FTX, Three Arrows, and SEC Join Forces Against BlockFi’s Bankruptcy Plans, Unveiling Billion-Dollar Dispute

FTX, Three Arrows Capital (3AC), and the Securities and Exchange Commission (SEC) have united against BlockFi’s bankruptcy plans, revealing a billion-dollar dispute that has brought them together.

In a legal filing submitted by FTX on June 7, it has been argued that BlockFi’s proposed plans exploit bankruptcy regulations. 

The filing, titled “Objection of the FTX Debtors to BlockFi Debtors’ Motion for Approval of Disclosure Statement, Solicitation Procedures and Forms, and Confirmation Schedule,” underscores the critical matter at hand, involving disputed transactions valued at over one billion dollars.

On June 28, 2023, BlockFi submitted two significant documents to the court: the Disclosure Statement and the Second Amended Joint Chapter 11 Plan. 

The Plan includes provisions known as “Third Party Releases,” which offer legal protections to specific individuals and entities involved in the bankruptcy process. 

These Releases aim to address a wide range of legal claims, causes of action, and other obligations that may arise during the bankruptcy proceedings and to ensure the provision of any further relief deemed fair and appropriate.

FTX strongly opposes the Disclosure Statement and the proposed Plan, asserting that they unfairly diminish its significant claims against BlockFi.

FTX highlights substantial repayment and collateral amounts tied to a loan involving its trading arm, Alameda Research, totaling hundreds of millions of dollars. 

Furthermore, FTX points out $1 billion in collateral pledges made by Emergent Fidelity, a company established by FTX’s CEO, Sam Bankman-Fried, to hold shares in Robinhood.

3AC and SEC Join the Opposition: Objecting to BlockFi’s Disclosure Settlement

In addition to FTX, Three Arrows Capital (3AC) also joined the opposition against BlockFi’s plans. 

As one of BlockFi’s most significant creditors, 3AC disputes the proposed Plan and seeks to protect its claims. 3AC intends to oppose the Disclosure Statement Motion, citing violations of procedural fairness and due process requirements. 

They argue BlockFi can only make their claims disappear by meeting these basic requirements. The proposed confirmation procedures violate the automatic stay applicable in 3AC’s Chapter 15 case. 

The Debtors have not sought relief from the stay that prevents them from pursuing equitable subordination of 3AC’s claims.

Furthermore, the Securities and Exchange Commission (SEC) has opposed BlockFi’s plans.

In a limited objection and reservation of rights, the SEC raises concerns regarding the adequacy of the disclosure statement and various related matters. 

While BlockFi’s counsel has addressed some of the SEC’s problems, the SEC reserves the right to modify its objection and potentially object to confirming the Plan based on these or other grounds. 

The SEC does not provide a legal opinion on the compliance of the transactions outlined in the Plan with federal securities laws. Still, it retains the right to challenge transactions involving crypto assets.

Following objections raised by the Securities and Exchange Commission (SEC) regarding BlockFi, the company’s creditors have also voiced their concerns. 

They argue that BlockFi’s bankruptcy plan serves as an expensive and convoluted method to absolve executives of accountability for their poor financial decisions. 

As a result, these creditors believe that the company should instead undergo liquidation.