Voyager Digital Under Fire: Creditor Demands Trustee Amidst Fraud Allegations

The turbulent waters of the crypto world are churning once again, and this time, Voyager Digital finds itself in the eye of the storm. Just when you thought the Voyager bankruptcy saga couldn’t get any more dramatic, a creditor has stepped forward with a bombshell: a demand for the appointment of a Chapter 11 trustee. But why this drastic measure? Let’s dive into the details and understand what this could mean for Voyager and its creditors.

Why is a Creditor Calling for a Chapter 11 Trustee?

Imagine being a creditor in a bankruptcy case. You’re already facing potential losses, and now you’re hearing whispers of mismanagement and potentially even fraud. That’s precisely the situation for Michelle DiVita, a Voyager creditor and finance lawyer, who has filed a compelling 120-page document urging the bankruptcy court to appoint a Chapter 11 trustee.

DiVita’s motion essentially argues that Voyager should be stripped of control over its own bankruptcy estate. This isn’t a typical request and signals serious concerns about Voyager’s handling of its finances and disclosures leading up to its bankruptcy filing.

The Core Allegations: A History of Misrepresentation?

According to DiVita’s filing, Voyager has a history of “financial statement mistakes and public misrepresentations.” These aren’t just minor accounting errors; they are alleged to be significant discrepancies that were either known or should have been known by Voyager before they declared bankruptcy in July 2022.

Let’s break down the key accusations:

• Inflated Loan Holdings: Voyager is accused of overstating its loan holdings by a staggering $1 billion in its financial reports. This paints a picture of a much healthier financial position than reality, potentially misleading investors and creditors.
• Underreported Three Arrows Capital (3AC) Loan: The petition claims Voyager significantly underreported a loan to the now-infamous crypto hedge fund Three Arrows Capital by a massive $609 million. Given 3AC’s collapse played a significant role in Voyager’s downfall, this underreporting is particularly concerning.
• Devaluation of Bitcoin: In a move that raises eyebrows, Voyager allegedly devalued Bitcoin in its financial records by an astounding 546% to minimize the apparent size of its loan portfolio. This manipulation of asset values could have further obscured the true extent of Voyager’s financial risks.

These are serious accusations, and if proven true, they could indicate a deliberate attempt to conceal the precarious state of Voyager’s finances.

Echoes from a Former Insider: Lavine’s Twitter Thread

Adding fuel to the fire, Shigo Lavine, a former director and CIO at Voyager, took to Twitter to highlight these allegations. His lengthy thread essentially amplifies the concerns raised in DiVita’s petition, lending further weight to the claims of financial irregularities. While social media posts aren’t legal proof, they do contribute to the narrative and public perception surrounding the case.

Coinbase’s Doubts: Did Due Diligence Uncover Red Flags?

Perhaps one of the most damning pieces of information in the petition is the claim that Coinbase, a major crypto exchange, reportedly backed out of a deal to acquire Voyager’s assets after uncovering these “financial reporting irregularities.”

The petition suggests that Coinbase’s due diligence process revealed that “the financials don’t line up.” If a sophisticated player like Coinbase, with resources for thorough financial analysis, had concerns strong enough to walk away from a potential acquisition, it certainly raises serious questions about the accuracy and reliability of Voyager’s financial reporting.

What is a Chapter 11 Trustee and Why Does it Matter?

For those unfamiliar with bankruptcy proceedings, the term “Chapter 11 trustee” might sound like legal jargon. In essence, a Chapter 11 trustee is an independent party appointed by the court to take control of a bankrupt company’s assets and operations.

Why is this significant in Voyager’s case?

• Loss of Control for Voyager: If a trustee is appointed, Voyager’s current management would essentially lose control of the bankruptcy process. The trustee would be responsible for managing the estate, investigating financial matters, and making decisions regarding asset distribution to creditors.
• Increased Scrutiny: A trustee appointment often signals a lack of confidence in the existing management’s ability to handle the bankruptcy fairly and transparently. It implies a need for independent oversight to ensure creditor interests are protected.
• Potential for Further Investigations: Trustees have broad powers to investigate the debtor’s finances and operations. If appointed, a trustee could delve deeper into the allegations of fraud and mismanagement, potentially uncovering further issues.

The Role of the U.S. Trustee: An Already Involved Watchdog

It’s important to note that a United States Trustee is already involved in Voyager’s bankruptcy case. The U.S. Trustee’s office is a part of the Department of Justice and plays a supervisory role in bankruptcy proceedings.

Their responsibilities include:

• Establishing creditors committees to represent creditor interests.
• Reviewing applications for professional fees and expenses.
• Most importantly, they are obligated to request the appointment of a Chapter 11 trustee if there are “reasonable grounds to suspect” fraud, dishonesty, or criminal activity by the debtor.

The fact that a creditor is now independently requesting a trustee could put additional pressure on the U.S. Trustee to consider whether such an appointment is warranted based on the mounting allegations.

Voyager’s Silence and Alameda’s Clawback Attempt

Cointelegraph reached out to Voyager for comment on these serious charges and the motion for a trustee, but as of now, there has been no public response. This silence is perhaps understandable given the legal sensitivity of the matter, but it also leaves questions unanswered.

Adding another layer of complexity to the Voyager bankruptcy is the ongoing dispute with Alameda Research, the trading firm closely linked to the collapsed FTX exchange. Alameda is attempting to “claw back” $446 million in loan repayments it made to Voyager shortly before Voyager filed for bankruptcy.

Here’s a quick rundown of the Alameda situation:

Voyager is contesting Alameda’s claim, arguing that Alameda’s earlier bid for Voyager’s assets (which Voyager couldn’t meet) caused significant losses to Voyager’s creditors, exceeding $100 million. Voyager contends that this should subordinate Alameda’s clawback claim to those of other Voyager creditors.

What’s Next for Voyager and its Creditors?

The demand for a Chapter 11 trustee is a significant development in the Voyager Digital bankruptcy saga. It underscores the serious concerns surrounding Voyager’s pre-bankruptcy conduct and financial reporting. The court will now need to consider DiVita’s motion and potentially the U.S. Trustee’s stance on the matter.

For Voyager creditors, this could be a double-edged sword. While a trustee might provide greater transparency and accountability, it could also prolong the bankruptcy process and potentially increase administrative costs. However, if the allegations of fraud and mismanagement are substantiated, a trustee might be the best path to maximizing recovery for creditors.

The coming weeks and months will be crucial in determining the future of Voyager Digital and the fate of its creditors. Will a trustee be appointed? Will the allegations of fraud be thoroughly investigated? And how will the dispute with Alameda Research be resolved? The crypto community will be watching closely as this unfolding drama continues to play out in the bankruptcy courts.