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ForbesForbes Digital Assets
Editors' Pick


GENESIS ‘HAS A FEW DEFENSES’ AGAINST $3.9 BILLION CLAIM FROM FTX

Nina Bambysheva
Forbes Staff
Senior Reporter, Digital Assets
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May 6, 2023,06:00am EDT|
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NurPhoto via Getty Images

Defunct cryptocurrency exchange FTX is seeking about $3.9 billion of cash and
cryptocurrencies from Genesis Global Capital, complicating the digital assets
lender’s negotiations with its creditors. If Genesis can’t work out a repayment
deal by Tuesday, its parent company, Digital Currency Group, may default on some
of its obligations, according to Gemini, the crypto exchange that is a creditor
of Genesis.





In documents filed Wednesday in the U.S. Bankruptcy Court for the Southern
District of New York, lawyers for FTX said they intend “to claw back funds
received by Genesis and non-debtor affiliates.” These funds would be used to
help compensate all of the FTX creditors in the Bahamas-based exchange’s own
bankruptcy case.



Genesis Global and GGC International (an affiliate that hasn’t filed for
bankruptcy but that is being asked to return approximately $213 millions) “have
a few defenses they can claim against the claw back,” said Fatemeh Fannizadeh,
chief of legal affairs and a board member at the Swarm Foundation, a nonprofit
organization that supports decentralized data network Swarm, in a written
statement to Forbes.



“Genesis can argue the ordinary course of business defense,” said Ram Ahluwalia,
CEO of investment advisory Lumida Wealth Management, at the Unchained podcast.
“That defense is used as a way for creditors to protect themselves from having
to return a preferential payment to the debtor,” he explained.



The court hearing on the FTX motion, scheduled for May 25, could shed more light
on the legitimacy of this preference demand, she added. A preference demand
makes it possible to request for the return, or claw back, of payments made by a
debtor to third parties in the 90 days prior to a bankruptcy filing. Should FTX
prevail, Genesis would have the ability to recoup some of the funds as a
creditor, but that could be a lengthy process.



“Since this proceeding is mainly between two entities which have filed for
Chapter 11 bankruptcy, ultimately the funds will be taken from one set of
debtors to benefit another set of debtors,” wrote Fannizadeh. “Which ones are
more legitimate to be made whole is yet another question.”

Lawyers for the current management of FTX alleged that Genesis “was one of the
main feeder of funds for FTX and instrumental to its fraudulent business model.”
At one point in 2021, the lender had over $8 billion of outstanding loans to FTX
affiliate Alameda, according to the filings.



“Genesis remains focused on our restructuring process, through which we are
working to reach a consensual resolution that maximizes value for all Genesis
clients and stakeholders,” the company said in a statement to Forbes. Lawyers
for FTX have not returned a request for comment.

The matter complicates Genesis’ bankruptcy case, including the disposition of a
loan it made to its parent, crypto conglomerate Digital Currency Group, or DCG,
controlled by billionaire Barry SIlbert. According to court filings, DCG owes
Genesis approximately $630 million due next week and risks a default if it does
not make a payment or restructure its debt before May 9. DCG risks “defaulting
on its obligation” if Genesis cannot work out an arrangement by then, according
to Gemini, a crypto exchange that had been a partner of the DCG unit and is now
working with creditors.

An earlier arrangement with Genesis creditors fell apart after some of them
“reneged and raised new demands,” DCG posted on its website. That deal would
have offered creditors about 80 cents on the dollar, according to a Genesis'
creditor, which cited an analysis by investment bank Houlihan Lokey HLI +1.1%.
Houlihan has not responded to Forbes' request for comment.

A DCG spokesperson said the company has no further comments beyond what has been
shared on its website.

“I expect DCG will not be able to make the payment unless they obtain
refinancing immediately,” says Ahluwalia.

The company faces difficult prospects. According to a shareholder letter that
was shared with Forbes, chief financial officer Michael Kraines stepped down in
April and the company engaged Heidrick & Struggles for a new CFO search.



In the letter, the DCG also said it had fully repaid a $350 million senior
secured term loan during the first quarter. It revealed a $6 million loss in the
period on an adjusted earnings before interest, taxes, depreciation and
amortization basis. Excluding the Genesis business, adjusted Ebitda was $35
million, up $39 million relative to Q4 2022. Based on Q1 performance, DCG’s
revenue for 2023 will come in at approximately $620 million and Ebitda at $140
million, excluding Genesis.

Last week, the DCG, Genesis and crypto exchange Gemini—which worked with Genesis
on a crypto lending program called Gemini Earn that was halted in
November—agreed to start a 30-day mediation process to reach a resolution on
compensation for unsecured creditors of the subsidiary

Genesis owes more than $3.5 billion to its top 50 creditors, according to its
Chapter 11 bankruptcy filing. Gemini users top the list at $766 million.

According to Gemini, the mediation is narrowly focused on DCG’s economic
contribution to the bankruptcy estate for the benefit of all creditors,
including Earn users, and is designed to bring a quick resolution to the Genesis
bankruptcy.

DCG posted a notice on its website that says “our understanding is that a subset
of creditors have decided to walk away from the prior agreement.”

Lumida’s Ahluwalia says DCG could seek “an out-of-court workout” if it doesn’t
meet its obligations next week. “A good analogy for this is when Genesis said
said that they cannot honor withdrawals but didn't immediately file for Chapter
11. You attempt to negotiate with your creditors and arrive at favorable terms,”
he explains. “That out-of-court workout is already happening in the bankruptcy
process itself, so they'll have to continue to negotiate, and there's a strong
interest the creditors have in preserving the ongoing value of DCG and seeking a
settlement promptly.”



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Nina Bambysheva
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I report on all things crypto and oversee the Forbes Crypto Confidential
newsletter and the annual Forbes Blockchain 50 list which features
billion-dollar leaders in distributed ledger

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