Sam Bankman-Fried’s Alameda, Voyager Digital sparring in bankruptcy court

Sam Bankman-Fried became a crypto billionaire and one of the most famous players in the industry by building cryptocurrency exchange FTX into 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 of nearly $10 billion in daily trading volume. But it’s still private, so the public doesn’t know how badly it has been damaged by the “crypto winter” of recent 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 became readily apparent last week during a five-hour Chapter 11 bankruptcy hearing in the Southern District of New York for beleaguered crypto brokerage Voyager Digital.

Voyager is among a growing number of crypto firms seeking bankruptcy protection amid a flood of client withdrawals that followed the plunge in bitcoin, ethereum and other digital currencies. Bankman-Fried’s role in the quagmire is further complicated because he also controls the quantitative trading firm Alameda Research, which borrowed hundreds of millions of dollars from Voyager and became a major equity investor before turning around and offering to bail out the firm.

Meanwhile, Bankman-Fried is trying to play the role of industry consolidator, picking up distressed assets both as a bet on their eventual recovery and to strengthen its foothold in the United States. In July, FTX acquired crypto-lending company BlockFi, and two months earlier Bankman-Fried disclosed a 7.6% stake in defunct trading app Robinhood. Bloomberg even reported that FTX was trying to buy Robinhood, although Bankman-Fried has denied that any active discussions are underway.

Outside the US, FTX bought Japanese crypto exchange Liquid and has been in discussions to buy the owner of South Korean crypto exchange Bithumb.

With his 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 argued in court over what was revealed to be a deep and complex relationship between the two companies. Documents reviewed by CNBC show ties stretching back as far as September 2021. In Voyager’s bankruptcy filings, the firm disclosed that Alameda owed the company more than $370 million, but did not say how long Alameda had been a Voyager borrower.

Voyager filed for bankruptcy in early July after suffering heavy 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 firms in the industry – including over $650 million from Voyager.

Voyager’s court documents and financial statements show that Alameda moved from a borrower to a lender within weeks of the 3AC debacle leaving Voyager in a desperate spot. Bankman-Fried’s firm provided a $500 million bailout for Voyager in late June.

Joshua Sussberg, a partner at Kirkland & Ellis representing Voyager, said in court that Bankman-Fried “wore many hats” during Voyager’s rapid journey from prosperity to bankruptcy. Indeed, FTX and Alameda moved in as a potential bidder for Voyager’s customer accounts a few weeks after Voyager’s bankruptcy filing, and Bankman-Fried said his priority should offer them liquidity.

Bankman-Fried took to Twitter to make her case, turning a typically tedious process into something of a circus. Voyager’s legal team was not happy and suggested that the billionaire was trying to create leverage for himself in a potential transaction.

“Parties in our process have expressly made us aware that FTX has a leg up 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 stand for it.”

Andrew Dietderich, Alameda’s attorney and a partner at Sullivan & Cromwell, said the bailout deal offered a faster timeline than Voyager’s, but it had been “violently rejected.”

Michael Wiles, U.S. Bankruptcy Judge for the Southern District of New York, did not like where the arguments were going.

Addressing the attorneys, Wiles said he did not intend to turn the hearings into “some kind of cable news show with people hurling accusations at each other and giving extremely descriptive descriptions of what their previous proposals or discussions were.”

Lawyers from Alameda acknowledged that the business ties between Voyager and their client ran deeper than a simple loan relationship, and that the firm borrowed approx. $377 million from Voyager.

Alameda is registered in the British Virgin Islands, with headquarters in Tortola, and is the only counterparty located there. It was one of at least seven devices that borrowed heavily from Voyager. The same Voyager document that revealed 3AC’s default also lists a “Counterparty A”, a British Virgin Islands-registered company, that owes Voyager $376.784 million. In the company’s bankruptcy filing, the Alameda company owes Voyager $377 million. In another submission, the loan amount is linked to a company with loan interest rates of 1% to 11.5%.

A Voyager did not respond to requests for comment.

Loan holdings of the British Virgin Islands-based fund fell to $728 million in March 2022, representing 36% of Voyager’s lent crypto assets, before falling to roughly $377 million three months later. Disclosure data was provided by FactSet and obtained from Canadian securities administrators.

Voyager’s relationship with Alameda would quickly change from lender to borrower, as 3AC’s default on the $654 million it owed Voyager brought the firm to the ground.

Alameda stepped in with a bailout on June 22, but with restrictions. The $500 million bailout — $200 million in cash and USDC and roughly $300 million in bitcoin, based on current market prices — had a limited withdrawal rate, limiting the amount of funding to $75 million over a 30-day period.

Attorneys for Alameda said in court Thursday that the loan was made “on an unsecured basis” at the specific request of Voyager management.

At the time, Bankman-Fried was already a major stakeholder in Voyager through two equity investments from Alameda.

In late 2021, Alameda closed a $75 million share buyback, acquiring 7.72 million shares at $9.71 apiece, according to Voyager’s filing for the period ended Dec. 31. In May of this year, Alameda spent another $35 million on about 15 million shares, with the share price plunging to $2.34.

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

As the holder 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 surrendered a block of 4.5 million shares, bringing its ownership down to 9.49% and lifting reporting requirements, according to Canadian regulations and Voyager’s own filing. The same filing shows that the surrendered shares were “subsequently canceled by Voyager.”

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

Neither Bankman-Fried’s equity injection nor bailout funding could stem the flow as customer redemptions swallowed Voyager’s cash. Nine days after the announcement of the $500 million Voyager package frozen customer withdrawals and trading. On July 6, Voyager declared Chapter 11 bankruptcy.