Voyager said it has about $1.3 billion worth of crypto on its platform and 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 client named Magnolia was the first user to step forward and share her experience.
Magnolia, who revealed only her first name, said she snagged over $1 million on the platform, including $350,000 that was earmarked to pay for college for her children. She said it took her 24 years to save and she did 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, even though she knew things were going wrong. She also asked if CEO Stephen Ehrlich was still getting paid and receiving a bonus.
Magnolia is one of Voyager’s 3.5 million customers, a group desperate for answers more than a month after the company halted all trading and filed for Chapter 11 bankruptcy shortly thereafter. Once a popular lending platform, Voyager 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 signed sports sponsorship deals 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 hype the service, they didn’t change the risk customers faced when they joined the platform. Your funds were unsecured.
A crash in crypto prices in 2022, mostly due to the Federal Reserve interest rate Rate hikes and investor rotation from the riskiest assets created a liquidity crunch 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 broader industry and lenders like Voyager.
Alongside the hearing in New York’s Southern District in early August, Voyager customers also had the opportunity to voice their displeasure in a live stream chat that accompanied a 52-minute virtual town hall last week. There they were able to make their pleas to the Voyager Official Committee of Unsecured Creditors, a group formed by SDNY’s bankruptcy court to resolve asset distributions.
The panel consists of lawyers from McDermott Will & Emery as well as restructuring consultants from FTI Consulting and a selected group of creditors. They say the focus is on the “immediate return of USD and crypto to creditors.”
Committee members provided an overview of the bankruptcy process to date, an estimated timeline for reimbursement and guidance on the filing process. However, one committee member noted that the guidance they provided “is not legal advice” and that it is “strongly recommended” that individual creditors consider hiring legal counsel to assist in this process.
At the time of publication, City Hall’s YouTube recording had more than 4,000 views. Voyager customers had the opportunity to submit questions the week before the event. Many also chimed in via real-time chat on YouTube
“I was a fool when I first heard about the loan as I didn’t take my cryptocurrency,” wrote Cindy Wheeler. “I thought Voyager would be a safe exchange.”
Another participant, Ari Gurewitz, pointed to Three Arrows Capital (3AC), a crypto hedge fund that filed for bankruptcy while owing Voyager over $650 million.
“Interesting that Voyager files for bankruptcy before it knows how 3AC’s bankruptcy will affect it,” Gurewitz wrote. “One wonders if that’s a little trick to just restructure and eliminate a lot of their losses – at the expense of their customers!”
Voyager said it has about 100,000 believers. They have to vote on the plan Voyager is going through in bankruptcy court, but many say they don’t have much say in the process. That’s why several customers are turning to US Bankruptcy Court Judge Michael Wiles for help.
‘Where was the forewarning?’
At the bankruptcy hearing, Magnolia said she felt Voyager cheated its customers. In a very short time everything went from boom to bust.
“This is a company that talks about how good it is,” she said. “You have Mark Cuban, Rob Gronkowski. They have the Dallas Mavericks Arena with the ‘Buy Voyager’ everywhere. They spend a lot of money on their marketing, on their people, on their locations?”
Another customer, who didn’t give his name but said he was 32, said at the hearing he was stranded “well over seven numbers” on the app.
“I just want to position myself as the owner and depositor of my cryptocurrency,” he said. “I witness 10 years of my life frozen on a platform I trusted.”
The ownership issue is proving to be particularly annoying for this and other customers. 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 their money back and expect to receive it, even though they viewed the funds as deposits and not investments.
“I have always identified myself as the owner and legal depositor of the cryptocurrency provided on their platform,” the client said. “I just want to better understand why I’m being referred to as a creditor or unsecured creditor instead of the owner of my cryptocurrency.”
Customers are rightly confused.
The Federal Deposit Insurance Corporation, which protects bank deposits, and the Board of Governors of the Federal Reserve System A joint letter to Voyager in late July alleging that the company had made false and misleading statements about its deposit insurance status.
At the bankruptcy hearing, a client named Ginger Little said that when she put money on the platform, she had to convert it from US dollars to US dollar-pegged stablecoin USDC in order to earn the attractive annual percentage return she was looking for to the app.
“We were never told that’s not the same as cash,” Little said. “We were told it has to be listed that way in order to earn interest on the money we put there as an investment.”
Magnolia echoed that sentiment, saying she believes Voyager touted its USDC as “FDIC-insured.”
Christine Okike, a partner at Kirkland & Ellis who represents Voyager, said during the bankruptcy hearing that current efforts are focused on cash recovery, not USDC.
“USDC is a type of cryptocurrency, a type of coin,” Okike said. “And that’s not being discussed or decided in the context of the cash release requested by debtors.”
A Voyager spokesman declined to comment.
Other customers have submitted letters addressed directly to the judge.
Jacob Redburn said he deposited 100 ethers, or about $198,800 at today’s price and $480,000 at the market high, into Voyager’s digital trading platform.
“I spent years saving, investing, and trading crypto assets to build up a life-changing amount of money that I would one day sell to meet my family’s college and other needs,” Redburn wrote on a yellow legal pad .
Redburn wrote that the CEO “lied to us straight out” when he said a week before the filing that the company had no issues.
“This will ruin my future, my daughter’s future, and cost the government hundreds of thousands in capital gains, which I would pay if I were planning a sale,” he wrote. “I ask that we receive our cryptos that are owed to us, not worthless stocks or Voyager tokens that are worthless.”
Christine Marcy, a recently retired senior living in Florida, said Voyager’s “willful and intentional actions (misconduct) are causing emotional and economic hardship for an entire customer community.” She said her attempt to remove some assets just before the payout halt was denied.
“I have an abruptly frozen account and my assets are now being held hostage,” Marcy wrote. “I invested in Voyager, a public company, with the expectation that there would be some level of accountability and responsibility to clients.”
Donald A., who currently freezes around $31,000 on the Voyager exchange, said his family was “excruciated to lose that money with no end in sight.” He said the company has never been transparent to customers about the types of risks it was taking, such as lending large sums to 3AC.
“I wake up most nights just walking up and down the stairs, thinking about my own mistakes and wondering if this will ever end,” he wrote. “My fear was a struggle.”
fight for money
The Unsecured Creditors Committee told customers at City Hall that Voyager will soon send proof of debt forms to all creditors with what Voyager believes they are owed to them in crypto, cash, or both.
Voyager currently has around $1.3 billion in crypto assets on the platform, $104 million in cash and a claim against the now-defunct 3AC for around $650 million. Claims by creditors so far amount to 1.8 billion US dollars. Updated numbers are expected this week when Voyager files its flight plans.
The committee said it was able to negotiate a “very aggressive” timeline for the plan, targeting late October, although the timeline is subject to change. After that, the distributions to the creditors would be made in November at the earliest.
The committee said it was taking the “unprecedented” step of lobbying for an interim distribution to give creditors some relief during the bankruptcy process.
Last Thursday was the first day that customers were supposed to get some of their money back from the platform, but the eligibility requirements were very strict.
Judge Wiles granted eligible Voyager users access to $270 million in cash held by Voyager at the Metropolitan Commercial Bank. Customers who had US dollars in their bank account are now apparently allowed to withdraw up to US$100,000 within 24 hours via the Voyager app.
Other Voyager users with funds held in crypto still cannot touch their funds.
“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, that is not the legal test in bankruptcy to determine whether the crypto is your property or property of the bankruptcy estate.”
— CNBC’s Rohan Goswami contributed to this report.
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