Crypto lender Voyager settles with executives who approved risky loans

(Reuters) – Crypto lender Voyager Digital has agreed to settle claims against company executives who approved a risky nearly $1 billion loan to failed crypto hedge fund Three Arrows Capital (3AC) after minimal due diligence, a misstep that contributed to Voyager’s own bankruptcy.

Voyager said in a court filing Monday that it would not be cost-effective to pursue lawsuits against CEO Stephen Ehrlich and another executive. Instead, Ehrlich will pay $1.125 million in cash to Voyager, and the company will pursue reimbursement from directors and officers insurance policies worth up to $20 million, according to the filing.

Voyager filed for bankruptcy protection in July, citing 3AC’s default on the June 2022 loan as a major factor in its insolvency. 3AC started liquidation proceedings in the British Virgin Islands at the end of June.

Voyager had lost significant value during an industry-wide cryptocurrency downturn caused by the May 2022 collapse of the Terra Luna stablecoin, stopping customers from withdrawing their crypto assets shortly before the bankruptcy filing.

The loan to 3AC consisted of 15,250 bitcoins and $350 million worth of USD coins, a stablecoin whose value is pegged to the US dollar. The loaned crypto was valued at $935 million in April 2022, according to court documents, but the price of bitcoin has halved since then, making the loan worth closer to $650 million today.

Ehrlich approved the 3AC loan based only on a one-page summary that said the hedge fund had $3.729 billion in cryptocurrency assets, according to court documents. 3AC had declined to provide more detailed financial information, saying it had previously had a bad experience with a competitor who used information about its crypto holdings to duplicate its trading strategy.

Voyager’s board chose to settle the company’s 3AC-related claims against Ehrlich and chief commercial officer Evan Psaropoulos, both of whom remain senior executives at Voyager, according to Monday’s court filing.

Although the settlement is “only a small fraction” of the potential 3AC loss, fighting to recover more from the two men’s personal assets will only result in higher legal costs and lower recovery from D&O policies, according to Voyager.

Ehrlich and Psaropoulos could not immediately be reached for comment.

Crypto exchange platform FTX was the winning bidder in a bankruptcy auction for Voyager’s assets last month.

Voyager intends to sell its business to FTX for $1.42 billion, after dismissing an earlier FTX proposal as a “low-ball bid dressed up as a white knight rescue.”

The FTX sale and the 3AC loan settlements must be approved by the bankruptcy court before they take effect.

In re: Voyager Digital Holdings Inc., US Bankruptcy Court for the Southern District of New York, No. 22-10943

For Voyager: Joshua Sussberg, Christopher Marcus and Christine Okike of Kirkland & Ellis

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