overruled because A, they have no standing to seek the funds
under the DNO policies. B, they wrongly place their interest in potential recoveries in
their adversary proceedings ahead of everybody else, including Mr. Bankman Fried's rights
under the DNO policy. And lastly, they falsely claim that Mr. Bankman Fried has been found
liable for, quote, both civil and criminal unlawful conduct. The simple fact is that
it would be patently unfair to allow the class actions to proceed against Mr. Bankman Fried,
but at the same time deprive him of the right to access the proceeds to defend against these
claims. This right to defense was recognized by the Southern District of New York in the
MF Global case and also by this bankruptcy court and ally, Digital, both of which we
cited in paragraph 20 of our reply. Lastly, Your Honor, I want to touch upon the debtor's
objection. I already mentioned the state relief, so I won't repeat that again. I've already
also mentioned the Covington-Berlin issue. I think if there is another basis for access
to the DNO proceeds, claims should be made. I was a little surprised that the debtor said
it would be both unfair and inequitable for you to grant this relief. Again, as we said
before, what we think is unfair and inequitable is that Mr. Bankman Fried was denied a
debtor's right to indemnification. He was then denied the debtor's agreeing to his stipulation
and instead the debtors have chosen to indemnify certain employees for whatever reason and
provide them with counsel free of charge while at the same time trying to stop Mr. Bankman
Fried from having any access to the DNO proceeds. If there's anything that would be unfair and
inequitable, Your Honor, it would be to deny this motion with respect to Mr. Bankman Fried.
Your Honor, in sum, we respectfully request this court grant the motion and enter the
proposed order that was completed with the motion.
Thank you.
Thank you, Your Honor.
Who wants to go first, the Committee or the debtors?
Committee.
Thank you, Your Honor. The tempus quali of Paul Hastings for the Official Committee of
Unsecured Creditors. First, Your Honor, let me just very quickly address the point that
the Committee shouldn't be heard today. The Committee is not a party to the policy. We're
a party in interest to the case. There's no reason offered either in contract or in law
as to why the Committee objection shouldn't be heard. And I know, Your Honor, through
your questions, it seems to be recognized in that, but I did want to mention that.
I think, Your Honor, one of your questions was right on point as well, and that is Mr.
Bankman Fried misinterprets the policy. The policy here does not provide any priority
to the side A claimants in the circumstances in which we stand here at the moment. The
priority, if any, only arises under the terms of the policy if a claim is going to, at that
point, exhaust the policy. So there is a sharing of the 10 million in aggregate proceeds between
the side A directors and officers and the debtors under side B, C, and D of the policy.
And because there is a sharing, Your Honor, as Judge Silverstein explained in the Boy
Scouts case very recently, the debtor's interest in the proceeds requires protection from
depletion and overrides the interests of the directors and officers. That's 642 Bankancy
per quarter, 504 and 573. So as we stand here today, it's actually the estates that have
a priority to the policy, to the proceeds of the policy, not the directors and officers.
Given that, Your Honor, and I think, again, your question to recognize this, there is
no question as a matter of law and contract that the proceeds here are property of the
state, and Mr. Bankman Fried then has the burden of convincing this court that state
relief is appropriate. No evidence has been presented by Mr. Bankman Fried in that regard.
And so let me hit those points in particular. The first, Your Honor, is that, excuse me,
I just lost my voice. There is prejudice to the estates if the state is lifted and Mr.
Bankman Fried is able to access the insurance proceeds for the very simple reason that the
debtors will then have to pay the costs of defending various claims, various investigations
that are pending now, not hypothetical, but that are pending at the moment, including
the class action complaint that the movement mentioned in argument and opposed the motion
as well. So there's nothing speculative or hypothetical about it. That exists today.
And absent being able to access this particular policy of these particular debtors, the assets
of the estate would be diminished in that regard. Second, as to the prejudice that Mr.
Bankman Fried claims that he would sustain, again, no evidence has been presented. And
in that regard more particularly, the motion itself at paragraph 22 references that Mr.
Bankman Fried by and through counsel submitted notice letters to various other insurance
carriers, including Realm here. But no evidence has been presented as to what other coverage
Mr. Bankman Fried has made claim to and may be receiving. In particular, we mention in
our opposition, it's the committee's understanding that there is a $20 million DNO policy of
a different debtor, paper bird, that does not contain side B, C, and D coverage. And
thus the issues that we're discussing today are not raised. But as I said, no evidence
in the record in that regard at all. Now, of course, the court has great discretion
and latitude in determining whether to lift the stay and in considering balancing the
equities. The court can consider in this regard the charges and claims that are very significant
against Mr. Bankman Fried, his alleged complicity in the very actions that led to these bankruptcy
cases, and the fact that three of his closest executives have pleaded guilty to serious
crimes. Those are all relevant facts before the court today. And that's even while we're
recognizing, of course, that Mr. Bankman Fried has the right to contest those charges and
claims. But the facts still remain of what the charges are as we look at the balance
of the equities before your honor. Finally, your honor, just if the court is inclined
to grant the motion, we would request that the movement be required to comply with Banker's
2016 and file applications with the court so that we can, the estates can monitor what
proceeds from these policies are being used and in what manner. So unless the court has
any other questions, those are the points I want to raise.
Thank you. No questions.
Thank you, your honor.
Good afternoon, your honor. For the record, Brian Gluckstein, Sullivan and Palmo for the
record. Your honor, we filed a response to the motion, as your honor knows. We share
the concerns that your honor raised about the enforceability of the provision, prevents
us from objecting. We, of course, understood the committee was going to be objecting to
this motion. We thought it prudent not to necessarily get into a fight with the insurance
carriers at this stage. From our perspective, your honor, there are a number of points that
Mr. Bank and Creed has assorted that are inaccurate. Mr. Vesquale addressed a number of them, particularly
how the policy works. And it is critical here, your honor, that the debtors do have coverage
under this policy. We do believe it's an asset of the estate. And we do believe that the
debtors today have claims under that policy with respect to side B, side C coverage. So
it's not a hypothetical as to whether there is a real interest here of the debtors, as
the court is considering whether or not to grant state relief to Mr. Bank and Creed.
The other point raised and articulated again today with respect to the fact that we are,
as the debtors, choosing certain current and former employees to indemnify and provide
counsel to, to cooperate with investigations is, of course, true. And that's this, Mr.
Bank and Creed's papers make it sound like this was novel and new. That arrangement was
disclosed back in February and in the declaration provided by the Covington firm in connection
with the OCP retention in paragraph five. It was disclosed very clearly that we had
the debtors had requested that that firm provide services to represent quote current and former
employees of the debtors in connection with ongoing investigations by the government,
as well as related inquiries from counsel to the debtors and third parties. And of course,
your honor, that's providing a benefit to the estate. These are individuals that have
information and they're sharing that information with the debtors in connection with the
investigations highlighted and walked through by Mr. Deedorick earlier and with the government.
Mr. Bank and Creed is not in that camp. Mr. Bank and Creed, of course, is not cooperating
with the debtors. There was a suggestion that we forced him to file this motion today. We
did decline to enter into any sort of stipulation as to state relief. We have no obligation
to do so. Even if the provision in the policy is enforceable, despite the concerns your
honor raises, it doesn't require us to cooperate with Mr. Bank and Creed. It simply states,
the language states that we would not oppose state relief, which we have not done. We do
think that certainly the question, the debtors, to be clear, have no intention of cooperating
with Bank and Creed on this or other issues at this time. With respect to the question
of one former officer director versus others accessing the policy, and we did raise this
in our submission, your honor, we do think that if the court is so inclined to access
the policy, that Mr. Bank and Creed should not get a leg up amongst among the other potentially
insured parties here today. And so we certainly understand and agree with the points raised
by the committee, but to the extent state relief is granted, it probably should be granted
for all. Thank you, your honor.
Thank you. Anyone else wish to be heard before I go back to Mr. Schnitzer?
Thank you, your honor. I'll be brief in responding. Your honor, first with respect to what the
committee said, they used the word sharing, and this was a word that they also used in
their motion, which I wanted to highlight. They want to give Mr. Bank and Creed nothing,
and they want to give all the proceeds to somebody else, whether that be Covington,
or the others, or somebody else. I don't believe that's the definition of sharing. I don't
believe that's the definition of anyone sharing, so I think if you truly want to do what the
committee is asking, which is have this policy shared, the relief thought should be granted.
If it's to be in a stipulation where it's granted with respect to an individual insured,
and then people can file their claim, certainly, but sharing does not mean all the money goes
to everybody except for Mr. Bank and Creed. That's not sharing. Your honor, I would also
note this goes to their argument in terms of the prejudice to the estate. They're arguing
basically that they'd be prejudiced because we would have access to money, and they would
have the debtors or the other insured would have access to money at the same time. They're
suggesting that basically the estate should get all the access to the money first, and
only if somehow after that there is leftover, then perhaps someday, years in the future,
you should grant this motion. That is not what the body of law says on this, your honor.
I don't think that's correct. They also made a point with respect to indemnification, and
I would just say, your honor, any payment of defense costs, and this is from the allied
digital case, quote, any payment of defense costs will remove any indemnification claim
individual defendants would have against allied digital. That works for Mr. Bank and Creed
as well. Mr. Bank and Creed does have a potential indemnification plan against the debtors.
If he receives reimbursement from the insurance proceeds, that satisfies the claim. Same as
perhaps any of these other individual insureds have. Your honor, the debtors again made this
point about these other parties, and I just wanted to state something clearly. They state
in their papers that we inappropriately sought the relief only with respect to the payment
of insurance proceeds to Mr. Bank and Creed. Again, your honor, from my perspective as
Mr. Bank and Creed's lawyer, that's all I could do. Your honor, I don't believe it's
appropriate. I believe it would in fact be unethical for me to file a motion for relief
and stay on behalf of people who I don't know. I can't even identify their names and who
actually, I believe, are being represented by another law firm, your honor. I believe
I'd be subject to, we'll say, lots of problems if I did that. So I think they're suggesting
that this was inappropriate, particularly when any party could have filed a motion at
any time, including a few minutes before this hearing, your honor. That's not correct.
Lastly, your honor, the committee suggests that this should be subject to some sort of
FIAP. In support of that, they cite to a 2005 case out of Ohio and a 2008 case from Florida.
Notably, they fail to cite to any case from Delaware. We have seen no case in Delaware
that does that. I'm not suggesting that means they don't exist. As you know, a case is not
the easiest thing to search, so it's possible. I don't believe it's appropriate. I don't
believe it's appropriate, particularly in this case. Mr. Bank and Creed is, as you know,
is a defendant in multiple class actions and is a target of multiple government investigations.
If he had a file of FIAP setting forth what his lawyers are doing for him, you'd either
have one of two situations. Either you'd have to reveal his strategy to the people who are
trying to proceed against him, or we would have to essentially redact almost the entire
invoice such that what you would have before you would look like a bunch of black lines,
is what it would look like. Your Honor, I don't believe it's appropriate. I also believe
it shows really the true intent here, and that's just to frustrate Mr. Bank and Creed's
ability to defend himself. Not only trying to deprive him of the right to proceed, but
then trying to condition it, well, if he can have a right to proceed, he should have to
file a FIAP. Something that they didn't suggest with respect to any other individual, something
that doesn't govern Covington and Burlington right now, as long as their fees are under
$200,000. So it seems like this is once again special achievement for Mr. Bank and Creed.
Well, in general, I would say everyone likes to feel special. This is not one of those
circumstances here where he should be treated differently. I would say this, Your Honor,
if you do believe some type of notice is appropriate so that this court is aware and so that perhaps
other parties are aware, you could do what was done in one of the cases cited by the
committee, and that's the case in Reed Beach First National Bank shares. It's 451 BR 406.
In that case, what the court said is the insurer should review fees paid under the defense
cost provisions of the policy to ensure that the costs actually relate only to the defense
of the directors and officers and that the fees and expenses were actually incurred and
necessary and reasonable, and at least five business days prior to dispersing any funds,
they should notify, in that case it was a trustee, notify the trustee of the amount
of defense cost paid. So basically what the court did in that case is said, told the insurers,
do your job, do what your policy requires you to do and what you were presumably doing
before the bankruptcy, and right before, as in five business days, you're going to disburse
funds, notify the bankruptcy estate that you're going to search so that people kind of have
a running total of what's being done. So if you believe that some type of notice is appropriate
so that people kind of know the balance, that I would suggest is a reasonable solution which
would not get into Mr. Bankman-Preet or anyone else's attorney client work product and just
general defense strategy issues. Thank you, Your Honor.
Thank you. I'm going to take a recess here. I don't know if there's any willingness or
desire for the parties to talk to one another about a potential resolution here. I mean
the options are I open this up for, I lift the stay for everybody so people can assert
their claim as it comes in and the insurance company will decide who gets paid and who
doesn't. Another option would be I don't lift the stay, but at the end of the day, at some
point in the future, parties come forward and say, well, this is the cost that we incurred
in this period of time and so we want reimbursement under the policy, something to that effect.
The other third option is I just deny the motion. So I don't know if, I'm going to take
a recess so you can talk if you want to. I don't know if I'm going to come back and give
you a ruling right now. I may. I may not. But let's take a recess for, let's take a
recess until 2 20 and I'll come back on the record. Yes. Your honor, I rise only to correct
something on the record, Jeff Saban from Veneville representing OKCoin and their affiliate OKX.
And I am happy for this court's approval and for all the cooperation that we got from
debtors council that led to the soon turnover and transfer to these estates of more than
$60 million. But the information that was exchanged was all pursuant to a confidentiality.
The motion itself and your order doesn't designate which of the two exchanges otherwise is turning
back what money. The accounts themselves are identifying the motion. The order approves
it. And so I don't want anyone on the press listening or anything else to say that it
was OKCoin as I think in the burden that Mr. Diedrich is referring to that is returning
a particular account that has roughly 150 million. I just wanted to correct the record.
Thank you. All right. Let's take a recess. Thank you.
Thank you.
OK.
Well, in order to lift the state, the burden is on the movement to prove cause.
And frankly, I have zero evidence to establish cause here.
Mr. Bankman Fried did not put on any evidence whatsoever as to what, the balancing of the equities here.
What harm is going to occur to him? I don't know what other insurance policies he has access to.
I don't know what other assets he has access to privately that would allow him to cover these costs and then recover them later under this policy.
I have nothing to show that there was cause here.
It was also the burden on Mr. Bankman Fried to prove that there would be no harm to the bankruptcy.
That has not been done either.
And finally, that he had the probability of success on the merits.
And I have absolutely no evidence whatsoever on that either.
So at this point, I have no choice but to deny the motion for lack of evidence.
I'll do so without prejudice.
If Mr. Bankman Fried wants to come back and put on an evidentiary hearing and will establish the elements necessary for me to lift the automatic state,
he's free to do so, but we'll deal with that another day.
So for now, the motion is denied.
The party should submit a or Mr. Bankman Fried's council should submit a form of order denying the motion without prejudice.
And we'll go from that.
Anything else before we adjourn for the day?
Thank you, Your Honor.
I got Brian boxing for the debtors.
The only other thing on the agenda today, Your Honor, was still was item 14, which was a status comp, the emerging case.
The parties did submit yesterday afternoon and agreed upon stipulation that the parties worked through since the hearing in March to address the issues that your honor raised at that hearing that is now agreed and executed.
Your honor saw.
We will be submitting that certainly in the FDX case and emerging case and block by be doing so in New Jersey in its case to get that formally approved by your honor as expeditiously as possible.
So that those states can go into effect.
But I did see I thought correct me if I'm wrong, but I thought I had read that that that it's contingent on both courts approving it.
It is your honor to be effective.
Both courts, so I probably need to call Judge Kaplan and find out when he's going to approve it before we're going to have to do it simultaneously.
I got I know that.
The Blackfriars Council.
But yeah, I mean, I think from our from our point of view, we don't I think Blackfriars agreement that there isn't any anticipated certainly issues there.
I wouldn't think so.
Yes, but yet we will we will submit an order to your honor with the stipulation asked that that be entered.
Other than that, I don't unless there's any other matters in the emerging case that your honor wanted to address, I don't think there is anything for the parties.
OK, thank you.
So you stand up.
I did, your honor.
Derek Abbott of Morris and Nicholas here for Blackfriar.
We're going to submit it expeditiously.
I think all parties would like to see it approved by both courts as quickly as possible.
So we'll do whatever we can to make that happen.
I'll just submit it under C.O.C.
I'll and I can enter it right away.
I have no problem with I've reviewed it.
I think it's appropriate and I would enter the order.
So once it's submitted to me under C.O.C., I'll do it.
We'll do, your honor.
Thank you very much.
All right.
Thank you very much.
We are adjourned.
Thank you.