Sam Bankman-Fried’s Crypto Firms Had Close Connections to Voyager Digital and Its Bankruptcy Destruction – CNBC | Vette Leader

Sam Bankman-Fried, Co-Founder and Chief Executive Officer of FTX, in Hong Kong, China on Tuesday May 11, 2021.

Lam Yik | Bloomberg | Getty Images

Sam Bankman-Fried became a crypto billionaire and one of the most prominent players in the industry by making cryptocurrency exchange FTX a top site used by traders and investors.

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

While Bankman-Fried, who lives in the Bahamas, has the financial advantage of opacity, his exposure to the broader industry washout was made clear last week during a five-hour Chapter 11 bankruptcy hearing in New York’s Southern District over beleaguered crypto brokerage Voyager Digital.

Voyager is among a growing number of crypto firms seeking bankruptcy protection amid a spate of customer withdrawals following the collapse of Bitcoin, Ethereum and other digital currencies. Bankman-Fried’s role in the morass is further complicated because he also controls quantitative trading firm Alameda Research, which borrowed hundreds of millions of dollars from Voyager and became a major stock investor before turning around and offering the company a bailout.

Meanwhile, Bankman-Fried is attempting to play the role of industry consolidator by buying up distressed assets, both as a bet on their eventual recovery and to bolster its position in the US. In July, FTX bought crypto lending company BlockFi, and two months earlier Bankman-Fried announced a 7.6% stake in seedy trading app Robinhood. Bloomberg even reported that FTX was attempting to buy Robinhood, though Bankman-Fried denied active talks were ongoing.

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

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

Last week, lawyers for Alameda Research and Voyager squabbled in court over a deep and complex relationship between the two companies. Documents reviewed by CNBC show ties dating back to September 2021. In Voyager’s bankruptcy filings, the company disclosed that Alameda owed the company over $370 million, but did not say how long Alameda had been a Voyager borrower.

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

Voyager’s court documents and financial statements show that Alameda went from borrower to lender in weeks after the 3AC debacle left Voyager in a desperate position. Bankman-Fried’s firm provided Voyager with a $500 million bailout in late June.

Joshua Sussberg, a partner at Kirkland & Ellis who represents Voyager, said in court that Bankman-Fried “wore a lot of hats” during Voyager’s rapid journey from wealth to bankruptcy. Indeed, a few weeks after Voyager filed for bankruptcy, FTX and Alameda jointly came forward as a potential bidder for Voyager’s customer accounts, with Bankman-Fried giving his testimony priority was to offer them liquidity.

Bankman-Fried took to Twitter to argue his case, turning a normally boring trial into something of a circus. Voyager’s legal team was not pleased and suggested the billionaire was trying to gain leverage in a potential transaction.

“Parties in our process have specifically expressed concern to us that FTX has a head start and is working behind the scenes to force its way,” he said. “I want to assure all parties, the court and our customers that we will not accept this.”

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

Michael Wiles, US Bankruptcy Judge for the Southern District of New York, didn’t like the direction of the arguments.

Speaking to attorneys, Wiles said he had no intention of turning the hearings into “a sort of cable news show with people blaming each other and giving highly characterized descriptions of their previous proposals or discussions.”

Voyager was initially a lender to Alameda

Loan balances to the British Virgin Islands-based funds fell to $728 million in March 2022, accounting for 36% of Voyager’s loaned crypto assets, before falling to about $377 million three months later. Disclosure data was provided by FactSet and sourced from Canadian Securities Administrators.

Voyager’s relationship with Alameda quickly shifted from a lender to a borrower as 3AC’s default on the $654 million owed by Voyager brought the firm down.

Alameda stepped in with a June 22 bailout, albeit with limitations. The $500 million rescue — $200 million in cash and USDC and approximately $300 million in bitcoin, based on prevailing market prices — had a capped withdrawal rate that matched the funding amount over a 30-day period capped at $75 million.

Alameda’s attorneys told the court Thursday that the loan was granted “on an unsecured basis” at the express request of Voyager management.

By this time, Bankman-Fried was already a major shareholder in Voyager through two Alameda investments.

In late 2021, Alameda completed a $75 million stock purchase and received 7.72 million shares at $9.71 a share, according to Voyager’s filing for the period ended Dec. 31 . The share price has fallen to $2.34.

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

As the owner of at least 10% of Voyager’s equity, Alameda was required to file disclosures with Canadian securities regulators. But on June 22, the day of the bailout, Alameda sold a block of 4.5 million shares, reducing its stake to 9.49% and nullifying reporting requirements under Canadian regulations and Voyager’s own filing. The same filing shows that the issued shares “were subsequently canceled by Voyager.”

Disclosure of the sale indicated that by bringing its stake below the 10% threshold, Alameda was giving away a 2.29% stake worth about $2.6 million.

Bankruptcy of Voyager

Neither Bankman-Fried’s capital injection nor the bailout financing could stem the tide as customer repayments ate up Voyager’s cash. Nine days after the announcement of the $500 million package, Voyager Client withdrawals and trades frozen. On July 6, Voyager declared Chapter 11 bankruptcy.

To reassure the platform’s millions of users, Voyager CEO Stephen Ehrlich tweeted that members with crypto in their accounts may be entitled to a grab bag after the company went through bankruptcy proceedings, including a combination of part of their holdings becoming shares in the reorganized Voyager, Voyager tokens and any proceeds they might receive from the now defunct loan to 3AC.

None of this is guaranteed. Voyager customers made a small gain in bankruptcy court Thursday after the court granted them access to $270 million in cash Voyager held at the Metropolitan Commercial Bank. For everything else, however, users are still unlucky.

Bankman-Fried says he’s here to help customers get back up and running and reclaim what they can. Voyager’s attorneys, on the other hand, are presenting the FTX-Alameda offer as a fire sale.

Whatever happens, this could be Bankman-Fried’s last-ditch effort to cash in on his massive financial commitment. In a July press release, he attempted to offer his offer as a benefit to Voyager customers suddenly caught up in an “insolvent crypto deal.”

Bankman-Fried said in the statement that the deal would allow Voyager customers “to obtain liquidity early and reclaim some of their assets without forcing them to speculate on bankruptcy outcomes and take unilateral risks.”

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