However, legal experts say they are skeptical about FTX’s chances. Marc Powers, an adjunct professor of law at Florida International University who served as counsel in the liquidation of Bernie Madoff’s infamous Ponzi scheme, says the exchange is trying to “get ahead of the other creditors” in the GGC bankruptcy . “Why should the bankruptcy of FTX, or FTX as 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 company’s yield farming service, Gemini Earn, which allowed clients to earn interest on their crypto, was introduced into GGC’s loan portfolio. When the lender filed for bankruptcy, $900 million in assets from Gemini clients was locked inside.
Gemini has already liquidated $280 million in collateral posted by GGC in August to recoup some of the lost money. But should FTX be successful in its recovery, the 340,000 Gemini Earn customers will be significantly out of pocket. Gemini did not respond to a request for comment.
“I don’t think the Genesis bankruptcy court will grant FTX’s motion,” says Powers. “Given the magnitude of the claim, I think it would be extremely disruptive.”
But if the motion is granted, things will get messy. In fact, two judges, from different jurisdictions, would be involved to some extent in both bankruptcies, Powers says. “That’s generally not good.”
If the case goes ahead, GGC will likely argue that the $1.8 billion loan repayments were made in the ordinary course of business, which would exempt them from recall. There are also questions, Powers and others point out, raised by the fact that FTX did not specify the dates of the recordings in the application.
But it’s not guaranteed that even if the New York judge goes ahead with FTX’s claim, the dispute will ever make it to court. According to Alan Rosenberg, a partner at law firm MRTH and a member of the American Bankruptcy Institute, chargeback cases are unlikely to eventually go to trial — they almost always end in a settlement. And FTX can use this fact to its advantage. “The truth is that there is an economic consideration to be taken into account when defending [against clawbacks]’ says Rozenberg. “Even if you have a great defense, it’s going to cost money to litigate. So you have to weigh up whether it is more beneficial to pay an amount to get rid of the claim.”
The only mercy for creditors, Rosenberg says, is that both FTX and GGC — as bankrupt entities — have a fiduciary duty to come to an agreement as soon as possible. “Everyone’s goal is to make a distribution to creditors. The more you fight, the more the estate will deplete,” he says. “Both parties have an interest in reaching a solution quickly.”
Ahluwalia does not share the same optimism. He says the likely outcome will be a protracted negotiation between FTX and GGC’s attorneys over the validity and scope of the recovery claim, all of which will be paid on creditors’ dime.
Solving these problems takes time. But the longer the legal dispute lasts, the more money leaks from the creditors’ pots into the pockets of the law firms. “I don’t think the FTX claim is valid. I think it’s a stretch,” Ahluwalia says. “I think John Ray is billing creditors for a small opportunity. And who’s making out like bandits? The lawyers.”
