Voyager Digital Holdings, Inc. – Special Committee Looks to Engage Quinn Emmanuel to Investigate $650mn of Loans Made to 3AC in March 2022

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July 21, 2022 – The Debtors filed a motion seeking Court authority to engage Quinn Emanuel Urquhart & Sullivan, LLP (“Quinn Emanuel”) as special counsel to the Special Committee of Voyager LLC effective from July 13, 2022; with Quinn Emmanuel to assist, inter alia, in the Special Committee's investigation of $650.0mn of loans made to Three Arrows Capital ("3AC") in March 2022 [Docket No. 125].

On July 5th, Voyager filed for bankruptcy citing…the  prolonged volatility and contagion in the crypto markets over the past few months, and the default of Three Arrows Capital (3AC) on a loan from the Company’s subsidiary, Voyager Digital, LLC…” That 3AC loan was comprised of 15,250 BTC and $350 million USDC (a dollar-pegged stablecoin) with Voyager’s total claim against 3AC in excess of $650.0mn. 

Going back one cryptocurrency domino, in late June 3AC was compelled by large losses in respect of its Luna and stablecoin UST holdings to initiate insolvency proceedings in the British Virgin Islands (with a parallel Chapter 15 proceeding commenced in the U.S. Bankruptcy Court in the Southern District of New York). Going back two dominoes, between May 7th and May 14th, the value of Terra's "algorithmic" stablecoin TerraUSD (“UST1") and the Luna token to which it was supposedly "pegged" plunged from $41.0bn to $0.0, this occurring after $2.0bn of UST was "unstaked" from the Terra blockchain protocol and the algorithm (intended to keep the Luna pegged to the $1UST by incenting arbitrageurs to step in and support either the UST or the Luna)….spectacularly failed.

The founders of 3AC are now on record as believing that lenders, including Voyager, may have been too casual in their lending practices; with 3AC's Su Zhu commenting that 3AC had benefitted from “accommodative borrowing arrangements” and that, even after the Luna meltdown, were able to access loans with relatively small amounts of collateral pledged.

The motion provides: "Voyager LLC respectfully requests authority to employ and retain Quinn Emanuel as special counsel to provide independent advice to, and act at the exclusive direction of, the special committee of Voyager LLC (the ‘Special Committee’) in connection with the Special Committee’s Mandate (defined below), effective as of July 13, 2022, in accordance with the terms and conditions of that certain engagement letter dated as of July 16, 2022 (the ‘Engagement
Letter’), annexed as Exhibit 1 to the Proposed Order…The board of directors of Voyager LLC formally established the Special Committee on July 5, 2022, comprising independent directors Timothy Pohl and Jill Frizzley (the ‘Independent Directors’), and vested it with authority to, among other things: (a) investigate any historical transactions relating to Voyager LLC, and (b) investigate any potential estate claims and causes of action against insiders of Voyager LLC, including claims arising from its [@$650.0mn] loan to Three Arrows Capital, and (c) perform any other activities consistent with the foregoing that the Special Committee or Voyager LLC’s board otherwise deems necessary or appropriate ((a)-(c), the ‘Special Committee’s Mandate’).

Quinn Emmanuel attorneys named in the motion include Susheel Kirpalani and Katherine Lemire. Quinn Emanuel has agreed that, subject to court approval, it will apply a 10% discount on its standard billing rates for all timekeepers, which will be applied to the total fees in each invoice. Applying the 10% discount, Quinn Emanuel’s billing rates are: $1,246.50 to $1,917 for partners and counsel; $747 to $1,183.50 for associates; and $432 to $603 for paraprofessionals.

1 The UST is an algorithmic stablecoin created by a 30-year-old South Korean named Do Kwon (using open-source blockchain protocol “Terra” created by his Terraform Labs) and intended to exist in a symbiotic relationship with Terra’s non-stable Luna. Stablecoins are supposed to do what they say on the tin, stay stable, as opposed to non-stable coins and have in their short history generally been backed by cash collateral meaning that $1.0 of a stable coin could be exchanged for $1.0 dollar of the underlying collateral (ie cash). The ability to easily move in and out of a cryptocurrency and fiat currency helping to answer one of the crypto world’s largest problems. Kwon’s algorithmic stablecoin was an attempt to create stability with a second coin of his creation, the Luna, without the nuisance of having to post collateral. The algorithm was designed to incent traders to act opportunistically to keep the UST at a stable value of $1 while maintaining a “pegged” relationship with the Luna. When the value of the Luna relative to the UST went up or down, traders were supposed to be there to capitalize on an arbitrage opportunity and drive the value of the UST back to $1.0. It didn’t work. The May 7th destaking of $2.0bn from the Terra blockchain protocol sent the UST down to $0.91, a level from which (in a pessimistic trading environment) it could not be saved by those drawn to the arbitrage opportunity and willing to “burn” Luna in favour of UST. Once the algorithm’s existential flaw was exposed, the UST crashed…taking the Luna with it.

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