US Judge Bars SEC From Punishing Voyager Over Bankruptcy Token

The ongoing bankruptcy proceeding for Voyager Digital has sprouted a controversy with the US Securities and Exchange Commission. As the court considers a restructuring plan to bring the firm out of bankruptcy, Voyager executives proposed to issue a repayment token and sell some assets to repay customers.

The SEC filed a supplemental objection to block the move touting that issuing bankruptcy tokens would violate securities law. But bankruptcy judge Michael Wiles overruled the suggestion, saying the regulator would not be allowed to fine Voyager executives.

The SEC Objects To Voyager Restructuring Plans

Voyager filed Chapter 11 bankruptcy on July 5, 2022, after taking a hit from the Terra implosion. Voyager’s executives expected to restructure the firm and repay their over 100,000 customers under the protection of bankruptcy law. They held an auction to bid for the firm’s assets, with Binance US emerging as the highest bidder. 

In a recent bankruptcy proceeding, the court considered allowing Binance US to acquire the firm’s assets and the executives to issue a repayment token to its customers. However, on February 22, the SEC objected to the sale, stating that a part of the restructuring plan could violate securities laws.

The SEC argued the disclosure statement provided by Binance US and other debtors does not prevent the transaction from being potentially illegal. According to the regulator, selling the firm’s assets could impact 51% recovery of funds paid to the firm’s users. It also argued that selling Voyager Tokens (VGX) may mean offering unregistered securities under federal law.

The SEC did not only object to the asset sales in a March 6 objection filing but also kicked against the legal protection of Voyager’s executives or any person relating to the restructuring transactions. The legal protection stated that no US agency, the SEC inclusive, can bring any enforcement action against the parties involved in Voyager’s restructuring transactions.

However, in the objection filing, the SEC’s lawyer, Therese Scheuer, argued that the legal protection is broad and could give Voyager employees and lawyers room to violate securities laws.

Court Criticizes The SEC’s Suggestions On Voyager’s Bankruptcy Token And Asset Sale

The court did not support the SEC’s objection, and in a March 2 hearing, it criticized the regulator for presenting such ambiguous reasoning. Michael Wiles, the judge presiding over Voyager’s bankruptcy case, commented on Voyager’s repayment token issuance and asset sale during the third hearing on March 6.

Judge Wiles said the court would not allow the SEC to fine the executives involved in the bankruptcy token issuance. This statement further affirms the legal protection of the parties involved in the restructuring while nulling the SEC’s objection to the plans.

The SEC in its argument, addressed the court’s provisions as extraordinary and highly improper. But judge Wiles explained that granting the SEC authority to fine the executives exposes anyone participating in the restructuring transaction to danger. 

According to Bloomberg, Wiles noted that it would be absurd for any bankruptcy case or court proceeding to function with such a suggestion.  After all, a bankruptcy filing aims to protect entities and individuals as they work out ways to repay debts and solve their financial problems. Allowing the SEC to punish Voyager executives under legal protection would defeat the purpose of Chapter 11 bankruptcy.

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