Voyager customers ask New York judge for money back after bankruptcy
Voyager said it has approximately $1.3 billion of crypto on its platform and holds over $350 million in cash on behalf of clients at New York’s Metropolitan Commercial Bank.
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During a five-hour Chapter 11 bankruptcy hearing earlier this month for crypto firm Voyager Digital, a customer named Magnolia was the first user to come forward and talk about her experience.
Magnolia, who revealed only her first name, said she had more than $1 million trapped on the platform, including $350,000 earmarked to pay for college for her children. She said it had taken her 24 years to save, and she has sacrificed spending time with their children to build that nest egg.
“I feel like we’re paying the ultimate price for them being fiscally irresponsible,” Magnolia said. “They had our trust, they had our money, and they didn’t run this company properly.”
Magnolia wanted to know why Voyager borrowed money instead of cutting costs when it knew things were going south. She also asked if CEO Stephen Ehrlich was still getting paid and received a bonus.
Magnolia is one of Voyager’s 3.5 million customers, a group desperate for answers more than a month after the company suspended all trading and shortly thereafter filed for Chapter 11 bankruptcy. Voyager, once a popular lending platform, attracted retail investors by offering them up to double-digit annual returns in exchange for parking their tokens with Voyager.
As the crypto market boomed last year, Voyager entered into sports sponsorships with the NBA’s Dallas Mavericks and owner Mark Cuban, Tampa Bay Buccaneers tight end Rob Gronkowski, NASCAR driver Landon Cassill and the National Women’s Soccer League.
While these names helped to hype the service, they did not change the risk that customers faced when joining the platform. Their funds were unsecured.
A crash in crypto prices in 2022, mainly due to Federal Reserve interest rates rises and investor rotation out of the riskiest assets, created a liquidity crisis for hedge funds and crypto sites with overexposure to digital assets. Many of these firms defaulted on loans, creating a cascading effect that infected the wider industry and lenders such as Voyager.
In addition to the early August hearing in the Southern District of New York, Voyager customers also had an opportunity to voice their displeasure in a live stream chat that accompanied a 52-minute virtual town hall last week. There they could make their pleas to the Voyager Official Committee of Unsecured Creditors, a group formed by the SDNY bankruptcy court to resolve the asset distribution.
The committee consists of lawyers from McDermott Will & Emery as well as restructuring advisers from FTI Consulting and a selected group of creditors. They say the focus is “fast return of USD and crypto to creditors.”
The members of the committee gave an overview of the bankruptcy proceedings so far, an estimated timetable for reimbursement and a procedure for submitting claims. However, a committee member noted that the guidance they provided was “not legal advice” and that it was “strongly recommended” that individual creditors consider retaining counsel to assist with this process.
At the time of publication, the recording of the town hall on YouTube had more than 4,000 views. Voyager customers had the chance to ask questions ahead of the event last week. Many also signed up over the real-time chat on YouTube.
“I was a fool not to take my crypto when I first heard about the loan,” wrote Cindy Wheeler. “Thought Voyager was a safe exchange.”
Another participant, Ari Gurewitz, referenced Three Arrows Capital (3AC), a crypto hedge fund that filed for bankruptcy while owing over $650 million to Voyager.
“Interesting that Voyager is declaring bankruptcy before knowing the full impact of the 3AC bankruptcy on them,” Gurewitz wrote. “Makes you wonder if this is a bit of a ploy to just restructure and wipe out a lot of their losses – at the customers expense!”
Voyager said it has about 100,000 creditors. They will have to vote on the plan Voyager establishes in the probate court, but many say they do not have much of a say in the process. That’s why several customers are begging U.S. Bankruptcy Court Judge Michael Wiles for help.
“Where were the heads up on this?”
During the bankruptcy hearing, Magnolia said she felt Voyager had defrauded its customers. In a very short time it all went from boom to boom.
“This is a company that talks about how well they’re doing,” she said. “They’ve got Mark Cuban, Rob Gronkowski. They’ve got the Dallas Mavericks Arena with ‘Buy Voyager’ all over it. They’re spending big on their marketing, on their people, on their locations. ?”
Another customer, who did not share his name but said he was 32, told the hearing he had “well over seven figures” stranded on the app.
“I just want to position myself as the owner and depositor of my cryptocurrency,” he said. “I’m witnessing 10 years of my life being frozen on a platform I trusted.”
The issue of ownership is proving particularly vexing for this customer and others. In crypto, one of the mantras is – “not your keys, not your coins” – which means that rightful ownership of tokens comes through custody of the corresponding private keys. Customers cannot simply claim the money back and expect to receive it, even if they viewed the funds as deposits, not investments.
“I have always identified myself as an owner and a rightful depositor of the cryptocurrency provided on their platform,” the customer said. “I just want to get more clarity on why I’m being labeled a creditor, or an unsecured creditor, instead of the owner of my cryptocurrency.”
Clients are right to be confused.
The Federal Deposit Insurance Corporation, which protects bank deposits, and the Board of Governors of the Federal Reserve System issued a joint letter in late July to Voyager, alleging that the company made false and misleading statements about its deposit insurance status.
During the bankruptcy hearing, a customer named Ginger Little said that when she put money on the platform, she had to convert it from US dollars to the US dollar-pegged stablecoin USDC to earn the attractive annual percentage return that drew her to the app.
“We were never told it wasn’t the same as cash,” Little said. “We were told it had to be listed that way to get interest on the money we put in there as an investment.”
Magnolia echoed that sentiment, saying she thought Voyager had designated its USDC as “FDIC insured.”
Christine Okike, a partner at Kirkland & Ellis, which represents Voyager, said during the bankruptcy hearing that current efforts are focused on cash collection, not USDC.
“USDC is a type of cryptocurrency, a type of coin,” Okike said. “And it is not discussed or judged in the context of the release of cash requested by debtors.”
A spokesperson for Voyager declined to comment.
Other customers have submitted letters directly addressed to the judge.
Jacob Redburn said he had deposited 100 ether, or about $198,800 at today’s price and $480,000 at the market peak, on Voyager’s digital trading platform.
“I have spent years saving, investing and trading crypto-assets to build what was a life-changing sum of money that I would one day sell to support my family and other needs,” Redburn wrote on a yellow legal pad.
Redburn wrote that the CEO “simply lied to us” when he said a week before the filing that the company had no problems.
“This will destroy my future, my daughter’s future and cost the government hundreds of thousands in capital gains I would pay when I plan to sell,” he wrote. “I am asking that we receive our cryptos as we are owed, not worthless shares or worthless Voyager tokens.”
Christine Marcy, a recently retired retiree who lives in Florida, said Voyager’s “willful and willful actions (wrongdoing) are causing emotional and financial hardship to an entire community of customers.” She said she was denied in her attempt to remove some assets just before the withdrawal freeze.
“I have an account freeze and my assets are now being held hostage,” Marcy wrote. “I made investments with Voyager, a publicly traded company, with the expectation that there would be some sense of accountability and responsibility to clients.”
Donald A., who currently has about $31,000 frozen in the Voyager exchange, said “losing this money with no end in sight has been unbearable” for his family. He said the company was never open to customers about the kind of risks it was taking, such as lending large sums to 3AC.
“I wake up most nights just pacing up and down the stairs thinking about my own mistakes and wondering if this will ever end,” he wrote. “My anxiety has been a struggle.”
Fighting for funds
The unsecured creditors committee told Town Hall clients that Voyager will soon send proof-of-claim forms to all creditors with what Voyager believes they are owed in crypto, cash or both.
Voyager currently has approximately $1.3 billion in crypto assets on the platform, $104 million in cash and a claim against the now-defunct 3AC of around $650 million. Creditor claims amount to $1.8 billion so far. Updated numbers are expected this week when Voyager posts its timetables.
The committee said it was able to negotiate a “very aggressive” planning timeline, which is targeting the end of October, although the timing is subject to change. On that schedule, distributions to creditors will take place in November at the earliest.
The committee said it is taking the “unprecedented” step of advocating an interim distribution to give creditors some relief during the bankruptcy process.
Last Thursday was the first day customers were supposed to be able to get some of their money back from the platform, but the conditions for eligibility were very strict.
Other Voyager users with funds held in crypto still can’t touch their money.
“We recognize that many of you were led to believe that the crypto you held on the Voyager platform was your property,” a committee member said during the town hall. “Unfortunately, for all of us, this is not the legal test in bankruptcy to determine whether the crypto is your property or the property of the bankruptcy estate.”
— CNBC’s Rohan Goswami contributed to this report.
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