Cryptocurrency Investment Firm’s Liquidation Plan Approved—Wait, What?
March 22, 2021 – Herrick Restructuring ReviewThe Herrick Restructuring Review provides insights and information related to restructuring and finance litigation. The Herrick team regularly represents official and ad hoc creditor committees, hedge funds, distressed debt investors, bondholders, and other parties in interest, and often serve as conflicts or special counsel for large-scale complex litigation matters.
On March 11, 2021, the Bankruptcy Court for the District of Delaware approved a plan of liquidation for Cred Inc. and debtor affiliates, a collection of cryptocurrency investment firms that filed for Chapter 11 protection on November 8, 2020. So how exactly did a cryptocurrency investment firm go bankrupt in Fall 2020? In November 2019, Bitcoin was trading between $7,000 and $9,500 per coin. By November 8, 2020, the price of BTC had doubled, hitting a high of $15,637. Just four months later, on March 13, 2021, BTC closed over $61,000. And it wasn’t just Bitcoin. Ethereum is up 970% since November 8, 2019; BinanceCoin is up 1,361%; and Cardano is up 2,814%. Even Dogecoin is up 2,111% since November 8, 2019. Anyone remotely involved in the cryptocurrency business should have had an historic year. So what was the problem for Cred Inc.?
First, per the First Day Declaration of the founder and CEO of Cred’s restructuring advisory firm, Cred’s operations used customer crypto-currency assets in dollar-denominated yield-generating vehicles. Because Cred used its customers’ crypto-asset deposits to fund other investments, the price increases ended up hurting the company.
Second, according to the plan of liquidation, Cred believes its former Chief Capital Officer, James Alexander, used company funds to take control of a Cred subsidiary from the parent by installing himself as sole director, and assigning voting shares to himself but non-voting shares to Cred. When Cred discovered Alexander’s alleged misconduct, they terminated him and he absconded with 225 Bitcoin—now worth over $12 million. Despite Cred’s demands, Alexander has not returned the coins.
Third, according to the plan of liquidation, Cred discovered that Alexander directed transfer of 800 Bitcoin—now worth over $45 million—to an imposter pretending to be an investment manager between February 2020 and April 2020. According to Cred, this was part of a social engineering scheme they discovered in August 2020.
Of course, after discovery of two thefts and the negative press in connection with those losses, key Cred partners closed their accounts and none of the expected potential investments materialized. Cryptocurrency offers nearly unlimited upside for potential investors, but Cred’s bankruptcy filing amid record BTC returns—as well as the surrounding facts—show that cryptocurrency remains a risky venture.
Cred’s bankruptcy case is In re Cred Inc., Case No. 20-12836 (Bankr. D. Del.).
For more information on this alert or other restructuring & finance litigation matters please contact:
Stephen B. Selbst at +1 212 592 1405 or [email protected]
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