BlockFi is a wealth management and trading firm for cryptocurrency holders that first commenced operations in 2017. In July 2021, we wrote about BlockFi’s bumpy road to going public, even though its valuation had just hit $5 billion. In February 2022, the SEC announced that BlockFi had agreed to pay $100 million in fines ($50 million to the SEC and $50 million to 32 states) to settle charges that it failed to register the offers and sales of its retail crypto lending product. The SEC described it at the time as a “first-of-its-kind” action. In November 2022, BlockFi filed for Chapter 11 bankruptcy protection, a victim of the larger FTX failure. These two events have now collided.
BlockFi apparently paid $20 million of the fine, leaving a balance of $30.28 million. It has been reported this makes the SEC the fourth largest creditor of BlockFi. On June 22, 2023, the SEC entered into a Stipulation with BlockFi and its debtors relating to this claim. According to the Stipulation, the Chapter 11 Plan sought to subordinate the SEC’s claim to the claims of general unsecured creditors. The Commission disagreed with that and asserted that its claims are general unsecured claims entitled to participate pari passu with other general unsecured creditors. Nevertheless, “in order to maximize the amount that may be distributed to investors and avoid delay in such distribution, the Commission has agreed to forego participating in any distributions under the Plan or requiring any cash reserve in connection with such distributions,” on account of the SEC’s own Proof of Claim.
The Stipulation further provides that it will be of no force or effect if the Plan is not confirmed by the court or the Plan does not thereafter become effective. In that regard, it is worth noting that the firm’s creditor’s committee did not support the Plan because it believed “that the plan provides releases of litigation claims against, among others, current and former directors and officers of BlockFi that committed significant misconduct that harmed BlockFi and its customers. The Committee also believes that it is not appropriate for BlockFi, via its current management and professionals, to control the liquidation of BlockFi and distributions to creditors.”