BlockFi's past business with FTX appeared legitimate and gave management no reason to worry about lending to Sam Bankman-Fried's crypto platform before
Findings of the seven-month investigation were made public Monday in New Jersey bankruptcy court to support a BlockFi settlement that would resolve potential legal claims related to the crypto lender's collapse against co-founders Zac Prince and Flori Marquez, as well as other company officers.
Management, in exchange, has agreed to assist company lawyers in potentially lucrative actions against firms they blame for BlockFi's collapse including FTX and failed crypto hedge-fund Three Arrows Capital. BlockFi management will serve as key witnesses in litigation involving FTX and Three Arrows, the outcome of which could result in $1 billion in value for creditors, the crypto lender said.
Prince, Marquez and the other executives have also agreed to waive or reduce recoveries of their personal digital assets on BlockFi's platform and contribute $2.2 million in cash to the company, according to court documents. The settlement must be approved by a judge.
Representatives for Prince and Marquez didn't immediately respond to messages seeking comment on Tuesday.
A committee representing BlockFi creditors is expected to oppose the settlement and allege the crypto lender's business model was "fundamentally flawed," court papers say. The committee claims Prince ignored concerns raised internally before lending to FTX's related trading firm, Alameda Research, which the company denies. The committee sought to take control of the Chapter 11 earlier this year.
BlockFi had an outstanding loan to Alameda totaling $975 million before Bankman-Fried's platform collapsed in early November. BlockFi filed Chapter 11 later that month, blaming its bankruptcy on its relationship with FTX. The crypto lender is liquidating and moving forward with a plan to repay customers as much as possible. Bankman-Fried has pleaded not guilty to fraud charges and is scheduled to go to trial in October.
BlockFi executives performed reasonable due diligence before entering into transactions with Alameda and other failed crypto firms, the independent directors' investigation concluded. The crypto lender also implemented checks on Prince's decision-making authority, court papers say.
"Ultimately, BlockFi failed because FTX and Alameda were and are fraudulent enterprises," BlockFi said in its court filing. The special committee found no evidence that BlockFi directors and officers "knew, should have known, or reasonably could have known, about FTX's and Alameda's true nature."
The case is BlockFi, 22-19361, US Bankruptcy Court for the District of New Jersey (Trenton).
