Voyager chooses to settle CEO negligence claims related to 3AC loans

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(Bloomberg) – Crypto lender Voyager Digital Ltd. is pursuing settlements with two senior executives after an internal investigation revealed potential allegations of gross negligence stemming from subprime loans made to former hedge fund Three Arrows Capital, according to court documents.

Chief Executive Stephen Ehrlich, in consultation with then-CFO Evan Psaropoulos, agreed to let Voyager lend nearly $1 billion worth of crypto to Three Arrows despite extremely limited financial disclosure from the hedge fund, according to reports. court documents filed Monday. Uncollected loans weighed heavily on Voyager before it filed for bankruptcy in July.

But pursuing lawsuits against Ehrlich and Psaropoulos would be difficult and potentially fruitless, according to the results of an investigation by two Voyager board members. Even if the company could prove that the executives breached their fiduciary duties to Voyager, the cost of the lawsuits would likely outweigh any potential lawsuit payout, board members concluded.

Instead, the company is proposing a settlement that asks Ehrlich to pay Voyager $1.125 million in cash, pursue claims under directors’ and officers’ insurance policies worth up to 20 million dollars, and to Ehrlich and Psaropoulos to continue to guide the company through bankruptcy. Ehrlich remains Voyager’s CEO, and Psaropoulos is now the company’s chief commercial officer.

The board’s investigation found no fraud or theft by any Voyager executive, according to court documents. A Voyager representative declined to comment on the settlement, while Ehrlich and Psaropoulos did not immediately respond to emails seeking comment.

Voyager needs its bankruptcy judge to approve the settlement before it can be enforced.

Due diligence

Voyager, which is looking to diversify its loan portfolio earlier this year, began pursuing a loan relationship with Three Arrows in February, according to court documents. During Voyager’s due diligence, Three Arrows provided information about its corporate structure, anti-money laundering policies and controls, and descriptions of its business strategy.

But the hedge fund’s financial disclosures fell short of those provided by Voyager’s other institutional borrowers: Three Arrows provided a one-sentence statement, signed by co-founder Kyle Davies, saying the firm controlled net assets of Voyager. worth $3.729 billion.

When pressed for greater transparency, Davies told Voyager that the hedge fund only provided summary net asset value statements to its lenders, according to bankruptcy court documents. The policy stems from a bad experience with a previous counterparty who used more detailed information to mimic Three Arrows’ trading strategy, Davies said.

Voyager agreed to begin lending crypto to Three Arrows on March 8 despite limited disclosures. As of May 5, loans totaled 15,250 Bitcoin and 350 million USDC, a stablecoin. Just over a month later, Three Arrows said it lost money in the collapse of the Terra blockchain. The hedge fund went into liquidation in the British Virgin Islands in June and Voyager did not collect any of the loan principal.

Bankruptcy is Voyager Digital Holdings Inc., 22-10943, US Bankruptcy Court for the Southern District of New York (Manhattan).

©2022 Bloomberg LP

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