Voyager Digital, a crypto lender, has agreed to pay claims against business officers who, without conducting adequate due diligence, made a risky loan of around $1 billion to the defunct crypto hedge fund Three Arrows Capital (3AC). This error led to Voyager’s own bankruptcy.
Voyager said in a Monday court filing that pursuing litigation against chief executive officer Stephen Ehrlich and another executive would not be cost-effective. Instead, Ehrlich will pay $1.125 million in cash to Voyager, and the company will pursue recoveries from director and officers insurance policies worth up to $20 million, according to the filing.
Voyager filed for bankruptcy protection in July, citing 3AC’s June 2022 default on the loan as a major factor in its insolvency. 3AC began liquidation proceedings in the British Virgin Islands in late June.
Voyager had lost significant value during an industry-wide cryptocurrency slump caused by the collapse of the Terra Luna stablecoin in May 2022 and stopped customers from withdrawing their crypto assets shortly before its bankruptcy filing.
The loan to 3AC consisted of 15,250 bitcoins and $350 million worth of USD coin, a stablecoin whose value is pegged to the U.S. dollar. The loaned crypto was valued at $935 million in April 2022, according to court documents, but the price of bitcoin has been cut in half since then, making the loan worth closer to $650 million today.
Ehrlich approved the 3AC loan based only on a one-page summary stating that the hedge fund had $3.729 billion in cryptocurrency assets, according to court documents. 3AC had refused to provide more detailed financial information, saying that it had previously had a bad experience with a competitor that used information about its crypto holdings to duplicate its trading strategy.
Voyager’s board of directors chose to settle the company’s 3AC-related claims against Ehrlich and chief commercial officer Evan Psaropoulos, both of whom remain in leadership positions at Voyager, according to Monday’s court filing.
While the settlement is “just a small fraction” of the potential 3AC loss, fighting to recover more from the two men’s personal assets would only result in higher legal costs and lower recovery from D&O policies, according to Voyager.
Ehrlich and Psaropoulos could not immediately be reached for comment.
Crypto exchange platform FTX was the winning bidder in a bankruptcy auction for Voyager’s assets last month.
Voyager intends to sell its business to FTX for $1.42 billion, after rejecting an earlier FTX proposal as a “low-ball bid dressed up as a white knight rescue.”
The FTX sale and the 3AC loan settlements must be approved in bankruptcy court before they become effective.
The case is In re: Voyager Digital Holdings Inc., U.S. Bankruptcy Court for the Southern District of New York, No. 22-10943
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