Legal experts, though, say they’re skeptical of FTX’s chances. Marc Powers, adjunct professor of law at Florida International University, who acted as counsel in the liquidation of Bernie Madoff’s infamous Ponzi scheme, says that the exchange is attempting to “jump ahead of the other creditors” in the GGC bankruptcy. “Why should the FTX bankruptcy, or FTX as a potential creditor of Genesis, be more important than any other?” he asks.
The largest of those GGC creditors is Gemini, the crypto exchange founded by Cameron and Tyler Winklevoss. The firm’s yield farming service, Gemini Earn, which allowed customers to earn interest on their crypto, fed into GGC’s loan book. When the lender filed for bankruptcy, $900 million of Gemini customers’ assets were locked inside.
Gemini has already liquidated $280 million worth of collateral posted in August by GGC to make back some of the funds lost. But should FTX be successful in its clawback, the 340,000 Gemini Earn customers will be left significantly out of pocket. Gemini did not respond to a request for comment.
“I don’t think the Genesis bankruptcy court will grant the motion of FTX,” Powers says. “Given the size of the claim, I think it would be extremely disruptive.”
Yet in the event the motion is granted, things will get messy. There would effectively be two judges, from different jurisdictions, involved to some degree in both bankruptcies, says Powers. “That’s generally not good.”
If the case proceeds, GGC will likely argue that the $1.8 billion in loan repayments were made in the ordinary course of business, which would exempt them from being recalled. There are also questions, Powers and others point out, posed by FTX’s failure to specify the dates of the withdrawals in its filing.
But it’s not guaranteed that, even if the New York judge allows FTX’s claim to continue, the dispute will ever get to court. The likelihood that clawback cases make it all the way to litigation, says Alan Rosenberg, partner at law firm MRTH and member of the American Bankruptcy Institute, is low—they almost always end in settlement. And FTX can use this fact to its advantage. “The truth is, there’s an economic consideration to be taken into account when defending [against clawbacks],” says Rosenberg. “Even if you have a great defense, it’s going to cost money to litigate. So you have to make a decision as to whether it’s more cost-effective to pay an amount to get rid of the claim.”
The only mercy for creditors, says Rosenberg, is that both FTX and GGC—as bankrupt entities—have a fiduciary duty to reach an agreement as quickly as possible. “Everybody’s goal is to make a distribution to creditors. The more you fight, the more it will deplete the estate,” he says. “Both parties have an interest in reaching a resolution swiftly.”
Ahluwalia doesn’t share the same optimism. He says the likely result would be a protracted negotiation between the lawyers of FTX and GGC over the validity and scope of the clawback claim—all of which will be paid for on the creditors’ dime.
Settling these issues will take time. But the longer the legal conflict goes on, the more money leaks from the creditors’ pot into the pockets of the law firms. “I don’t think the FTX claim is valid. I think it’s a stretch,” says Ahluwalia. “I think John Ray is billing creditors for a remote possibility. And who is making out like bandits? The lawyers.”