That action came less than a month after the platform halted withdrawals.
Two weeks ago, BlockFi filed a motion in U.S. Bankruptcy Court for the District of New Jersey to allow customer withdrawals, which are still currently frozen on the platform. A hearing on that motion is set for Jan. 9.
For the BlockFi bankruptcy, Newark-based Genova Burns will work with the national bankruptcy and cryptocurrency groups at Brown Rudnick LLP, primary counsel to the creditor’s committee.
Daniel Stolz, chair of Genova Burns’ Bankruptcy, Reorganization & Creditors’ Rights practice, said the firm is honored to be retained in this landmark Chapter 11 case.
“Our team is looking forward to working diligently to provide creditors of BlockFi with the largest possible recovery,” said Stolz.
“This is another step towards firmly establishing Genova Burns as a key player in the bankruptcy and restructuring space, and as an emerging player in the world of cryptocurrency disputes,” added James Burns, managing partner of Genova Burns, in a statement.
The crypto collapse continued Nov. 28 as Jersey City’s BlockFi announced that it had sought bankruptcy protection.
The Chapter 11 filing in New Jersey comes amid an industry-wide downturn and on the heels of FTX’s dramatic fall, which has affected BlockFi’s business. The company said the purpose is to stabilize its businesses and provide an opportunity to consummate a restructuring that maximizes values for its clients and stakeholders.
“As part of its restructuring efforts, the company will focus on recovering all obligations owed to BlockFi by its counterparties, including FTX and associated corporate entities,” BlockFi said in a statement announcing the move. “Due to the recent collapse of FTX and its ensuing bankruptcy process, which remains ongoing, the company expects that recoveries from FTX will be delayed.”
“With the collapse of FTX, the BlockFi management team and board of directors immediately took action to protect clients and the company,” said Mark Renzi of Berkeley Research Group, the company’s financial advisor. “From inception, BlockFi has worked to positively shape the cryptocurrency industry and advance the sector. BlockFi looks forward to a transparent process that achieves the best outcome for all clients and stakeholders.”
It also follows a transactions pause, which remains in place, announced two weeks ago with the cryptocurrency lender acknowledging that the company has significant exposure to FTX.
“We know the past few days have been incredibly difficult for you,” BlockFi wrote in a letter to clients on Nov. 14. “We are deeply saddened to see the devastation that is cascading across an industry that we love and believe in, touching the lives of so many people. Our top priority remains doing the best we can for our clients.”
BlockFi said its filing included a series of customary motions to allow it to continue operating its business, including requests to pay employee wages and continue employee benefits without disruption, to establish a Key Employee Retention Plan to ensure the company retains trained internal resources for business-critical functions during this process. The company also initiated an internal plan to considerably reduce expenses, including labor costs.
In its filing, the company said it had more than 100,000 creditors and liabilities and assets ranging from $1 billion to $10 billion. BlockFi has $256.9 million in cash on hand, which the company expects to provide sufficient liquidity to support certain operations during the process.
Haynes and Boone LLP, Kirkland & Ellis LLP and Cole Schotz PC are serving as counsel in the proceedings; Moelis & Co. and Berkeley Research Group are providing financial advice. C Street Advisory Group LLC is serving as strategic restructuring and communication advisor to BlockFi.
“Since the pause, our team has explored every strategic option and alternative available to us and has remained laser-focused on our primary objective of doing the best we can for our clients,” BlockFi leaders wrote in a letter to clients Monday. “Rest assured, we will continue to work on recovering all obligations owed to BlockFi as promptly as practicable.”
The company said those obligations from counterparties include an outstanding loan of $275 million to FTX US.
“Acting in the best interest of our clients is our top focus and continues to guide our path forward,” BlockFi wrote on Twitter.
Acting in the best interest of our clients is our top focus and continues to guide our path forward. Chapter 11 is a transparent process and we will continue to communicate with our clients to ensure they hear directly from us.
The Securities and Exchange Commission charged Jersey City-based BlockFi Lending LLC on Feb. 14 “with failing to register the offers and sales of its retail crypto lending product,” according to the SEC.
Calling it a “first-of-its-kind action,” the SEC also charged BlockFi with violating the registration provisions of the Investment Company Act of 1940.
According to the SEC, BlockFi agreed to pay a $50 million penalty, cease its unregistered offers and sales of the lending product BlockFi Interest Accounts (BIAs) in the U.S., and attempt to bring its business within the provisions of the Investment Company Act within 60 days.
BlockFi’s parent company also announced it intends to register under the Securities Act of 1933 the offer and sale of a new lending product.
BlockFi agreed to pay an additional $50 million in fines to 32 states to settle similar charges.
“This is the first case of its kind with respect to crypto lending platforms,” SEC Chair Gary Gensler said in a prepared statement. “Today’s settlement makes clear that crypto markets must comply with time-tested securities laws, such as the Securities Act of 1933 and the Investment Company Act of 1940. It further demonstrates the commission’s willingness to work with crypto platforms to determine how they can come into compliance with those laws. I’d like to thank and commend our remarkable SEC staff and state regulators for their efforts and collaboration on this settlement.”
Gurbir Grewal, director of the SEC’s Division of Enforcement and New Jersey’s former attorney general, added, “Crypto lending platforms offering securities like BlockFi’s BIAs should take immediate notice of today’s resolution and come into compliance with the federal securities laws. Adherence to our registration and disclosure requirements is critical to providing investors with the information and transparency they need to make well-informed investment decisions in the crypto asset space.”
The order also finds that BlockFi made a false and misleading statement for more than two years on its website concerning the level of risk in its loan portfolio and lending activity, the SEC stated.
Without admitting or denying the SEC’s findings, BlockFi agreed to a cease-and-desist order prohibiting it from violating the registration and antifraud provisions of the Securities Act and the registration provisions of the Investment Company Act.
In a prepared statement, Zac Prince, CEO and founder of BlockFi, said, “From the day we started BlockFi, we have always known that strong engagement with regulators would be critical for the adoption of financial services powered by cryptocurrencies. Today’s milestone is yet another example of our pioneering efforts in securing regulatory clarity for the broader industry and our clients, just as we did for our first product – the crypto-backed loan. We intend for BlockFi Yield to be a new, SEC-registered crypto interest-bearing security, which will allow clients to earn interest on their crypto assets.”
The BlockFi statement said the company cooperated with the government’s investigation and implemented remediation actions. Both the SEC and state-level agreements contain no admission or denial of wrongdoing or liability.
The SEC’s investigation was conducted by Gwen Licardo, Craig Welter and Kenneth Gottlieb, with assistance from Brent Wilner, under the supervision of Hane Kim, chief of the Retail Strategy Task Force; Lara Shalov Mehraban, associate regional director of the SEC’s New York Regional Office; and Kristina Littman, chief of the Cyber Unit.
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