Busted Hedges, Alleged Fraud Bankrupt Silicon Valley Crypto Firm

(Bloomberg) — Cryptocurrency investment firm Cred Inc. filed for bankruptcy Saturday after its founder and a top executive got into a bitter legal fight and the company’s Bitcoin hedging strategy foundered amid pandemic price fluctuations.

Cred Inc. says it was defrauded by its former chief capital officer, who tried to take control of a unit of the company and later ran off with around $3 million in Bitcoin that was meant to help the company rectify its hedging strategy. Cred Inc. owes its users around $140 million, according to court filings.

San Mateo, California-based Cred Inc. pays customers who pledge cryptocurrency to the company interest and invests the assets with third-party investment managers. Former PayPal Holdings Inc. employees Daniel Schatt and Lu Hua founded the company in 2018.

In March, the company sought to set up a new entity called Cred Capital that would help arrange bond offerings and oversee crypto asset management. Though Cred Inc. was supposed to control the unit, former Chief Capital Officer James Alexander sought to make himself sole director and gave Cred Capital’s voting shares to an unnamed outside investor who ultimately never put money into the company, Schatt said in court papers.

Missing Bitcoin

Alexander also failed to use a 300-Bitcoin loan from Hua to set up new hedging strategies and instead took some of the proceeds to pay off vendors who helped form Cred Capital, according to the court declaration. Alexander was fired in June, after which the company learned he’d moved Bitcoin worth about $3 million to a private e-wallet and refused to return it.

“A material loss connected with the onboarding of a fraudulent asset manager by former Chief Capital Officer, James Alexander, and his misappropriation of certain Debtors’ digital assets severely impaired the Debtors balance sheet,” according to the court filing.

Cred Inc. later sued Alexander in a California court. A lawsuit Alexander filed in Delaware Chancery Court last week tells a different story, saying Cred Capital was always meant to be a separate company with Alexander as the sole director, but Schatt moved to “squeeze out” Alexander after the two men had disagreements.

‘Coup’

“This action seeks to stop a corporate coup d’état by defendants Daniel Brian Schatt and Joseph Podulka, as they try to seize control of Cred Capital without any authority to do so,” the lawsuit states. Podulka is Cred Inc.’s chief financial officer.

Lawyers representing Cred Inc. and Alexander didn’t respond to emails seeking comment.

In its Chapter 11 bankruptcy filing, Cred Inc. lists assets between $50 million and $100 million and liabilities between $100 million and $500 million.

The bankruptcy case is Cred Inc., 20-12836, U.S Bankruptcy Court for the District of Delaware. To view the docket on Bloomberg Law, click here.

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