The crypto lender Voyager Digital is pursuing settlements with two top executives after an internal probe uncovered potential claims of gross negligence stemming from risky loans made to the defunct hedge fund Three Arrows Capital,
Chief Executive Stephen Ehrlich, in consultation with then-Chief Financial Officer Evan Psaropoulos, agreed to let Voyager lend nearly $1 billion of crypto to Three Arrows despite extremely limited financial disclosure from the hedge fund, according to court papers filed Monday. The uncollected loans weighed heavily on Voyager prior to its July bankruptcy filing.
But pursuing lawsuits against Ehrlich and Psaropoulos would be difficult and potentially fruitless, according to the results of an investigation conducted by two members of Voyager's board of directors.
Even if the company could prove that the executives breached their fiduciary duties to Voyager, the cost of litigating would likely outweigh any payout from potential lawsuits, the board members concluded.
Instead, the company is proposing a settlement that calls for Ehrlich to pay $1.125 million in cash to Voyager, pursuing claims under directors and officers insurance policies worth as much as $20 million, and for both Ehrlich and Psaropoulos to continue guiding the company through bankruptcy. Ehrlich remains Voyager's CEO and Psaropoulos is now the company's chief commercial officer.
The board's investigation found no fraud or theft by any Voyager executive, according to court papers. A representative for Voyager decline to comment on the settlement, while Ehrlich and Psaropoulos didn't immediately respond to emails seeking comment. Voyager needs its bankruptcy judge to approve the settlement before it can be executed.
Due diligence
Voyager, looking to diversify its loan book early this year, began pursuing a lending relationship with Three Arrows in February, according to court papers. During Voyager's due diligence, Three Arrows provided information about its corporate structure, anti-money- laundering policies and controls, along with descriptions of its trading strategy.
But the hedge fund's financial disclosures fell short of those provided by other institutional Voyager borrowers: Three Arrows provided a single-sentence statement, signed by co-founder Kyle Davies, indicating the firm controlled net assets worth $3.729 billion.
When pressed for greater transparency, Davies told Voyager the hedge fund only provided summary net-asset value statements to its lenders, according to the bankruptcy court papers. The policy stemmed from a bad experience with a prior counterparty who used more detailed disclosures to mimic Three Arrows' trading strategy, Davies said.
Voyager agreed to begin lending crypto to Three Arrows on March 8 despite the limited disclosures. By May 5, the loans totaled 15,250 bitcoin and 350 million USDC, a stablecoin. A little more than a month later, Three Arrows said it lost money in the Terra blockchain collapse. The hedge fund entered liquidation in the British Virgin Islands in June and Voyager has collected none of the loan principal.
The bankruptcy is Voyager Digital Holdings Inc., 22-10943, U.S. Bankruptcy Court for the Southern District of New York (Manhattan).
