Cred Inc. – Creditors Seek Dismissal, Conversion or Appointment of Chapter 11 Trustee for Cases of Cryptocurrency Firm, Citing “Madoff”-Level Fraud, Hearing Set for December 9th

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November 18, 2020 – Krzysztof Majdak and Philippe Godinea (the “Moving Creditors”) filed a motion requesting that the Debtors’ Chapter 11 cases be (i) dismissed, (ii) converted to cases under Chapter 7 or (iii) put in the hands of a Chapter 11 trustee [Docket No. 62]. The Moving Creditors argue that $54.0mn of assets currently claimed by the Debtors are either "fictitious" or "uncollectable," leaving "only $14 million in assets to repay $136.499 million in liabilities, or approximately 10% of the outstanding liabilities." 

"Time is of the essence," they continue, "there are no prospects of curbing the losses because there is no viable business." Matters are being made worse still, they argue, given that the "Debtors are being run by professionals with no expertise in cryptocurrency" with the notable exception of the Debtors' co-founder and still CEO Daniel Schatt, "the very person who is responsible for the Debtors’ demise."

The motion is scheduled to be considered at a December 9, 2020 hearing.

The current motion explains, “This is a bankruptcy case involving a cryptocurrency financial platform that is rife with fraud and deception on ‘Madoff’ level proportions. Moving Creditors are two of approximately 6,000 customers of Debtors who invested their savings in the form of cryptocurrencies, many of whom have lost their life savings through Debtors’ investment platform.

Time is of the essence. There is cause to dismiss or convert these cases from cases under Chapter 11 to cases under Chapter 7 because the Debtors have grossly mismanaged the estates, and there is no reasonable likelihood of rehabilitation all while the estates are being depleted on a daily basis. In the alternative, Moving Creditors seek the immediate appointment of a Chapter 11 trustee with expertise in hunting down their stolen cryptocurrency.”

Boring down, the Moving Creditors argue that not only was a Madoff level fraud committed, that fraud was committed during the watch of co-founder and current CEO Daniel Schatt who "is the only party with significant knowledge about the Debtors’ operations [and] the very person who is responsible for the Debtors’ demise;" the fox, the Moving Creditors suggest, very much still in the hen house. NB" See the Schatt Declaration at Docket No. 12, for Mr Schatt's view of the events leading to the chapter 11 filings.

The motion continues: "According to Debtors’ pro-forma balance sheet as of the Petition Date, and despite having been formed two years ago in 2018, there is a shortfall of assets to liabilities of over $68 million….The shortfall is likely to be well over $100 million dollars. The footnotes to the balance sheet are both cryptic and euphemistic. Whereas the Debtors purport to possess $14.709 million in crypto-currency, the accompanying footnote warns that the currencies held are ‘illiquid.’ Publicly available information reveals that these tokens may be worthless. In fact, Moving Creditors’ counsel has received correspondence from ex-employees of Cred that this $14.709 million number is fictitious.

Under ‘loans under management,’ the $39.074 million receivable is accompanied with a footnote that this line comprises of a single loan made to moKredit, ‘an insider owned entity, which has not yet paid any outstanding principal.’ Worse, ‘the account balance may be partially or completely uncollectible.

Assuming that these two items are worthless –the ‘illiquid’ crypto-currency, together with the potentially ‘uncollectible’ insider loan –there are only $14 million in assets to repay $136.499 million in liabilities, or approximately 10% of the outstanding liabilities.

The values of the Debtors’ estates are diminishing every day and there are no prospects of curbing the losses because there is no viable business. The Debtors are being run by professionals with no expertise in cryptocurrency and, in addition to incurring three sets of professionals’ fees; Debtors’ counsel, the independent director, and the Chief Restructuring Officer, the Debtors are proposing to pay monthly employees’ salaries in excess of $300,000. However, as is clear from the declarations submitted, the only party with significant knowledge about the Debtors’ operations is Mr. Schatt, the very person who is responsible for the Debtors’ demise."

Background 

On November 7, 2020, Cred Inc. and four affiliated Debtors (“Cred” or the “Debtors”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the District of Delaware, lead case number 20-12836. At filing, the Debtors, a San Mateo, California-based cryptocurrency global financial services platform serving customers in 183 countries, noted estimated assets between $50.0mn and $100.0mn; and estimated liabilities between $100.0mn and $500.0mn.

About the Debtors

According to the Debtors: “Cred is a global financial services platform serving customers in 183 countries. Cred is a licensed lender and leverages a substantial balance sheet and proprietary technology to provide business and retail credit and to allow its customers to earn a yield on more than 15 crypto and fiat currencies through its partner network.

Founded by former PayPal veterans and based in the San Francisco Bay Area, Cred brings together a diverse team of entrepreneurial leaders to leverage machine learning and the power of blockchain technology.

Cred’s mission is to harness the power of blockchain to allow everyone to benefit from low-cost credit products.

Using the power of partnerships and blockchain technology, we dream of an open, fair and global financial infrastructure."

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