BlockFi Bet Big on FTX and Alameda Even After Seeing Infamous Balance Sheet, Creditors Say

Cryptocurrency lender BlockFi misled investors, chopped corners and stake large connected FTX adjacent aft seeing a concealed equilibrium expanse that revealed cardinal flaws successful Sam Bankman-Fried’s empire, BlockFi creditors said.

The company’s Committee of Unsecured Creditors, representing customers owed wealth aft its November bankruptcy, are arguing the institution should beryllium liquidated close distant without further costly ineligible delays, and without freeing executives from aboriginal litigation risks.

The report, made successful a court filing unsealed Friday, alleges that mismanagement astatine the company, and successful peculiar its overexposure to failed crypto speech FTX, exposed the institution and its creditors to “losses of a staggering quantum,” which were not conscionable foreseeable, but really foreseen.

In a Nov. 2 article, CoinDesk revealed that overmuch of the equilibrium expanse of FTX’s hedge money limb Alameda Research was made up of its ain FTT token. That revelation was truthful fatal to assurance successful the speech that FTX filed for Chapter 11 bankruptcy conscionable 9 days aboriginal (the sum also, incidentally, won CoinDesk two awards for journalism).

Yet seeing FTX’s toxic interior arrangements failed to deter BlockFi, which collapsed a fewer weeks aft FTX, BlockFi creditors claim.

“BlockFi had the nonstop aforesaid equilibrium expanse published by CoinDesk ….before it placed immoderate of the cryptocurrency placed connected the FTX/Alameda level successful the 2nd fractional of 2022,” the Friday filing by creditors said, adding that BlockFi’s concern – including astir $900 cardinal re-lent to Alameda betwixt July and September 2022 – is “money that present whitethorn beryllium irretrievable.”

BlockFi “failed to implicit basal owed diligence” connected Bankman-Fried’s empire, offering “special attraction for FTT and Alameda… that formed hazard absorption principles wholly to the wind,” added the report, based connected a reappraisal of 30,000 interior documents, and interviews and depositions with cardinal individuals including laminitis and main enforcement Zac Prince.

Warnings from BlockFi’s ain interior hazard committee went unheeded oregon were overruled by Prince, who, alternatively of expanding collateral requirements, said the institution should “offer presumption that we deliberation the lawsuit [Alameda] could accidental yes to,” the filing said.

Blockfi had besides misled investors astir its hazard absorption strategies, plus attraction and the honoring of lawsuit withdrawals, the filing added.

Creditors person antecedently argued they should beryllium allowed to record their ain plans to upwind up the company, accusing BlockFi absorption of “extortion” by delaying proceedings to guarantee they tin negociate a ineligible merchandise from idiosyncratic liability.

In an emailed statement, BlockFi told CoinDesk it “disagrees with the Committee’s report,” and cited its ain July 10 filing, which said that nary of BlockFi absorption had misused lawsuit funds for their ain purposes, oregon directed transactions without tenable knowing of the risk.

“The Special Committee has not uncovered immoderate grounds that the Released Parties knew, should person known, oregon reasonably could person known, astir FTX’s and Alameda’s existent nature” and immoderate ineligible claims “do not warrant prosecution from a cost/benefit perspective,” the July 10 filing connected behalf of the institution said.