Case 20-12836-JTD Doc 605 Filed 03/08/21 Page 1 of 103

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF DELAWARE

In re: Chapter 11

CRED INC., et al., 1 Case No. 20-12836 (JTD)

(Jointly Administered)
Debtors.

REPORT OF ROBERT J. STARK, EXAMINER

BROWN RUDNICK LLP ASHBY & GEDDES, P.A.

Andrew M. Carty Gregory A. Taylor (DE Bar No. 4008)
Michael W. Reining Katharina Earle (DE Bar No. 6348)
Tiffany B. Lietz 500 Delaware Avenue, 8th Floor
Seven Times Square P.O. Box 1150
New York, NY 10036 Wilmington, DE 19899
212-209-4800 302-654-1888
[email protected] [email protected]
[email protected] [email protected]
[email protected]
ANKURA CONSULTING GROUP, LLC
Stephen R. Cook Vikram Kapoor
2211 Michelson Drive, 7th Floor 485 Lexington Avenue, 10th Floor
Irvine, CA 92612 New York, NY 10017
949-752-7100 212-818-1555
[email protected] [email protected]

E. Patrick Gilman
601 Thirteenth Street NW, Suite 600
Washington, DC 20005
202-536-1730
[email protected]

Dated: March 8, 2021

1
The Debtors in these chapter 11 cases, along with the last four digits of each debtor’s tax identification number are
as follows: Cred Inc. (8268), Cred (US) LLC (5799), Cred Capital, Inc. (4064), Cred Merchant Solutions LLC
(3150), and Cred (Puerto Rico) LLC (3566). The Debtors’ mailing address is 3 East Third Avenue, Suite 200, San
Mateo, California 94401.
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TABLE OF CONTENTS

I. EXECUTIVE SUMMARY .................................................................................................1

A. Scope of the Investigation, In Brief. ....................................................................... 1

B. What Was Cred and What Was It Supposed to Do? ............................................... 3

C. Why Did Cred Fail? ................................................................................................ 3

1. Cred’s Corporate Governance and Business Management. ........................ 4

2. Cred’s Business Functions. ......................................................................... 4

3. The moKredit Relationship. ........................................................................ 6

4. Mr. James Alexander. ................................................................................. 6

5. Summary of the Events Giving Rise to Cred’s Bankruptcy. ...................... 7

D. Additional Topics Included within the Investigation and this Report. ................. 10

II. KEY ENTITIES AND INDIVIDUALS ............................................................................11

A. Debtor Entities. ..................................................................................................... 11

B. Involved Entities. .................................................................................................. 12

C. Relevant Individuals. ............................................................................................ 15

III. RELEVANT CASE BACKGROUND ..............................................................................18

A. The Commencement of the Chapter 11 Cases and Appointment of Examiner. ... 18

B. The Examiner’s Work Plan for the Investigation. ................................................ 20

C. The Methods Employed to Conduct the Investigation. ........................................ 21

IV. GENERAL BACKGROUND REGARDING THE DEBTORS .......................................23

A. Corporate History and Organization. .................................................................... 23

B. Cred’s Primary Products. ...................................................................................... 25

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V. CRED’S OPERATIONS AND CIRCUMSTANCES LEADING TO THE FINANCIAL

COLLAPSE ...................................................................................................................................28

A. Cred’s Business Functionality. ............................................................................. 28

1. Cryptocurrency Asset Storage. ................................................................. 28

2. Diligence Process and Procedures. ........................................................... 33

3. Financial and Accounting Practices. ......................................................... 35

4. Insurance Coverage................................................................................... 37

5. Internal Compliance Function................................................................... 40

B. Cred’s Relationship and Dealings with moKredit. ............................................... 41

1. moKredit, In General. ............................................................................... 41

2. Cred’s Business Dealings with moKredit. ................................................ 43

3. Cred’s Failed Attempts to Withdraw moKredit Investments. .................. 45

4. Potential Conflicts of Interest. .................................................................. 47

5. Diligence and Risk Management Respecting moKredit. .......................... 49

6. Disclosures to Customers Regarding moKredit Relationship. ................. 50

7. Luxembourg Bonds................................................................................... 52

C. Cred’s Pre-Petition Losses and Liquidity Crisis. .................................................. 54

1. JST Capital. ............................................................................................... 54

2. Cred’s Other Asset Managers. .................................................................. 69

3. Cred Develops, But Does Not Implement, the So-Called “All-Weather”

Strategy. ................................................................................................................ 76

D. Cred’s Relationship with QuantCoin. ................................................................... 77

1. Inception of Relationship. ......................................................................... 77

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2. Chronology of Material Events Involving Cred and QuantCoin. ............. 80

E. Lu Hua’s Transfer of 300 Bitcoin to Cred. ........................................................... 86

F. Cred’s Dealings with James Alexander. ............................................................... 89

1. General Background on James Alexander. ............................................... 89

2. Organization of Cred Capital. ................................................................... 91

3. James Alexander’s Alleged Misappropriation of Assets. ......................... 91

VI. INVESTIGATIVE CONCLUSIONS ................................................................................95

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I. EXECUTIVE SUMMARY

A. Scope of the Investigation, In Brief.

On December 23, 2020, the United States Bankruptcy Court for the District of Delaware

(the “Court”) Ordered the appointment of an examiner in the Chapter 11 cases of Cred Inc., et

al. (“Cred” or the “Debtors”). On January 7, 2021, the Office of the United States Trustee filed

its notice of appointment of Robert J. Stark, as Examiner, and its motion seeking approval of

such appointment. On January 8, 2021, the Court entered its Order approving such appointment

(the “Examination Order”). In the Examination Order, the Court directed the Examiner to

investigate allegations of fraud, dishonesty, incompetence, misconduct, mismanagement, or

irregularity in the management of the affairs of the Debtors of or by current or former

management of the Debtors, and otherwise perform the duties of an examiner, as set forth in

Bankruptcy Code Sections 1106(a)(3) and 1106(a)(4) (the “Investigation”).

In organizing his Investigation, the Examiner was mindful that these bankruptcy cases

have involved “dueling narratives.” Cred, on the one hand, pinned much of its troubles on its

former Chief Capital Officer, failed investments in a Chinese entity named moKredit, and a

failed investment in an entity named QuantCoin. Other case constituents have put blame

elsewhere, raising allegations of gross mismanagement and potentially fraud. The Examiner

viewed his charge as collecting and analyzing the available evidence, providing an objective

view of the facts underlying these cases, and enabling the Court and all stakeholders to better

understand why Cred failed and who might be responsible for such failure.

To conduct his Investigation, the Examiner obtained documents from the Debtors, the

Official Committee of Unsecured Creditors (the “Committee”), and certain customers of the

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Debtors. 2 In total, approximately 13,000 documents were delivered and reviewed. The

Examiner’s professionals interviewed 23 individuals, including Daniel Schatt (founder, co-

owner, director, former CEO), Lu Hua (founder, co-owner, director, former CEO), James

Alexander (former Chief Capital Officer), Matthew Foster (Chief Restructuring Officer), Scott

Wiley (interim Chief Financial Officer), Joseph Podulka (former Chief Financial Officer), Daniel

Wheeler (former General Counsel), and Daniyal Inamullah (former Vice President of Capital

Markets). Those interviews were conducted over a span of one month, and each lasted for

several hours. None of those interviews were conducted under oath, but the Examiner’s

professionals conducted the interviews in deposition style. In general, the Examiner found the

Debtors, Committee members, executives, and other interviewees responsive to the Examiner’s

information requests, willing to provide/volunteer information and, during the interviews, answer

questions largely without interruption by counsel. In sum, even though the Investigation was

conducted in a very short time frame (i.e., approximately 8 weeks), the Examiner believes that he

was able to conduct a sufficient Investigation 3 to acquit his charge under the Examination

Order. 4

2
The Examiner wishes to particularly thank the Debtors’ and the Committee’s professionals for their assistance in
connection with the Investigation. The Examiner believes that the various case professionals were attentive to the
Examiner’s information needs, forthcoming and candid, and that their insights were critically important to the
Investigation.
3
It is important to note that this Investigation was conducted under very tight time constraints, under very pressured
circumstances and, given those obstacles, was necessarily reliant on voluntary cooperation of the parties. No
assurances can be given that all relevant documents were produced or that no other relevant information/evidence
would be revealed in formal discovery bearing on the matters discussed herein.
4
An earlier draft Report was shared with the Debtors and the Committee, and their feedback was solicited. The
Examiner did not make any substantive revisions or modifications to the Report based on commentary from the
Debtors or Committee after their review.

2
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B. What Was Cred and What Was It Supposed to Do?

Cred was a cryptocurrency financial services platform that offered holders of

cryptocurrencies the option of investing those assets with Cred (through the “CredEarn”

program) or borrowing against those cryptocurrencies (through the “CredBorrow” program).

Those participating in CredEarn agreed to invest their cryptocurrency with Cred for a finite

period of time, during which Cred guaranteed those customers a predetermined rate of return.

CredBorrow, on the other hand, allowed customers to deposit their cryptocurrency with Cred and

obtain a loan against those assets, usually in an amount not to exceed 50% of the cryptocurrency

value at the time of the deposit, for a fixed period and with a fixed interest rate.

Although the loan agreements reviewed by the Examiner (particularly under the

CredEarn program) contained terms and conditions as to repayment and yield, they did not

dictate precisely how cryptocurrency proceeds would be used or invested by Cred, or include any

conditions/constraints with respect to such investments. Based on interviews with certain Cred

customers, it appears some believed, based on statements from Cred’s website and blog posts

(among other things), that Cred’s investments were collateralized. For the most part, this was

not the case, and certain Cred employees expressed concern that such statements were potentially

misleading.

C. Why Did Cred Fail?

The specific causative event was a “flash crash” in cryptocurrency trading value in March

2020, followed by a run-up in April and May 2020 resulting in a liquidity crisis. The Examiner

believes, however, that the firm’s failure is more aptly attributed to dereliction in corporate

responsibility. Swings in cryptocurrency trading value were, after all, a foreseen aspect of the

firm’s business model. But, Cred’s corporate managers did not run the business to effectively
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counterbalance such risk, as was promised to customers. This dereliction was grave. Noticeable

failures include, among other things: (i) un-systemic, chaotic and, in some instances, non-

existent diligence, accounting, and compliance functions; (ii) allowance for currency migration

to non-Cred entities operating in mainland China (moKredit), without legal or practical capacity

to repatriate capital as and when requested/needed by Cred; and (iii) allocation of important

managerial and operating functions to an individual with an extremely worrisome past. Cred, it

seems, excelled at its marketing objectives; but, its failures in the most basic of business

functions portended its eventual demise.

1. Cred’s Corporate Governance and Business Management.

Cred’s Board consisted of only two directors (Messrs. Schatt and Hua), one of whom

(Hua) was recused on all “big” operations issues, purportedly on advice of his counsel. The

Board and senior management seemingly did not adopt clear and effective policies and

procedures for virtually any day-to-day functions. There is little evidence that the Board (i.e.,

Mr. Schatt) ran the business to ensure operative systems/practices, consistent with customer

expectations, and to effectively ward off risks inherent in the business.

2. Cred’s Business Functions.

For much of its existence, Cred maintained only an informal and “ad hoc” diligence

process with respect to material aspects of its business, from the hiring of key officers and

employees to the deployment of its assets. Cred did not have formal diligence or oversight

policies respecting investment decisions, including the selection of asset managers with whom to

invest Cred’s assets and customer deposits. Nor did it develop and maintain a standardized,

formal process for decision-making pertaining to Cred’s investment proposals, investment

allocations, risk management strategies, or liquidity. Although certain employees indicated that

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they employed informal diligence processes relating to investment decisions, no such processes

were formally adopted by the company or implemented consistently.

Cred operated in a similarly undisciplined manner respecting asset management, storage,

and transfers. Cred did not maintain records identifying or tracking assets between the

CredEarn, CredBorrow, or other programs, and had no discernable method for identifying or

tracking specific assets or transfers. Rather, customer assets were comingled and maintained

together without a standardized method for distinguishing which assets were deposited by whom

and from which program they were derived. Additionally, Cred did not develop and maintain a

standardized, comprehensive protocol for tracking customer deposits and for initiating and

authorizing transfers. Cred’s method for initiating, authorizing, and executing transfers often

came through informal channels of communication and all steps were often performed by a

single individual without a defined, discernible method of approval or oversight. Moreover,

Cred did not maintain reliable records for its trading accounts and did not adopt a regular

practice of issuing transaction statements.

These deficiencies extended to the accounting and compliance functions. Cred did not

have a centralized, integrated accounting function. Certain accounting information was

maintained in offline Excel spreadsheets, but they were not regularly updated. By the time Cred

filed for bankruptcy, it had not performed a comprehensive financial reconciliation of accounts

in almost a year.

Cred did not implement a formal reporting or compliance policy concerning its

investments (either internally, with respect to employees tasked with overseeing investments, or

externally, with respect to asset managers overseeing Cred’s investments). Again, certain Cred

employees indicated that they had developed informal procedures for obtaining investment
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information and updates from asset managers, but the Examiner is unaware of any formal Cred

policy governing this process.

Given the foregoing, the Examiner endeavored to reconcile Cred’s books and records to

more accurately appreciate its financial posture and to determine whether funds were properly

accounted for or, potentially, improperly diverted from the company. However, given the

disorganized and incomplete state of Cred’s books and records, as well as the time constraints on

the Investigation, the Examiner was not able to complete such reconciliation.

3. The moKredit Relationship.

Throughout its history, Cred was tightly bound to the fortunes of moKredit – a Chinese

microlender owned by Lu Hua, Cred’s co-founder and 50% equity owner. Cred’s business

primarily involved converting customer cryptocurrencies into fiat currency for moKredit to lend

to its borrowers. Converting cryptocurrencies into fiat currency exposed Cred to fluctuations in

cryptocurrency trading prices, a risk that required constant hedging. Even though Cred placed a

significant portion of its asset-base with moKredit, it had little visibility as to moKredit’s ability

to return capital when/if needed to, among other things, maintain an effective hedging position.

Cred had, in fact, almost no information respecting moKredit’s loan portfolio at any given point

in time. When the “flash crash” caused a liquidity crisis for Cred, Cred had to repatriate

substantial capital from moKredit, but moKredit was not positioned to return any capital. Cred’s

hedge positions fell away, rendering it “naked” to future swings in cryptocurrency trading prices.

Its fate was thereby sealed.

4. Mr. James Alexander.

Considerable corporate authority was vested in James Alexander, Cred’s Chief Capital

Officer (“CCO”). Neither Cred’s CEO, Dan Schatt, nor the Cred Board, nor any other employee

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at Cred appears to have conducted any meaningful diligence (e.g., background search, credit

check) with respect to Mr. Alexander either prior to his hiring or during his period of

employment. It has come to the Examiner’s attention that Mr. Alexander was convicted on

December 3, 2007 in the United Kingdom for crimes related to illegal money transfers, for which

he was sentenced to three years and four months in prison to be served at HMP Ford Prison in

West Sussex, England. At the time of his incarceration, there was a prison break at this facility.

Mr. Alexander has been identified by the UK government as a fugitive. 5

Mr. Alexander is an important figure in the story of Cred’s demise. Again, the Examiner

attributes responsibility for the firm’s demise largely to failures in corporate leadership,

primarily Messrs. Schatt and Hua. But, Alexander’s participation/involvement in poor decision-

making is a recurring theme, especially when evaluating particularized errors in business

oversight (e.g., undisciplined diligence and asset-allocation functions) and points of loss (e.g.,

QuantCoin and repayment of the Luxembourg Bonds, both discussed below). At the end of his

tenure with the company, and at various times thereafter, Mr. Alexander engaged in behavior

that may be charitably described as aberrant. His actions, described herein, only add to the aura

of suspicion.

5. Summary of the Events Giving Rise to Cred’s Bankruptcy.

Set forth below is a brief synopsis of the circumstances leading to Cred’s bankruptcy

filings:

5
MN Form UCF-17-2, Order Granting Name Change, Aug. 18, 1994, (Exhibit 167); see also Letter from Andrew
Selous MP, Parliamentary Under-Secretary of State for Justice, to Philip Davies MP, House of Commons (Nov. 7,
2014) (Exhibit 168); Rachel Millard, Exposed: Inmates on the run from Ford Prison, The Argus (Apr. 7, 2015),
https://www.theargus.co.uk/news/12873674.exposed-inmates-on-the-run-from-ford-prison/. All “Exhibit” references
in this Report refer to exhibits set forth in the Compendium of Exhibits to Report of Robert J. Stark, Examiner, a
copy of which is being provided to the Court, the U.S. Trustee, the Debtors, and the Committee.

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• Under Cred’s initial business model, customers would deposit their

cryptocurrency assets with Cred (through the CredEarn program) for a fixed term
and return. Cred would convert these assets into other forms of currency (e.g.,
“USDT,” which is a cryptocurrency backed by the U.S. dollar) and use the
proceeds to make short-term loans to moKredit. moKredit would convert the
assets to Yuan and make short-term, high-interest microloans, typically to
Chinese consumers.

• Based on the evidence obtained by the Examiner, Cred’s loans to moKredit were
unsecured and not backed by any collateral. Cred appears to have performed
minimal diligence before entering into the moKredit arrangement, and it does not
appear that Cred had considered or developed an effective mechanism to ensure
repayment of the loans.

• In an effort to manage the risk and volatility present in the cryptocurrency market,
and Cred’s exposure to such risk when it converted its cryptocurrency assets to
more stable currency, Cred entered into a series of hedge positions (e.g., options,
swaps, futures) that were, in theory, structured so as to insulate Cred from
fluctuations in cryptocurrency prices. The hedges established under this program
did not, however, protect Cred from a significant downturn in the market, and
instead exposed Cred to exacerbated losses in such a downturn scenario.

• On March 12, 2020, the price of Bitcoin (Cred’s most significant cryptocurrency
asset) experienced a quick and precipitous decline (a “flash crash”), after which
Cred encountered margin calls in connection with certain of its hedge positions.
Cred was unable to satisfy the margin calls and, so, the hedges were terminated.
Following the “flash crash,” Cred had a cumulative net short position with respect
to its hedges of approximately $27 million.

• With approximately 50% of its assets invested with moKredit, Cred did not have
in its possession the assets (i.e., $9 million in Bitcoin) necessary to reconstitute its
hedges. Failure to reconstitute the hedges left Cred exposed (“naked”) to market
fluctuations, and, if Bitcoin prices increased, would result in Cred’s liabilities
(i.e., the market price of the Bitcoin it owed its customers) increasing. In the
ensuing weeks and months, the price of Bitcoin steadily rose and, because Cred
did not reestablish its hedges (due to a lack of liquidity), so too did Cred’s
liabilities.

• On or about March 12, 2020, Cred attempted to recall $10 million of the
approximately $38 million principal loan amount it had extended to moKredit in
order to reconstitute its hedges. Notwithstanding the terms of moKredit’s loan
agreement, moKredit did not meet that recall request. Despite representations that
it would be able to satisfy at least part of the redemption within 10 days, moKredit
did not. moKredit’s failure to satisfy the request may be attributed, at least in
part, to the economic fallout from the COVID-19 pandemic. At this time,

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moKredit’s loan default rates rose to above 60%, making it difficult (if not
impossible) for moKredit to collect on outstanding loans.

• moKredit’s situation significantly and adversely impacted Cred’s liquidity profile.

But, it was not the only cause of Cred’s deteriorating liquidity position.
Beginning in February 2020, Cred transferred a total of 800 Bitcoin to an entity
named QuantCoin, which Cred believed to be an asset management firm. Cred’s
relationship with QuantCoin seemingly began on the recommendation of James
Alexander, 6 as did the execution of an initial 500 Bitcoin transfer. As discussed
further herein, Cred ended up losing its entire 800 Bitcoin investment with
QuantCoin, valued at approximately $9 million (August 2020). Based on the
evidence reviewed by the Examiner, it appears that Cred did minimal diligence on
QuantCoin before making its investment. 7

• As the Chief Capital Officer of Cred, and head of Cred Capital, James Alexander
was responsible for raising and deploying capital for Cred. Information delivered
to the Examiner indicates that Alexander had “free reign” to choose asset
managers and raise and deploy assets in his discretion, with little or no oversight
from the Board, Schatt, or other management personnel. When Schatt discovered
that Alexander and Dan Wheeler (Cred’s former General Counsel) established
Cred Capital in a manner contrary to his instructions, Alexander promptly
transferred to his personal accounts $200,000 USD and 225 Bitcoin of Cred’s
assets (Cred Capital) with the assistance, wittingly or not, of Daniyal Inamullah.

• In January 2020, Cred sold $14 million of its moKredit loans through an
independent entity in Luxembourg, Income Opportunities (the “Luxembourg
Bonds”), to two investors. Alexander served as a director of Income
Opportunities and was responsible for developing and proposing the investment.
The Luxembourg Bonds matured on June 30, 2020, at which time it appears,
based on the Examiner’s review of relevant documents, only moKredit bore
responsibility to Income Opportunities. By June 2020, it was evident that
moKredit could not repay the loan balance. Cred purchased the Luxembourg
Bonds (i.e., $14 million in exposure to moKredit) from the two investors,
notwithstanding its own acute liquidity problems. 8

6
According to Alexander, he was introduced to QuantCoin through Schatt. The Examiner was not furnished with
any information corroborating this statement.
7
The Examiner was unable to fully investigate the QuantCoin transaction, given time and information constraints.
The Examiner was unable to discern, for example, if anyone at the company (e.g., Alexander) received any
payments from those involved with QuantCoin.
8
The Examiner was unable to fully investigate the Luxembourg Bonds transaction, given time and information
constraints. The Examiner was unable to discern, for example, if Alexander separately received any payments in
connection with his involvement with Income Opportunities and the Luxembourg Bonds.

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In the Examiner’s opinion, the cumulative effect of these events, coupled with (and in

some cases, a result of) Schatt’s and the Board’s failure to adequately oversee and manage the

day-to-day operations of the company, led to Cred’s decline and ultimate Chapter 11 filings.

D. Additional Topics Included within the Investigation and this Report.

The Investigation also included a review of Lu Hua’s transfer of 300 Bitcoin to Cred in

March 2020, which was prompted after Hua informed Cred that moKredit would not be able to

repay $10 million of its principal loan balance as requested by Cred in March 2020. Hua and

Schatt characterize the 300 Bitcoin transfer as a loan. Relevant documents indicate, however,

that Hua made the transfer as an equity contribution in exchange for 5,000,000 shares of Class B

common stock in Cred Capital.

Finally, the Examiner analyzed certain issues implicated by Cred’s Chapter 11 plan of

liquidation, 9 specifically, the estate release provisions contained therein. 10 Based on his review

of the definition of “Released Parties” under the Chapter 11 Plan, and discussions with

professionals for the Debtors and Committee, the Examiner understands that the estate releases

under the Chapter 11 Plan encompass only those professionals retained by the Debtors and the

Committee in the Chapter 11 Cases (and certain related parties). 11 During the course of his

9
See First Amended Combined Joint Plan of Liquidation and Disclosure Statement of Cred Inc. and Its Subsidiaries
under Chapter 11 of the Bankruptcy Code, Jan. 21, 2021, ECF No. 380 (as amended, modified, or supplemented, the
“Chapter 11 Plan”) (Exhibit 169).
10
See id. § 18.2.
11
Under the Chapter 11 Plan, the term “Released Parties” is defined as “Professionals retained by the Debtors, Grant
Lyon as the Debtors’ independent director, Matthew Foster as the Debtors’ chief restructuring officer, any other
staff supplied by Sonoran Capital Advisors, LLC, the Professionals retained by the Committee, and the respective
agents and representatives of each of the foregoing.” See id. § 1.113. The term ‘Professional” is, in turn, defined as
“any professional Person employed in the Chapter 11 Cases pursuant to section 327, 328, 363 or 1103 of the
Bankruptcy Code pursuant to an Order of the Bankruptcy Court and to be compensated for services rendered
pursuant to sections 327, 328, 329, 330, 331 or 363 of the Bankruptcy Code.” See id. § 1.106.

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Investigation, the Examiner did not become aware of any facts that, in his opinion, would give

rise to any viable estate claims or causes of action against any of the Released Parties.

In this respect, the Examiner notes that, following discussions with the U.S. Trustee’s

Office, the Committee, and the Debtors, the Examiner reviewed work performed by Cred’s

outside counsel, Paul Hastings LLP (“Paul Hastings”), prior to the Petition Date. The Examiner

received a list of matters on which Paul Hastings performed work for Cred (including a privilege

log of purportedly privileged materials and information) and conducted an interview of a

representative of Paul Hastings regarding such matters (and related issues, as deemed appropriate

by the Examiner). As with the other Released Parties, the Examiner did not become aware of

any facts that would, in his opinion, give rise to any viable estate claims or causes of action

against Paul Hastings.

II. KEY ENTITIES AND INDIVIDUALS

A. Debtor Entities. 12

• Cred, Inc.: The parent company of the below subsidiaries. Cred, Inc.
handled business with international customers.

• Cred (US) LLC: A wholly-owned subsidiary of Cred, Inc. Cred (US)

LLC handled borrowing and lending for domestic customers.

• Cred Capital, Inc.: A wholly-owned subsidiary of Cred, Inc. Formed in

March 2020, its stated purpose was to sell securities products.

• Cred Merchant Solutions LLC: A wholly-owned subsidiary of Cred Inc.

Formed in October 2019, its stated purpose was to facilitate the purchase
of cryptocurrency assets at the physical point of sale. Cred Merchant
Solutions had no business and no assets as of the Petition Date.

12
Unless otherwise specified, the Debtors are collectively referred to herein as “Cred” or the “Debtors”.

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• Cred (Puerto Rico) LLC: A wholly-owned subsidiary of Cred. Inc.

Formed in March 2020, its stated purpose was to facilitate transactions for
customers in Puerto Rico. 13

All Debtor entities are organized under Delaware law and have their principal place of

business in California, except Cred (Puerto Rico) LLC, which was formed under the laws of

Puerto Rico. 14 Cred (US) LLC holds a California Finance Lender license. 15

B. Involved Entities.

• 100 Acre Ventures (“100AV”): Formed in Delaware and registered as a

foreign LLC in California. A technical investment firm focused on
institutional investment and risk management in digital assets. 16 Cred
invested with 100AV beginning in April 2020, based on James
Alexander’s recommendation. 17

• Blockfills.com (“Blockfills”): A DBA of Reliz Limited and registered in

the Cayman Islands, is a digital asset liquidity provider. It provides an
off-exchange platform for customers to exchange cryptocurrency and fiat
currency. 18 Cred Capital initiated a relationship with Blockfills on the
recommendation of Daniyal Inamullah, Cred’s Vice President of Capital
Markets, who oversaw due diligence on Blockfills. 19

• CryptoLab Capital LLC (“Cryptolab Capital”): Based in California, a

now-defunct hedge fund that used a data-heavy approach to invest
cryptocurrency assets. 20 Cred invested in Cryptolab Capital (also referred
to as the “Martingale investment”). Cryptolab lost 100% of its assets

13
Decl. of Daniel Schatt in Supp. of Debtors’ Chapter 11 Pet. and First Day Mot. ¶ 12. (ECF No. 12) (“Schatt
Decl.”) (Exhibit 1).
14
Id. ¶ 13.
15
Base Prospectus, Jan. 30, 2020 at 2 (Exhibit 2); License Search, California Dept. of Fin. Protection and
Innovation, https://docqnet.dfpi.ca.gov/LicenseSearch/LicenseDetails/ (last visited Mar. 7, 2021) (search for License
No. 60DbO-91480).
16
100 Acre Ventures Form ADV, May 15, 2020 (Exhibit 20); 100 Acres Ventures Mission Page,
https://www.100acreventures.com/mission (last visited Mar. 4, 2021).
17
Interview with Daniyal Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 23, 2021).
18
Blockfills FAQ Page, https://www.blockfills.com/faq/ (last visited Mar. 4, 2021).
19
Videotaped Dep. of Daniyal Inamullah, Dec. 8, 2020 (“Inamullah Dep.”) 46:16–47:7 (Exhibit 9).
20
Laurence Fletcher, Crypto hedge funds struggle to recover from ‘bloodbath’, Fin. Times, May 20, 2020 (Exhibit
19).

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when Bitcoin prices fell in March 2020, resulting in a 14% loss for Cred
on its position. 21

• Cyber Quantum Pte. Ltd. (“Cyber Quantum”): Founded by Daniel

Schatt, Cyber Quantum is a Singapore entity registered by Hua in January
2018 used to raise funding for Cred through an Initial Coin Offering. 22

• JST Capital (“JST”): Also known as JST Systems, a limited liability

company organized under New Jersey law. 23 JST provides financial
services to individuals in the digital asset market in two primary areas:
trading and asset management, and risk and balance sheet management. 24
In late 2018, Cred hired JST as a consultant to assist Cred with a hedging
platform. 25 JST created hedging positions against various cryptocurrencies
for Cred, including Bitcoin (BTC), Ripple (XRP), Ethereum (ETH),
Bitcoin Cash (BCH), Litecoin (LTC), XLMedia (XLM), OMG Network
(OMG) and Cardano (ADA). Cred also used JST as its “paying agent” in
connection with interest payments received from moKredit. 26 Under this
arrangement, JST received interest payments from moKredit in
cryptocurrency and transferred those payments to Cred in the form of
USD. 27 In connection with this service, JST invoiced Cred for monthly
“profit share” fees. 28

• Kingdom Trust: Kingdom Trust is an escrow agent for and custodian of

both fiat and alternative assets, including cryptocurrencies. 29 Cred did not

21
Inamullah Dep. 104:9–16, 210:11–211:1 (Exhibit 9).
22
Cyber Quantum Pte. Ltd. Unaudited Financial Statements, 2018 (Exhibit 7); Cyber Quantum Pte. Ltd. Directors’
Resolutions, 2018 (Exhibit 8).
23
Business Name Search, NJ Division of Revenue and Enterprise Services,
https://www.njportal.com/DOR/BusinessNameSearch/Search/BusinessName (last visited Mar. 4, 2021) (search for
JST Capital).
24
Services, JST Capital, https://jstcap.com/#services (last visited Mar. 4, 2021).
25
Inamullah Dep. 105:8–14; 110:4–17 (Exhibit 9) (“[W]e’re essentially taking cryptocurrency liabilities in the form
of CredEarn participations and translating that into a dollar asset, which is – in moKred. Now, if crypto starts to
rise, we will not be able to return the same number of cryptocurrency units back to the customer if we do not hedge
the upside exposure.”); Emails exchanged between H. Ng, K. Wong, D. Schatt and InnReg representative regarding
JST onboarding process, Dec. 7–20, 2018 (Exhibit 10).
26
Email from J. Alexander to K. Wong, Jan. 22, 2019 (Exhibit 11).
27
Email from D. Granet to L. Hua, copying in Messrs. J. Alexander, K. Wong, S. Zhang and S. Freeman, Jan. 14,
2019 (Exhibit 12).
28
Exhibit 11; JST Systems Invoice, Jan. 22, 2019 (Exhibit 13).
29
Qualified Custodian Executive Summary, Kingdom Trust, https://www.kingdomtrust.com/qualified-
custodian/executive-summary (last visited Mar. 4, 2021).

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transact with Kingdom Trust, but transferred 800 Bitcoin to a person or

entity purporting to be a Kingdom Trust employee between February and
April 2020. 30

• moKredit Inc. (“moKredit”): Founded by Cred co-founder Lu Hua in

2012, moKredit Inc. 31 is a Chinese consumer lending platform that
provides microcredit loans to Chinese borrowers. 32 moKredit is
incorporated in the Cayman Islands and based in Shanghai, China. 33
Beginning in 2018, Cred lent funds obtained through its customers’
investments – generally retail customers – to moKredit. Cred received
20% interest return on those loans. 34 Cred passed between 6-10% of that
interest on to its customers, depending on the cryptocurrency invested
(i.e., Bitcoin, Ethereum, XRP) and the amount of time those customers
“locked up” their funds. 35 Cred allocated to itself the remaining 10% of
the moKredit interest proceeds as revenue. 36

• Sarson Funds Inc. (“Sarson Funds”): A cryptocurrency “marketing

company” that advertises investment products (“sub-funds,” organized as
separate entities). 37 Cred invested in two Sarson Funds sub-funds in or
around March 2020: (a) Fifth Khagan, a small coin/small token fund; 38
and (b) AX Momentum, 39 a “covered call options fund.” 40

• UpgradeYa Investments, LLC (“UpgradeYa”): A cryptocurrency

investment firm and a customer of Cred’s borrowing program,

30
Inamullah Dep. 155:4–156:16 (Exhibit 9); Cred Inc. Update for the Creditors Committee, Dec. 14, 2020 at 23
(Exhibit 25).
moKredit Inc. Overview Report at 2.1 Corporate History, Aug. 7, 2019 (Exhibit 3). At times, parties also refer to
31

moKredit as “moKred,” “mo9,” and previously “GamaxPay, Inc.”

32
Videotaped Dep. of Dan Schatt 26:18–24, Dec. 14, 2020 (“Schatt Dep.”) (Exhibit 4).
33
Articles of Association of moKredit, Oct. 25, 2017 (Exhibit 170); Note Purchase Escrow Agreement, Jan. 28,
2020 (Exhibit 171).
34
Schedule of Advances (Exhibit 46).
35
Loan and Security Agreement between moKredit Inc., and Cred LLC, Dec. 27, 2018 (Exhibit 5).
36
Interview with Joseph Podulka, former Chief Financial Officer, Cred Inc. (Feb. 16, 2021).
37
Sarson Funds, https://www.sarsonfunds.com/ (last visited Mar. 4, 2021).
38
Sarson Funds Fact Card: Fifth Khagan (Exhibit 14).
39
Sarson Funds Fact Card: AX Momentum (Exhibit 15).
40
Inamullah Dep. 208:24–209:1 (Exhibit 9).

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“CredBorrow.” 41 On April 20, 2020, UpgradeYa and Cred entered into a

Loan and Security Agreement whereby Cred agreed to provide
UpgradeYa with a $2 million revolving line of credit secured by Bitcoin
pledged by UpgradeYa equal to an initial maximum loan-to-value ratio of
50%. 42 UpgradeYa also participated in the CredEarn plan to earn interest
on its cryptocurrency. 43

• Uphold: A cloud-based asset platform that enables users to store, buy,

and convert classes of assets. 44 At Cred’s founding, Schatt served on
Uphold’s board of directors and later added Uphold as a partner for Cred
in early 2019. 45 For Cred, Uphold assisted with operations and acted as its
customer wallet. 46 Throughout 2019, Uphold was also one of Cred’s
primary sources for customer leads. 47

C. Relevant Individuals.

• Daniel (“Dan”) Schatt: Co-founder and former Chief Executive Officer

(“CEO”) of Cred. Schatt has 20 years of experience in the finance and
financial technology sectors. Schatt met Cred’s other co-founder, Lu Hua,
while both worked at PayPal in 2009. When Schatt and Hua founded Cred
(then called Libra Credit), Schatt became the company’s president and
Hua the CEO. Schatt stepped into the CEO role after Hua resigned in
mid-to-late-2018. Schatt resigned as CEO in December 2020. Schatt and
Hua each own 50% of Cred’s equity. 48

41
Suppl. Decl. of Marc Parrish in Supp. of the Mot. of UpgradeYa Investments, LLC for Relief from Stay under
Bankruptcy Code Section 362 ¶ 2 (ECF No. 128) (Exhibit 172); Nathan DiCamillo, Here’s What Happened at
Crypto Lender Cred’s Latest Bankruptcy Hearing, CoinDesk, Dec. 18, 2020 (Exhibit 18).
42
Mot. of UpgradeYa Investment, LLC for Relief from Stay Under Bankruptcy Code Section 362 ¶ 8 (ECF No. 89)
(Exhibit 17); UpgradeYa Loan and Security Agreement, Apr. 20, 2020 (Exhibit 176); Holdings Update, Oct. 11,
2020 (Exhibit 177).
43
Decl. of Marc Parrish in Supp. of the Mot. of UpgradeYa Investments, LLC for Relief from Stay under Bankruptcy
Code Section 362 ¶ 5 (ECF No. 91) (Exhibit 173); UpgradeYa Tranche 1 Closing Statement (Exhibit 178); Exhibit
177.
44
Interview with Joseph Podulka, former Chief Financial Officer, Cred Inc. (Feb. 16, 2021); Uphold About Page,
https://uphold.com/en/resources/about (last visited Mar. 4, 2021).
45
Interview with Joseph Podulka, former Chief Financial Officer, Cred Inc. (Feb. 16, 2021).
46
Id.
47
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).
48
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021);
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).

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• Lu Hua: Founder of moKredit in 2012. In 2018, Hua also founded what

is now Cred with Dan Schatt, his former PayPal colleague. 49 Hua owns a
50% equity stake in Cred and sat on its Board from its inception until the
eve of its bankruptcy filing. Initially, Hua served as Cred’s CEO before
yielding the role to Schatt in mid-to-late 2018 as Cred shifted its
operations from China to the United States. 50

• Joseph (“Joe”) Podulka: Cred’s Chief Financial Officer from July 2019
to December 2020. 51 In that role, he oversaw Cred’s corporate cash
management and expenses incurred by Cred Capital. 52 On June 29, 2020,
he became a member of Cred Capital’s board of directors. 53 Podulka, also
a former PayPal employee, was Head of Finance with PayPal Europe from
2010 to 2011 and Head of Finance at PayPal New Ventures from 2011 to
2014. 54

• Daniel (“Dan”) Wheeler: Joined Cred as its General Counsel in August

2019. Wheeler previously served as Cred’s primary outside counsel while
a partner at Bryan Cave Leighton Paisner LLP (“Bryan Cave”) from May
2012 to August 2019. 55 In 2020, Wheeler oversaw the organization of
Cred Capital, 56 and was appointed Cred Capital’s Corporate Secretary and
General Counsel on or about March 16, 2020. 57

• James Alexander: Hired as Cred’s Chief Capital Officer in August

2018. 58 Alexander’s primary roles included soliciting cryptocurrency
investments and allocating assets. 59 In March 2020, Cred directed

49
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).
50
Id.
51
Decl. of Joe Podulka in Supp. of Debtors’ Obj. to Mot. of James Alexander to Dismiss the Cred Capital, Inc. Case
(Jan. 29, 2021) ¶ 12 (“Podulka Decl.”) (Exhibit 21).
52
Id. at ¶ 6.
53
Id. at ¶ 9–11.
54
Podulka Decl. ¶ 2; LinkedIn Profile of Joe Podulka https://www.linkedin.com/in/Podulka/ (last visited Mar. 4,
2021).
55
Decl. of Daniel F. Wheeler RE Mot. of James Alexander to Dismiss the Cred Capital, Inc. Case ¶ 1 (ECF No.
386) (“Wheeler Decl.”) (Exhibit 24); Schatt Dep. 43:8-14 (Exhibit 4).
56
Wheeler Decl. ¶¶ 2–3 (Exhibit 24).
57
Id. ¶ 1.
58
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021);
Interview with James Alexander, former Chief Capital Officer, Cred Inc. (Mar. 3, 2021).
59
Interview with James Alexander, former Chief Capital Officer, Cred Inc. (Mar. 3, 2021).

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Alexander to establish and manage Cred Capital as a subsidiary of Cred. 60

Instead, Alexander organized Cred Capital as a separate, independent,
entity over which he had almost complete control. 61 On June 24, 2020,
two days before Cred terminated him, Alexander directed Daniyal
Inamullah to transfer 225 Bitcoin from a Cred Capital account to a
blockchain address provided by Alexander. 62

• Daniyal Inamullah: Served as Cred’s Vice President of Capital Markets

from January 2020 to April 2020. 63 In that role, Inamullah reported to
James Alexander and was responsible for seeking investment
opportunities, conducting due diligence, and proposing investments to
Cred’s “investment committee.” 64 From April 2020 to July 2020,
Inamullah served as Cred Capital’s Vice President of Capital Markets,
where he was responsible for underwriting and selling debt products and
marketing bonds. 65 Amid a corporate shuffle, Cred Capital terminated
Inamullah in July 2020 and Cred immediately re-hired him as Vice
President of Capital Markets, where he reported to Schatt. 66 Inamullah
left Cred in November 2020 and is now the Chief Investment Officer at
Sarson Funds, one of Cred’s asset managers. 67

• Grant Lyon: The co-founder of Arete Capital Partners and has over 30
years’ experience in financial restructuring. 68 On November 3, 2020,
Cred appointed Lyon as an Independent Director, and he is now the sole
remaining member of Cred’s Board. In that capacity, Lyon effectively has
sole decision-making authority over all matters requiring Board
approval. 69

60
Schatt Decl. ¶ 22 (Exhibit 1); Podulka Decl. ¶ 5 (Exhibit 21); Exhibit C, Decl. of Daniel Schatt in Supp. Of Def.’s
Opp. To Pl.’s Mot. for Prelim. Inj., Alexander v. Schatt, No. 20-CIV-02728 (Cal. Super. Ct. Aug. 27, 2020) (Exhibit
174).
61
Schatt Decl. ¶ 22 (Exhibit 1).
62
Podulka Decl. ¶ 2 (Exhibit 21).
63
Decl. of Daniyal Inamullah in Supp. of Mot. of the United States Trustee for Entry of an Order Directing the
Appointment of a Trustee, or in the Alternative, (I) Directing the Appointment of an Examiner, or (II) Converting the
Cases to Chapter 7 Cases (ECF No. 133) ¶ 1 (“Inamullah Decl.”) (Exhibit 6).
64
Id. at ¶ 2.
65
Inamullah Dep. 30:23–31:3 (Exhibit 9).
66
Id. at 31:24–32:2.
67
Inamullah Decl. ¶ 1 (Exhibit 6).
68
Decl. of Grant Lyon in Supp. of Debtors’ Obj. to Mot. of James Alexander to Dismiss the Cred Capital, Inc. Case
¶ 2 (ECF No. 433) (“Lyon Decl.”) (Exhibit 26).
69
Id. ¶ 2.

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• Matthew (“Matt”) Foster: A managing director and founding partner of

Sonoran Capital Advisors, a turnaround, crisis management, and financial
advisory firm. 70 Cred hired Foster as its Chief Restructuring Officer
(“CRO”) in November 2020. Foster reports to Cred’s Board and manages
Cred’s day-to-day operations. He is also responsible for assessing and
implementing the restructuring of Cred’s businesses, including overseeing
Cred’s liquidity needs. Foster has 15 years of restructuring experience and
Cred is his fifth CRO appointment in the last 36 months. 71

• Scott Wiley: Senior Advisor at Sonoran Capital Advisors, a turnaround,

crisis management, and financial advisory firm. Wiley is Cred’s interim
Chief Financial Officer, overseeing Cred’s day-to-day accounting, finance,
and cash management functions. 72

• Paul Maniscalco / Pablo Bonjour (MACCO): Paul Maniscalco is a

senior managing director and Pablo Bonjour is a managing director at
MACCO Restructuring Group, LLC (“MACCO”). 73 MACCO provides
interim executive leadership, financial advisory services, and fiduciary
services to businesses in financial and operational distress. Bonjour and
Maniscalco are financial advisors to Cred. Bonjour has an investment
banking and consulting background, having worked with more than 1,000
U.S. and international clients. 74 Maniscalco has over 20 years’ experience
in corporate finance, capital markets, and business restructurings. 75

III. RELEVANT CASE BACKGROUND 76

A. The Commencement of the Chapter 11 Cases and Appointment of Examiner.

The Debtors filed for Chapter 11 relief on November 9, 2020, citing, among other things:

(i) material losses incurred in connection with or as a result of the alleged misconduct of its

former Chief Capital Officer, James Alexander; (ii) the purported theft of certain cryptocurrency

70
Exhibit 25 at 34.
71
Id. at 3.
72
Id. at 35.
73
Id. at 32–33.
74
Id. at 32.
75
Id. at 33.
76
For this section, references made to affirmative actions taken by the “Examiner,” necessarily include those actions
taken by Examiner’s counsel and experts.

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assets in connection with a failed investment with QuantCoin; and (iii) the Debtors’ deployment

of significant assets with moKredit and the subsequent inability or unwillingness of moKredit to

return those assets to Cred pursuant to the terms of the parties’ agreement. 77

Amid allegations of fraud, theft, and mismanagement, the Office of the United States

Trustee, on December 4, 2020, filed its Motion for Entry of an Order Directing the Appointment

of a Trustee, or in the Alternative, (I) Directing the Appointment of an Examiner, or (II)

Converting the Cases to Chapter 7 Cases. 78 On December 18, 2020, the Court conducted a

hearing with respect to this motion and, on December 23, 2020, the Court entered its Order

Denying in Part, and Granting in Part, the Trustee/Examiner Motions, pursuant to which the

Court granted the U.S. Trustee’s request for the appointment of an examiner pursuant to

Bankruptcy Code Section 1104(c). 79 The Examination Order provides, in pertinent part, that the

Examiner will investigate any allegations of fraud, dishonesty, incompetence, misconduct,

mismanagement, or irregularity in the management of the affairs of the Debtors of or by current

or former management of the Debtors, and otherwise perform the duties of an examiner set forth

in Bankruptcy Code Sections 1106(a)(3) and 1106(a)(4).

On January 7, 2021, the U.S. Trustee appointed Robert J. Stark as Examiner and filed a

motion seeking Court approval of such appointment, 80 and on January 8, 2020, the Court entered

an Order approving Mr. Stark’s appointment as Examiner. 81

77
See Schatt Decl. ¶¶ 18–40 (Exhibit 1).
78
See United States Trustee Mot. For Entry of an Order Directing the Appointment of a Trustee, or in the
Alternative, (I) Directing the Appointment of an Examiner, or (II) Converting the Cases to Chapter 7 Cases (ECF
No. 133) (“UST Motion”) (Exhibit 27).
79
See Order Den. in Part, and Granting in Part, the Trustee/Examiner Mot. (ECF No. 281) (“Examination
Order”) (Exhibit 28).
80
See App. of the United States Trustee for Order Approving Appointment of Examiner (ECF No. 330) (Exhibit 29).

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Promptly following his appointment, the Examiner and his counsel met and conferred

with the U.S. Trustee, the Debtors, and the Committee regarding the scope, timeline, and budget

with respect to the Investigation. Thereafter, on January 20, 2021, the Examiner filed his

Proposed Scope, Work Plan, and Budget for Investigation, Prepared and Submitted by Robert J.

Stark, as Examiner, 82 which the Court approved by order dated January 28, 2021. 83 On February

24, 2021, the Examiner filed a proposed amendment to the work plan and budget. 84

B. The Examiner’s Work Plan for the Investigation.

Pursuant to his work plan, the Examiner identified the following specific topics of the

Investigation:

(i) investigating the Debtors’ business and operations including allegations of

comingling corporate and client accounts and possible insider transactions;

(ii) examining the facts and circumstances surrounding the substantial losses
the Debtors’ endured as a result of the liquidation of certain hedge
positions;

(iii) the Debtors’ relationship with moKredit, including investments made by

the Debtors, and outstanding debt owed by moKredit;

(iv) the facts and circumstances surrounding Lu Hua’s transfer of 300 Bitcoin
to the Debtors and the related controversy that ensued;

(v) the facts and circumstances surrounding the transfer of 800 Bitcoin to
QuantCoin and the losses associated therewith; and,

(vi) the facts and circumstances involving certain dealings between the
Debtors and James Alexander.

81
See Order Approving Appointment of Examiner (ECF No. 338) (Exhibit 30).
82
Notice of Filing of Proposed Scope, Work Plan, and Budget for Investigation, Prepared and Submitted by Robert
J. Start, as Examiner (ECF No. 376) (“Examiner Work Plan”) (Exhibit 31).
83
Order Approving Examiner’s Proposed Scope, Work Plan, and Budget for Investigation (ECF No. 431) (Exhibit
32).
84
Notice of Filing of Proposed Amend. to Work Plan, and Budget for Investigation, Prepared and Submitted by
Robert J. Stark, as Examiner (ECF No. 552) (Exhibit 33).

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Although completing an investigation and report of this scale in approximately 8 weeks

was a large undertaking, the Examiner endeavored to complete and file his report in advance of

the plan confirmation hearing, presently scheduled for March 9, 2021.

C. The Methods Employed to Conduct the Investigation.

Because of the complex nature of this Investigation and the specialization it demands, the

Examiner engaged (a) Brown Rudnick LLP and Ashby & Geddes, P.A. to serve as his counsel,

and (b) Ankura Consulting Group, LLC to assist with the digital asset market analysis.

Additionally, and as provided in the Examination Order, the Examiner utilized and leveraged

work performed by advisors to the Debtors and Creditors’ Committee in conducting the

Investigation, including Dundon Advisers, LLC and CipherTrace, Inc.

The Examiner obtained documents from the Debtors, the Committee, and other parties in

interest. In total, the Examiner received and analyzed approximately 13,000 documents and over

55 gigabytes of information.

The Examiner conducted 23 witness interviews. Because of health and safety protocols,

all witness interviews were conducted over video conference. All interviewees participated

willingly. The majority of those interviewed were represented by counsel. The following is a

list of the persons interviewed in connection with the Investigation and the dates of the

interviews:

Interviewee Title Date of Interview

Tim Kuhman General Counsel, Kingdom Trust February 3, 2021
Barbara J. Valliere Assistant United States Attorney, United February 4, 2021
States Attorney’s Office for the Northern
District of California
Alexandra E. Special Agent, Federal Bureau of February 4, 2021
Bryant Investigation

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 Case 20-12836-JTD Doc 605 Filed 03/08/21 Page 26 of 103

Matthew Foster Chief Restructuring Officer, Cred Inc. February 8, 2021

Managing Director and Founding Partner,
Sonoran Capital Advisors
Scott Wiley Interim Chief Financial Officer, Cred Inc. February 9, 2021
Senior Advisor, Sonoran Capital Advisors
Pablo Bonjour Financial Advisor to Cred Inc. February 10, 2021
Managing Director, MAACO
Restructuring Group
Paul Maniscalco Financial Advisor to Cred Inc. February 10, 2021
Senior Managing Director, MAACO
Restructuring Group
Daniyal Inamullah Former Vice President of Capital Markets, February 10, 2021
Cred Inc. February 23, 2021
Former Vice President of Capital Markets,
Cred Capital Inc.
Grant Lyon Independent Director, Cred Inc. February 11, 2021
Co-Founder and Managing Partner, Arete
Capital Partners
Daniel Wheeler Former General Counsel, Cred Inc. February 12, 2021
Joseph Podulka Former Chief Financial Officer, Cred. Inc February 16, 2021
Daniel Schatt Co-Founder, Cred Inc. February 17, 2021
Former Chief Executive Officer, Cred Inc.
Mr. C.M. Creditor and former customer, Cred Inc. February 18, 2021
Mr. M.M. Creditor and former customer, Cred Inc. February 18, 2021
Lu Hua Founder moKredit February 18, 2021
Co-Founder, Cred Inc.
Mr. C.dL. Creditor and former customer, Cred Inc. February 19, 2021
Tonia Tautolo Interim Chief Financial Officer, Cred Inc. February 19, 2021
Mr. D.F. Creditor and former customer, Cred Inc. February 24, 2021
Mr. E.S. Creditor and former customer, Cred Inc. February 24, 2021
Mr. J.S. Creditor and former customer, Cred Inc. February 24, 2021
Mr. G.B. Creditor and former customer, Cred Inc. February 24, 2021
James Grogan Paul Hastings March 2, 2021
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James Alexander Former Chief Capital Officer, Cred Inc. March 3, 2021
Former Director, Cred Capital Inc.

IV. GENERAL BACKGROUND REGARDING THE DEBTORS

A. Corporate History and Organization.

Daniel Schatt and Lu Hua formed Cred, Inc. and its affiliated Debtors in or around May

2018. 85 At inception, Hua and Schatt each owned 50% of the equity in Cred. Before forming

Cred, Schatt and Hua worked together at PayPal, overlapping from 2007 until 2011. Hua left

PayPal in or around mid-2011 and subsequently formed moKredit, a microcredit lending

company in Singapore and Shanghai. Schatt and Hua stayed in contact following their time at

PayPal. 86

In January 2018, Schatt and Hua established an entity named Cyber Quantum in

Singapore. Cyber Quantum’s stated purpose was to conduct an Initial Coin Offering (“ICO”) in

or around May 2018. The proceeds of the Cyber Quantum ICO would be used to provide initial

funding for a different and newly-formed entity, Cred. Through the ICO, Schatt and Hua raised

approximately $5 million. 87

85
The responsible parties originally organized Cred as an LLC in Delaware, which also was originally known as
Libra Credit and also transacted through Cyber Quantum Pte. Ltd., a Singaporean entity. Schatt Dep. 37:1–10
(Exhibit 4); Cred LLC and Subsidiary Financial Statements, 2018 (Exhibit 34).
86
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021); Interview with Daniel Schatt, co-
Founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).
87
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021);
Interview with James Alexander, former Chief Capital Officer, Cred Inc. (Mar. 3, 2021). According to Alexander,
Cyber Quantum raised $26 million in Ethereum during the ICO. The Examiner has not seen any evidence to
substantiate this assertion.

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Schatt and Hua initially intended for Cred to operate out of China, with Hua (a resident of

China) serving as CEO and Schatt (a resident of California) serving as president. 88 At some

point in 2018, Schatt and Hua decided to relocate the business to the U.S. in an apparent effort to

increase scale. 89 After relocating Cred to the U.S., Schatt assumed the CEO role and Hua

resigned his position as an officer of Cred, although Hua remained a member of Cred’s Board

until November 2020. 90

Cred brought in more than $135 million in “borrowed” capital from its CredBorrow and

CredEarn programs (discussed further below) between December 2018 and October 2020. It did

so by offering guaranteed rates of return against investments (CredEarn) and providing loans to

institutional and retail customers backed by their pledged cryptocurrency (CredBorrow).

CredEarn customers were told that regardless of the market trends, they would “receive

the upside potential of [their] crypto.” 91 Cred advertised that customer cryptocurrency was used

to lend and transact with a variety of customers including retail borrowers and money managers

(but not short-sellers). 92 CredBorrow customers received credit lines based on a loan-to-value

ratio calculated on a monthly basis. 93

Cred customers executed CredEarn or CredBorrow agreements memorializing the terms

of the arrangements. The Examiner was provided with copies of certain (but not all) of the

agreements under the CredEarn and CredBorrow programs. In those agreements, Cred did not

88
Schatt Dep. at 20:22–21:12 (Exhibit 4); Interview with Daniel Schatt, co-Founder and former Chief Executive
Officer, Cred Inc. (Feb. 17, 2021).
89
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).
90
Schatt Dep. 21:2–12; 22:4–6; 37:9–38:2 (Exhibit 4).
91
CredEarn Page, https://mycred.io/earn/ (last visited Mar. 4, 2021).
92
Id.
93
Standard CredBorrow Multi-Tranche Credit Agreement at 2–3 (Exhibit 36).

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make representations respecting or covenant as to how Cred would invest its customers’

cryptocurrency. 94 Further, none of the agreements reviewed by the Examiner spoke to whether

customer funds or Cred’s investments were to be collateralized.

B. Cred’s Primary Products.

(a) CredBorrow.

CredBorrow was Cred’s first consumer product. Cred launched the CredBorrow program

in December 2018 as a mechanism to offer customers loans in U.S. dollars (USD) using a

customer’s cryptocurrency as collateral for the loan. 95 Cred marketed the program to customers

as “cash on your crypto without cashing out,” meaning that a customer could lend its

cryptocurrency to Cred and receive payment streams from Cred, without having to sell the

cryptocurrency. 96

Under the CredBorrow program, customers would transfer their cryptocurrency to Cred,

which would hold such assets in a Cred account (typically with an entity named BitGo), and

receive a loan in USD from Cred. CredBorrow loans would typically bear interest at between

9% and 14% on an annual basis, depending on the length of the loan and the underlying

collateral. 97 Cred also typically charged a 3% “origination” fee. The credit line was available to

94
Exhibit 36; Email from J. Alexander to K. Wong, Feb. 12, 2019 (Exhibit 39) (James Alexander sending samples
of Cred’s Enhanced Yield Agreement and Multi-Tranche Credit Agreement when asked for sample contracts for
CredEarn and CredBorrow customers); Enhanced Yield Agreement for CredEarn Customers (Exhibit 40).
95
CredEarn CredBorrow Information Sheet (Exhibit 35); Interview with Lu Hua, Chief Executive Officer,
moKredit, Inc. (Feb. 18, 2021).
96
CredBorrow Page, https://mycred.io/borrow/ (last visited Mar. 4, 2021).
97
Exhibit 35; Standard Cred Multi-Tranche Credit Agreement at 2–3 (Exhibit 36).

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CredBorrow customers for three years, with payments due annually. The loan-to-value ratio was

calculated on a monthly basis. 98

After Cred received cryptocurrency assets through the CredBorrow program, it often

converted the assets to USD or Stablecoin (USDT) – a cryptocurrency with a market value

pegged to a “stable asset,” in this case U.S. dollars – and used the proceeds to make loans to

moKredit for interest rates typically ranging from 18% to 24%. 99 The loan agreements between

Cred and moKredit provided that moKredit had to return principal on the sooner of the maturity

date of the loan or upon 30 days’ notice at Cred’s discretion. 100

(b) CredEarn.

Schatt and Hua recognized that the CredBorrow business model was susceptible to the

volatility of underlying cryptocurrency prices, which directly impact the collateral value of the

loans. 101 Following a significant drop in Bitcoin prices in 2018, Schatt and Hua began

developing another business line that could, in theory, compliment the CredBorrow business and

off-set certain of the risk attendant to that business. 102

In February 2019, Cred launched its CredEarn program. Under CredEarn, customers

were offered the opportunity to earn interest on their cryptocurrency assets by depositing them

with Cred for a predetermined period of time at a set interest rate (similar to a certificate of

98
CredBorrow Page, https://mycred.io/borrow/ (last visited Mar. 5, 2021).
99
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021); Interview with Daniel Schatt, co-
Founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).
100
See, e.g., Exhibit 36; moKredit Tranche Agreement No. 29, May 1, 2019 (Exhibit 37).
101
Interview with Daniel Schatt, co-Founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021);
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).
102
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).

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deposit). 103 Cred would then convert cryptocurrency assets deposited under the CredEarn

program into fiat currency and use the proceeds to make loans. 104 According to Cred’s

investment thesis, Cred would generate profits based on the spread between the interest rate

offered to customers and the rate charged by Cred under the relevant loans. 105

Cred boasted that customers would “still receive the upside potential of [their] crypto in a

bull market.” 106 Cred advertised that customer loans were used to lend and transact with a

variety of customers, including retail borrowers and money managers, but not to short-sellers. 107

CredEarn contracts did not detail precisely how Cred intended to invest customer assets and

made no mention of converting digital assets to USD/Stablecoin (USDT) and loaning those

assets to a company in China. 108 As discussed further in Section V(B), the vast majority of

CredEarn assets were utilized to make loans to moKredit.

CredEarn enrollment occurred on the 1st and 15th of every month, after Cred conducted a

Know Your Customer (“KYC”) check and executed a yield agreement with the customer. 109

Cred advertised the program on their website as a 6 month program, after which cryptocurrency

was returned to the customer. Customers also had the ability to opt for a 3 month auto-enroll. 110

Contracts obtained by the Examiner provided that the agreements between the customer and

103
Interview with Dan Schatt, co-Founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021); Interview
with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).
104
Crypto-to-Fiat Process Diagram (Exhibit 175).
105
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).
106
CredEarn Page, https://mycred.io/earn/ (last visited Mar. 4, 2021).
107
Id.
108
Interview with Mr. M.M., Creditor and former customer, Cred Inc. (Feb. 18, 2021).
109
CredEarn Process and Asset Flow (Exhibit 38).
110
CredEarn Page, https://mycred.io/earn/ (last visited Mar. 5, 2021).

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Cred were structured as so-called “Enhanced Yield Agreements” – agreements that linked to the

performance of foreign exchange rates, and thus the potential for a higher return. 111

In an effort to mitigate the risks associated with converting digital assets to fiat currency

Cred established hedge positions through JST. As explained in greater detail below, Cred’s

positions were intended to protect Cred in the event cryptocurrency prices increased, but created

a risk if they decreased.

V. CRED’S OPERATIONS AND CIRCUMSTANCES LEADING TO THE

FINANCIAL COLLAPSE

A. Cred’s Business Functionality.

1. Cryptocurrency Asset Storage.

Cred held very few assets itself and, instead, worked with certain firms to, among other

things, store and initiate transfers of Cred’s cryptocurrency assets, typically through a digital

“wallet” maintained with the firm. 112 A digital wallet acts as a bank that allows one to deposit,

withdraw, and make transactions with cryptocurrencies. 113 Given that cryptocurrencies are not

physical, all transactions are recorded on a ledger referred to as a blockchain. 114 By providing a

wallet address (every cryptocurrency wallet has a distinct address) an individual can transfer

funds to that wallet. 115 Given that all transactions are recorded on the blockchain, it is easy to

111
Email from J. Alexander to K. Wong, Feb. 12, 2019 (Exhibit 39) (James Alexander sending samples of Cred’s
Enhanced Yield Agreement and Multi-Tranche Credit Agreement when asked for sample contracts for CredEarn
and CredBorrow customers); Enhanced Yield Agreement for CredEarn Customers (Exhibit 40); Exhibit 36.
112
Interview with Daniyal Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 10, 2021);
Interview with Joseph Podulka, former Chief Financial Officer, Cred Inc. (Feb. 16, 2021).
113
Digital Wallet, https://www.investopedia.com/terms/d/digital-wallet.asp (last visited Mar. 7, 2021).
114
What is Blockchain Technology, https://www.coindesk.com/learn/blockchain-101/what-is-blockchain-
technology (last visited Mar. 7, 2021).
115
Id.

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track the total amount of funds designated to a particular wallet. 116 Furthermore, an individual

can possess as many digital wallets as he or she wants. 117

(a) JST Capital.

JST Capital was Cred’s initial wallet provider through March 2020. During that time,

CredEarn deposits were often transmitted directly to a JST wallet. 118 JST converted those

deposits into USD/Stablecoin and then executed transfers with moKredit pursuant to Cred’s loan

agreements with moKredit. 119 Under its arrangement with JST, Cred was unable to confirm

receipt of funds for customers until JST sent confirmation that funds had been received. 120

(b) Fireblocks.

In or around February 2020, Cred began to transition from an exclusive relationship with

JST. Cred was looking to diversify its investment portfolio and wanted to find a new over-the-

counter (“OTC”) asset custodian that could both hold and facilitate the transfer of Cred’s

cryptocurrency. At Schatt’s direction, 121 Cred partnered with Fireblocks, an asset custodian that

both holds and facilitates the transfer of cryptocurrency, to fill the company’s OTC need. 122

Cred entered into a licensing agreement with Fireblocks on February 21, 2020. 123

116
What is a Distributed Ledger, https://www.coindesk.com/learn/blockchain-101/what-is-a-distributed-ledger (last
visited Mar. 7, 2021).
117
Digital Wallet, https://www.investopedia.com/terms/d/digital-wallet.asp (last visited Mar. 7, 2021).
118
Interview with Scott Freeman, JST Capital (Mar. 2, 2021); Chat Log between S. Zhang and T. Perez, Aug. 28,
2019 (Exhibit 41).
119
Chat Log between S. Zhang and T. Perez, Jul. 8, 2019 (Exhibit 182) (confirming investments did not always go
through Cred).
120
Chat Log between S. Zhang and T. Perez, Dec. 4, 2019 (Exhibit 183).
121
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).
122
Interview with Daniyal Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 10, 2021).
123
Fireblocks License Agreement, Feb. 21, 2020 (Exhibit 43).

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The Fireblocks licensing agreement required Cred to put in place adequate controls to

avoid so-called “collusion risk” (i.e., the risk of double-spending cryptocurrency), including

enacting protocols and procedures to ensure that passwords and recovery passwords were

appropriately stored and tracked. 124 In this respect, Daniyal Inamullah (at the time, Cred’s Vice

President of Capital Markets) recommended that Cred adopt certain procedures (e.g., joint

password managers) to avoid potential collusion and other risks. 125

Joe Podulka was the Fireblocks “workspace owner,” which gave him responsibility for

Cred’s policies and configuration as they related to Fireblocks, including the decision of who at

Cred could access the platform. 126 Although Podulka appeared to agree with Inamullah’s

suggestion regarding joint password managers, the Examiner found no evidence that this policy

was adopted. Ultimately, Podulka, Inamullah, Alexander and Adnan Khakoo (a former fund

accountant) had access to Cred’s Fireblocks accounts and each had the ability to individually

initiate transactions and make transfers with little or no oversight. 127

To transfer assets, Inamullah, among others with access, digitally submitted transfer

requests that were then confirmed or denied by the authorizer. As a matter of informal policy,

the initiator of the transaction was not permitted to also authorize the transaction. 128 The sender

usually transferred a small test amount to ensure the receiving wallet address was correct. Upon

confirmation, the sender then completed the transaction. 129

124
Exhibit 43 at 5.2.
125
Interview with Daniyal Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 10, 2021).
126
Exhibit 43 at 5.9.
127
Inamullah Dep. 218:11–17 (Exhibit 9).
128
Interview with Joseph Podulka, former Chief Financial Officer, Cred Inc. (Feb. 16, 2021).
129
Interview with Daniyal Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 10, 2021).

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When a user sent funds from Fireblocks, the Fireblocks ledger would create an outgoing

entry, and Cred’s NetSuite accounting platform would record the date of the transaction and

where the assets were sent. Fireblocks’ system only recorded the destination wallet address. 130

It was the user’s responsibility to manually input identifying information regarding the

transaction. 131 That rarely occurred such that, according to Scott Wiley (Cred’s interim CFO),

the information in Cred’s journal entries was not particularly meaningful. 132

Although Inamullah personally adopted an informal policy of requiring two persons to

effect transfers (one to authorize and one to initiate) to ensure oversight, 133 that practice was not

adopted prior to Cred’s transition to Fireblocks. 134 Even then, however, it is unclear whether it

was more widely implemented or an effective control. 135

As a general practice, Cred did not (had no mechanism to) distinguish between its assets

in its Fireblocks accounts: (i) customers would transfer assets to Cred’s digital wallets; (ii) Cred

would transfer those assets to a central concentration account where such assets would be

comingled with all other customer deposits; and (iii) Cred would send assets from the

concentration account to various asset managers. The Examiner saw no evidence that Cred

130
Interview with Tonia Tautolo, Interim Controller, Cred Inc. (Feb. 19, 2021).
131
Id.
132
Interview with Scott Wiley, interim Chief Financial Officer, Cred Inc. (Feb. 9, 2021).
133
Interview with Daniyal Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 10, 2021).
134
Interview with Joseph Podulka, former Chief Financial Officer, Cred Inc. (Feb. 16, 2021).
135
The Examiner received conflicting reports on this issue. Compare 135 Interview with Daniyal Inamullah, former
Vice President of Capital Markets, Cred Inc. (Feb. 10, 2021) with Interview with Joseph Podulka, former Chief
Financial Officer, Cred Inc. (Feb. 16, 2021). Also, Cred’s interim Controller, Tonia Tautolo, explained that wallets
could be “whitelisted,” i.e., pre-approved, on Fireblocks prior to a transfer. It was Tautolo’s understanding that a
wallet address needed to be whitelisted on Cred’s Fireblocks system before it could receive a transfer. See Interview
with Tonia Tautolo, interim Controller, Cred Inc. (Feb. 19, 2021). However, Inamullah indicated that, although
wallets could be “whitelisted,” it was not a requirement in order to effect an outgoing transfer from a Cred
Fireblocks accounts to a particular wallet. Interview with Daniyal Inamullah, former Vice President of Capital
Markets, Cred Inc. (Feb. 23, 2021).

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distinguished between assets deposited through the CredEarn or CredBorrow programs (or any

other programs).

To further complicate matters, customer deposits in Fireblocks were intended to be

tracked only manually in an Excel ledger, which was maintained offline and not updated

regularly. 136 Cred maintained certain client folders that contained contracts indicating how much

certain customers had deposited, but the Examiner has not seen any evidence that Cred kept

records of what assets were received in which wallet and when. 137 In all, Cred’s comingling of

its assets and absence of meaningful financial records made it impracticable for the company to

discern whose assets belonged to whom.

Due to the lack of available information for transactions, the Examiner has significant

concerns regarding the reliability of Cred’s books and records regarding pre-petition transfers

sent from Cred’s Fireblocks account.

(c) Uphold.

Uphold is a cloud-based asset platform that enables users to store, buy, and convert

classes of assets. 138 At Cred’s founding, Schatt served on Uphold’s board of directors and later

added Uphold as a partner for Cred in early 2019. 139 For Cred, Uphold assisted with operations

and acted as its customer wallet. 140 Throughout 2019, Uphold was also one of Cred’s primary

136
Interview with Tonia Tautolo, interim Controller, Cred Inc. (Feb. 19, 2021).
137
Id.
138
Interview with Joseph Podulka, former Chief Financial Officer, Cred Inc. (Feb. 16, 2021); Uphold About Page,
https://uphold.com/en/resources/about (last visited Mar. 4, 2021).
139
Interview with Joseph Podulka, former Chief Financial Officer, Cred Inc. (Feb. 16, 2021).
140
Id.

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sources of customer leads. 141 When a customer bought cryptocurrency on Uphold, Uphold

would display an advertisement referencing its partnership with Cred and representing that Cred

products allowed Uphold customers to earn interest on their assets. 142

According to Matt Foster (Cred’s CRO), Uphold customers could participate in the

CredEarn program directly through Uphold’s platform (its web application). 143 Uphold was a

customer generator for Cred and also operated a wallet service similar to Fireblocks. Under the

customer agreements furnished to the Examiner, Cred retained the discretion to invest funds

obtained from Uphold customers as it saw fit (no differently than any other CredEarn

customer). 144

2. Diligence Process and Procedures.

As Cred’s Chief Capital Officer, James Alexander was tasked with primary responsibility

for diligence respecting Cred’s investment partners. 145 Alexander delegated diligence

responsibilities to Inamullah, Cred’s former Vice President of Capital Markets, who stated that,

as of his arrival in January 2020, Cred did not have an effective diligence process with respect to

its investments, “at least on paper.” 146 Although in his sworn deposition Inamullah stated that he

was responsible for conducting diligence on behalf of Cred, in his interview with the Examiner,

Inamullah disclaimed any responsibility for Cred’s diligence function. 147

141
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).
142
Id.
143
Interview with Matthew Foster, Chief Restructuring Officer, Cred Inc. (Feb. 9, 2021).
144
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).
145
Inamullah Dep. 34:15–35:2 (Exhibit 9).
146
Id. at 52:2–14.
147
Interview with Daniyal Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 10, 2021).

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According to his deposition testimony, Inamullah adopted what can best be described as

an informal process for vetting potential investment partners. When evaluating a potential asset

manager, Inamullah explained that he would first exchange general compliance information with

the party, including beneficial ownership information, background on the business itself, and

basic financial information. 148 He would then run the beneficial owner names through the

relevant anti-money laundering or KYC software, and contact others in the industry for

references. 149 To log information related to a potential investment, Cred used an internal Google

form. 150

Inamullah stated that he would question asset managers about experience, strategies, and

points of risk, 151 then would compile his findings into a brief investment proposal (typically 3-5

pages) for consideration by an informal “investment committee,” consisting of Schatt, Podulka,

Inamullah, Wheeler, and Alexander. 152 In his deposition testimony, Inamullah stated that he

developed a diligence checklist to vet investment managers but, in his subsequent interview with

the Examiner, he stated that no such list existed. 153 In any event, even in his deposition

testimony, Inamullah stated that he rarely used a diligence list during his tenure, 154 and that he

took few steps to validate information provided by asset managers. 155

148
Inamullah Dep. 42:15–44:1 (Exhibit 9).
149
Id. at 30:20–25, 35:9–14; 42:15–44:1.
150
Id. at 45:20–46:5.
151
Id. at 42:15–44:1, 53:18–24.
152
Id. at 42:15–44:1. It also appears that Khakoo, Sally Zhang (Senior Accounting Manager), Heidi Ng (Director of
Product and Partner Integrations), and Karen Wong (Cred’s Head of Finance / CFO prior to Podulka) attended at
least some “investment committee” meetings. See Cred Investment Committee Meeting Minutes (Exhibit 44).
153
Interview with Daniyal Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 10, 2021).
154
Inamullah Dep. 47:23–50:7 (Exhibit 9).
155
Id. at 53:25; 60:15–20.

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In his deposition, Inamullah stated that he and Alexander would supplement their

diligence efforts by contacting attorneys for counter-parties and other industry professionals,

seeking to verify information provided by an asset manager (e.g., corporate documents, financial

statements). 156 In all, the diligence process described by Inamullah was, in the Examiner’s

opinion, informal and appeared, in places, to be cursory.

3. Financial and Accounting Practices.

The Examiner reviewed extensive records and conducted several interviews with key

financial personnel, all of whom described incomplete or inadequate accounting practices at

Cred. 157 The Examiner’s review of Cred’s financial documents and transaction history

confirmed significant gaps in Cred’s accounting and record keeping practices, gaps that were

confirmed by the Debtors’ advisors, MACCO and Sonoran Capital Advisors. 158

Although Cred had access to Oracle’s NetSuite accounting software to produce financial

statements, Cred appears to have relied principally on Microsoft Excel and Google Sheets in

place of an integrated accounting function. 159 According to Paul Maniscalco and Pablo Bonjour,

MACCO was unable to readily identify Cred’s beginning cash balance upon initiating its work

156
Id. at 53:25–60:14.
157
Interview with Matthew Foster, Chief Restructuring Officer, Cred Inc. (Feb. 8, 2021); Interview with Scott
Wiley, interim Chief Financial Officer, Cred Inc. (Feb. 9, 2021); Interview with Pablo Bonjour and Paul
Maniscalco, Financial Advisors, MACCO, (Feb. 10, 2021); Interview with Tonia Tautolo, interim Controller, Cred
Inc. (Feb. 19, 2021).
158
Interview with Matthew Foster, Chief Restructuring Officer, Cred Inc. (Feb. 8, 2021); Interview with Scott
Wiley, interim Chief Financial Officer, Cred Inc. (Feb. 9, 2021); Interview with Pablo Bonjour and Paul
Maniscalco, Financial Advisors, MACCO, (Feb. 10, 2021).
159
Interview with Pablo Bonjour and Paul Maniscalco, Financial Advisors, MACCO, (Feb. 10, 2021); see, e.g.,
Email from S. Hwang to J. Podulka, Nov. 12, 2020 (Exhibit 45) (referencing Google Sheets); Schedule of Advances
(Exhibit 46) (tracking all of Cred’s tranches with moKredit in Excel); Email from J. Podulka to F. Cottrell and A.
Khakoo, Nov. 18, 2020 (Exhibit 47) (referencing NetSuite); see also Accounting Software, Netsuite,
https://www.netsuite.com/portal/products/erp/financial-management/finance-accounting.shtml (last visited Mar. 4,
2020).

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with Cred due to incomplete accounting records. 160 MACCO representatives had to manually

determine Cred’s cash balance by obtaining and/or creating financial statements. 161

Cred’s interim Controller, Tonia Tautolo, confirmed that Cred’s financial records were in

a state of disarray when she arrived in December 2020. 162 Very few transaction records existed,

and, in the instances where a transaction record did exist from Uphold or Fireblocks, Cred did

not consistently input the statement information into its accounting system, leaving Cred’s

records incomplete and/or out-of-date. 163 Instead, Cred attempted to track liabilities in what was

referred to as the “Cred Ledger” in Excel, which Tautolo described as falling short of any

reasonable accounting standards. 164 As just one example, Cred relied on a series of Excel

spreadsheets to track tens of millions of dollars’ worth of transactions with moKredit. Based on

the evidence obtained by the Examiner, these spreadsheets appear to be Cred’s only records of

when funds moved between Cred, moKredit, and JST.

Further, it appears that Cred did not perform a financial reconciliation of any accounts for

the 2020 financial year. The Examiner was able to obtain only unaudited 2019 financial

statements for Cred. 165 It bears noting that, although MACCO could not identify the last point at

which Cred had a complete and accurate records reconciliation, Armanino LLP – an independent

accounting and business consulting firm – produced a signed audit report dated December 31,

160
Interview with Pablo Bonjour and Paul Maniscalco, Financial Advisors, MACCO, (Feb. 10, 2021).
161
Id.
162
Interview with Tonia Tautolo, interim Controller, Cred Inc. (Feb. 19, 2021).
163
Id.
164
Interview with Tonia Tautolo, interim Controller, Cred Inc. (Feb. 19, 2021); Cred LLC General Ledger, 2020
(Exhibit 48).
165
Cred Financial Statements, 2019 (Exhibit 49).

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2018. 166 Cred engaged Armanino to audit Cred’s financial statements for the year ending

December 31, 2019, but work papers that MACCO examined suggest that the audit was still on-

going as of Cred’s bankruptcy filing. 167

Cred did not appear to regularly mark-to-market or record unrealized gains in any

system. 168 MACCO informed the Examiner that it did not find profit and loss or mark-to-market

account entries in Cred’s general ledger. 169 According to Foster, Cred did not complete monthly

account reconciliations, 170 which is also inconsistent with financial industry standards. 171

4. Insurance Coverage.

In soliciting customers, Cred advised potential customers that the company had “one of

the most comprehensive insurance policies available,” 172 and provided information about its

policies through its website. 173 In certain instances, Cred claimed that customers’

cryptocurrency investments were insured up to $100 million through industry-leading custodians

like BitGo. 174 In communicating with certain customers, Cred further represented that its asset

custodians –namely, BitGo and Bittrex – provided an extra layer of security through their own

166
Exhibit 34.
167
Email from J. Podulka to H. Moore and E. Rye, May 21, 2020 (Exhibit 50).
168
Interview with Pablo Bonjour and Paul Maniscalco, Financial Advisors, MACCO, (Feb. 10, 2021).
169
Id.
170
Interview with Matthew Foster, Chief Restructuring Officer, Cred Inc. (Feb. 8, 2021).
171
Id.
172
Email from M. Zhang to M. Parrish, June 24, 2020 (Exhibit 59).
173
Screenshot of Cred website discussing insurance policies (Exhibit 60).
174
Screenshot of Cred website discussing partnership with BitGo (Exhibit 61); Email chain between M. Zhang and
T. Miyauchi, June 19, 2020 (Exhibit 62).

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insurance policies. 175 Additionally, Cred touted its cyber hacking coverage obtained through

Lockton. 176

Snapshots from Cred’s website are excerpted below: 177

Cred also sent customers links to blog posts and webpages with insurance information

that, according to certain customers, led them to believe that their investment was fully protected

by Cred’s insurance policies. 178 One customer noted that he placed confidence in Cred due to its

“advertised claim to have ‘industry leading’ insurance.” 179 When another customer asked

whether Cred would compensate for losses resulting from customers’ Bitcoin being hacked or

stolen, he was assured that, once assets were in Cred’s custody, Cred took “full responsibility for

[their] safety and redelivery.” 180

Exhibit 59; Email from T. Perez to C.D. Nov. 14, 2019 (Exhibit 63); Email chain between M. Zhang and J.S.,
175

Apr. 15, 2020 (Exhibit 64).

176
Exhibit 59.
177
Exhibit 60; Exhibit 61.
178
Exhibit 59; Interview with Mr. M.M., Investor, Cred. Inc., (Feb. 18, 2021).
179
Email from D.F. to T. Perez, Nov. 8, 2020 (Exhibit 66).
180
Exhibit 62.

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Based on the information obtained by the Examiner, it appears that Cred’s assertions

regarding the strength and scope of its insurance coverage were inaccurate and/or overstated.

Cred maintained several insurance policies that it acquired through Lockton Insurance Brokers,

LLC (“Lockton”). 181 The policies in effect during 2020 were the following: 182

• Commercial package from The Hartford Financial Services Group, Inc.

(“The Hartford”). 183 Cred’s commercial package from The Hartford
provides general liability, property, automotive, and umbrella liability for
a total premium of $4,121. 184 The Hartford policy provides $2 million in
general liability insurance for each occurrence with a general aggregate
limit of $4 million. 185 Cred’s umbrella policy provides an additional $1
million coverage limit. 186 Cred renewed its policy from The Hartford in
2020 to extend coverage through November 6, 2021. 187

• Cyber liability from AXIS Insurance, which provides Cred with cyber
liability coverage up to a $5 million limit for a total premium of
$29,314. 188 Although the AXIS policy covered certain events, including
crisis management, fraud response, and business interruptions up to the
full $5 million policy limit, its coverage for “social engineering fraud loss”
was subject to a $250,000 coverage limit. 189

• Errors and omissions (“E&O”) from Validus Specialty (“Validus”),

which provides $1 million of coverage for a total premium of $270,000. 190
This policy does not cover third-party losses and contains a “Crypto
Currency, Token or Coin Exclusion.” 191 That policy exclusion, applies to

181
Lockton Summary of Insurance, 2020–2021 (Exhibit 51).
182
Policy terms ran from October 2019 to October 2020 or January 2020 to January 2021. In any event, the
coverage periods encompassed all relevant events for the purpose of the insurance claim discussion. Id.
183
Hartford Business Owners Policy, Oct. 1, 2020 (Exhibit 52); Hartford Workers’ Compensation and Employers’
Liability Busines Insurance Policy, Nov. 30, 2020 (Exhibit 53).
184
Exhibit 51; Exhibit 52; Exhibit 53.
185
Exhibit 51.
186
Id.
187
Exhibit 53.
188
Certificate of Liability Insurance, Nov. 11, 2020 (Exhibit 54); Axis Insurance Policy (Exhibit 55).
189
Exhibit 54; Exhibit 55.
190
Validus Errors and Omissions Policy Declarations (Exhibit 56).
191
Email from T. Khuu to B. De Lude, D. Schatt, and J. Podulka, Oct. 30, 2020 (Exhibit 146); Exhibit 56 at 31–32.

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any claim arising out of “any investment of any kind, whether or not a
security, that is in the form of crypto currency, crypto token or coin,
digital token or coin” or “any theft, misappropriation, or conversion of any
crypto currency, crypto token or coin, digital token or coin.” 192

• Directors and officers insurance (“D&O”) from Validus, which provides

$1 million in coverage for a total premium of $40,000. 193 This policy
does not cover third-party losses and contains a cryptocurrency exclusion,
as explained above. 194

• Excess D&O insurance from Euclid Insurance, which provides an

additional $1 million in coverage for covered losses exceeding $1 million,
for a total premium of $35,200. 195

• Coverage for lawyers from One Beacon Insurance, which provides $1

million in coverage for Cred’s employed lawyers for a total premium of
$4,957. 196

5. Internal Compliance Function.

In 2018, Cred hired InnReg LLC (“InnReg”) to assist Cred in developing internal

compliance protocols addressing, among other things, information security, privacy, credit risk,

and marketing products. However, it appears that, as late as June 2020, no compliance program

had been created, let alone implemented. 197 In connection with the Investigation, the Examiner

requested that Cred produce all of its internal policies concerning trading risk management and

leverage limits, but was advised by Cred’s counsel that no such document exists. The only

responsive document that the Examiner received was an advertising and marketing policy. 198

192
Exhibit 146 (ellipses omitted); Exhibit 56 at 31–32.
193
Validus Directors and Officers Policy Declarations at 3 (Exhibit 57).
194
Exhibit 57 at 30–31.
195
Euclid Financial Excess Insurance Policy (Exhibit 58).
196
Exhibit 51; Exhibit 54.
197
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).
198
Cred Advertising and Marketing Policy (Exhibit 67).

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As noted in Sections V(A) and V(F)(3), it appears that Cred’s compliance policies with

respect to asset transfers were deficient. Inamullah once observed that Cred did not “have robust

(or for that matter, any) reporting from [its] primary lender (MoKred) which [made] up ~50% of

[its] portfolio.” 199

In June 2020, Cred hired Bethany De Lude to be the company’s Chief Information

Security Officer. After reviewing Cred’s internal controls and procedures, De Lude promptly

imposed background checks for all employees and vendors of Cred. Up to that time, this was not

a function Cred was performing. 200

B. Cred’s Relationship and Dealings with moKredit.

1. moKredit, In General.

After leaving PayPal in 2011, Lu Hua founded moKredit Inc. to facilitate payment

systems for the emerging Chinese mobile gaming market. 201 Hua recruited early PayPal co-

workers to join his venture, 202 and the company raised money from angel investors and venture

capitalists. 203

Through moKredit, Hua sought to build a peer-to-peer payment application to connect

mobile game customers with developers, while providing an alternative to credit cards for online

payments. 204 By initial design, moKredit served as an intermediary that collected a service fee

199
Email from D. Inamullah to D. Kline, July 6, 2020 (Exhibit 68).
200
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).
201
Exhibit 3 at 3; Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).
202
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).
203
Exhibit 3 at 6–7.
204
Exhibit 3 at 6–7.

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from borrowers for each loan it originated. 205 The premise for the company was that a customer

could submit a short application online, which allowed moKredit to perform a quick credit check

and then offer a credit line to mobile users based on the data output. 206 While moKredit initially

offered lines of credit ranging from $1.45 to $145, the company soon scaled up to offering loans

from $20 to $1,000. 207 Customers would use the credit line subject to a 7-, 14-, or 30-day

repayment term. 208

From 2013 to 2014, moKredit’s mobile platform experienced rapid growth. 209 However,

the original intermediary concept appeared to reach a plateau after larger competitors entered the

market. In response, moKredit pivoted its business model to focus on microcredit lending. 210

After ramping up in 2016, moKredit’s business proved to be, at least initially, successful,

generating 510 million RMB ($78 million) of revenue, 174 million RMB ($26.5 million) of gross

profit, and 93 million RMB ($14 million) of net profit in 2017. 211 Increased competition cut into

moKredit’s business by 2018, but the company remained profitable. 212

By this time, moKredit sought to expand its operations, with funding organized through a

pool of lenders led by credit unions and high net worth individuals. 213 To access funds,

205
Id. at 9.
206
Id. at 7.
207
Exhibit 3 at 7; Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).
208
Exhibit 3 at 7–8.
209
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).
210
Exhibit 3 at 3.
211
Id. at 12–13.
212
Id.
213
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).

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moKredit traditionally paid funding costs ranging from 10-15% to its lenders. 214 moKredit

capitalized on a significant spread between its borrowing costs and rates at which it loaned funds

to customers, which were as high as 36% 215 on an annual basis. 216

2. Cred’s Business Dealings with moKredit.

On December 27, 2018, Cred entered into its first loan and security agreement with

moKredit. 217 Pursuant to the agreement, Cred extended a $100 million line of credit to

moKredit. 218 JST was Cred’s “paying agent” in connection with its lending arrangement with

moKredit. 219 JST received interest payments from moKredit in USDT and subsequently

converted and transferred funds back to Cred in USD. 220 JST was paid a percentage of the funds

managed based on a monthly “profit share” fee agreement. 221

In early 2019, Cred began “investing” converted fiat currency from its cryptocurrency

assets with moKredit. 222 As Schatt described the deal between the companies, Cred could

allocate funds to moKredit at an agreed-upon interest rate – starting at 18-24% per annum and

dropping to 12-18% per annum over time 223 – with a callable period within each tranche. 224

214
Id.
215
Initially, moKredit lent against interest rates as high as 80% until the Chinese government capped consumer
interest rates at 36%. Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).
216
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).
217
Exhibit 5.
218
Id.
219
Exhibit 11.
220
Exhibit 12.
221
Exhibit 11; Exhibit 13.
222
Schatt Decl. ¶ 19 (Exhibit 1); Exhibit 46.
223
Schatt Decl. ¶ 19 (Exhibit 1); Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).
224
Schatt Dep. 47:18–48:14 (Exhibit 4).

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Cred controlled the allocations, which required moKredit to make monthly interest payments on

the principal and send principal back upon Cred’s request. 225 Cred took cryptocurrency it

received from its customers and converted it to fiat currency before transferring it through a

series of entities – including JST as Cred’s broker – to moKredit. moKredit lent out fiat currency

in China (typically through short-term, high interest rate microloans) before returning interest to

Cred every 15 days. 226

Transactions between Cred and moKredit initially reflected attributes of formal arm’s-

length dealing, with funds frequently sent back and forth, typically through JST as Cred’s

broker. 227 Cred and moKredit soon shifted to a more casual style of business dealings, often

without “proper controls” (e.g., transferring funds before receiving a signed tranche agreement;

225
Id.
226
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021); Exhibit 175.
227
See, e.g., January 2019 transaction documents: Email from K. Wong to L. Hua, Jan. 15, 2019 (Exhibit 70);
Exhibit 12; Email from J. Alexander to L. Hua and K. Wong, Jan 22, 2019 (Exhibit 71); Exhibit 11.

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not issuing monthly statements for moKredit’s loan balance). 228 This might be explained by the

companies’ connectivity through Hua, even though they were not otherwise legally affiliated.

The lack of formality caused confusion about finances and how to account for different payments

that the companies routinely sent back-and-forth. 229 Nevertheless, Cred’s book of loans to

moKredit rapidly grew to approximately $20 million by May 2019 and $40 million by

September 2019. 230 As Cred’s book of loans to moKredit grew, so too did Cred’s risk. 231

3. Cred’s Failed Attempts to Withdraw moKredit Investments.

According to Schatt, by the fourth quarter of 2019, Cred had stopped allocating new

funds to moKredit in a purported effort to diversify Cred’s asset managers. 232 However, based

on the evidence obtained by the Examiner, it appears that allocations to moKredit did not end

until the January 2020 timeframe. 233 The majority of Cred’s assets were already loaned to

228
Email from K. Wong to S. Zhang and J. Alexander, Feb. 4, 2019 (Exhibit 72).
229
Email from K. Wong to L. Hua and D. Schatt, Feb. 13, 2019 (Exhibit 73) (Wong asked, “are we accounting for
the loan as a fixed $1.5M or a USD equivalent of an RMB amount?”); Email from K. Wong to H. Ng, J. Alexander,
and S. Zhang, Feb. 14, 2019 (Exhibit 74) (Wong: “Although MoKredit will be signing another loan agreement for
the amount of the funds, we will not be sending the funds to them this time around as they are paying down the
principal on tranche 3.”); Email from J. Alexander to K. Wong, Feb. 15, 2019 (Exhibit 75) (Alexander asked Wong:
“How do you want to do the accounting for this tranche? Are we adding this as another loan to MoKredit? Or
reducing the interest payable on others?” Wong replied, “We agreed to consider this a paydown of principal on
tranche 3 (the $1.5M loan), but we also still need to consider it another loan to MoKredit in order for the numbers to
foot, right?”).
230
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (February 18, 2021); Schedule of Advances
(Exhibit 46).
231
See Email from J. Alexander to K. Wong, May 21, 2019 (Exhibit 77) (Alexander raised inconsistencies or
incomplete information in Cred’s financial reports to Wong and Schatt: “I recall an initial advance to Cred of about
$750k in March, which was to be repaid by the T3 $790k you reference. However, an additional $500k was
advanced to Cred. We need to account for any advances to Cred within our loan book. Can you help reconcile the
amount please?”).
232
Schatt Dep. 42:13–20 (Exhibit 4).
233
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021); Exhibit
46 (last transaction logged is on Jan. 1, 2021).

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moKredit. 234 Thus, when Cred experienced a sudden and increased need for liquidity (discussed

further in Section V(C)(1)), it was largely reliant on moKredit to make principal payments on

loaned funds. 235

On or about March 12, 2020, Cred attempted to recall $10 million in principal from

moKredit, but Hua responded that it was not possible. 236 moKredit’s inability to repay the loan

when requested was attributed in part to the economic fallout from the COVID-19 pandemic,

including large default rates (e.g., 50% - 70%) among moKredit’s microloans and the Chinese

government’s unwillingness to enforce consumer loan agreements. 237

moKredit’s failure to repay the requested principal when called by Cred had a significant

and adverse impact on Cred’s liquidity and cash flow position. 238 Cred’s executive team agreed

to an updated plan with Hua for moKredit to repay principal about 10 days later, but moKredit

failed to meet the updated plan’s schedule. 239 Instead, at Alexander’s request, Hua offered

personal assistance in the form of a transfer of 300 BTC (discussed further in Section V(E)).240

Hua alleges that this transfer “was intended as a loan,” notwithstanding that Hua signed a Cred

234
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).
235
Schatt Dep. 70:17–72:24 (Exhibit 4).
236
Email from J. Alexander to L. Hua, D. Inamullah, S. Zhang, and J. Podulka, Mar. 12, 2020 (Exhibit 79);
Inamullah Decl. ¶ 14 (Exhibit 6).
237
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021); Inamullah Dep. at 77:16–19
(Exhibit 9).
238
Liquidity Analysis Post March 2020 Flash Crash and Recommended Steps, Apr. 5, 2020 (Exhibit 113);
Inamullah Dep. at 113:25–114:7 (Exhibit 9).
239
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021); Inamullah Decl. ¶ 10 (Exhibit 6).
240
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).

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Capital equity contribution agreement in or around this time exchanging 300 Bitcoin for class B

non-voting shares in Cred Capital. 241

As Bitcoin prices plummeted in March 2020, Cred encountered substantial margin calls

in connection with its hedge positions, further eroding Cred’s liquidity profile. With a

significant portion of its asset base invested with moKredit and, at the time, yielding no return,

Cred did not have sufficient liquidity to satisfy the margin calls or reinstate its hedge positions.

By June 2020, Cred recognized internally that its moKredit loans were “distressed.” 242 As of the

Petition Date, moKredit owed Cred no less than $38 million. 243

4. Potential Conflicts of Interest.

As the founder of moKredit and co-founder of Cred, Hua consulted his personal counsel

to determine whether a conflict of interest existed. 244 He purportedly received guidance that, so

long as he was only a shareholder in Cred and stayed away from so-called “big” operations, there

was no conflict. 245 The Examiner has not seen evidence of Board minutes or other customary

documents reflecting the Board’s decision-making process. The only “minutes” the Examiner

received were those attributed to the “investment committee,” which was not a Board committee.

241
Schatt Dep. 73:22–23 (Exhibit 4); Contribution Agreement between L. Hua and Cred Capital, LLC, Mar. 31,
2020 (Exhibit 80). Hua claims that he did not read the relevant agreement with any level of scrutiny before signing.
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).
242
Email from D. Schatt to D. Wheeler, June 16, 2020 (Exhibit 81); Email from D. Inamullah to D. Schatt, J.
Podulka, and A. Khakoo, June 29, 2020 (Exhibit 82).
243
Email from J. Podulka to D. Schatt, Dec. 1, 2020 (Exhibit 83); Cred Near Term Liquidity Analysis, Nov. 7, 2020
(Exhibit 84).
244
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).
245
Id.

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Hua was, however, one of two members of Cred’s Board from its inception until the eve

of bankruptcy in November 2020. 246 The Examiner has not been furnished with any information

explaining how a Board of two directors could function effectively when one director must be

recused from “big” operational issues.

According to Hua, he delegated all decision-making regarding loan amounts and timing

to Cred employees after advising them how much capacity he had to take on loans at

moKredit. 247 Additionally, Hua states that he ensured that Cred would have the highest priority

if it had to call back funds. 248

The issue of a potential conflict of interest came to a head when moKredit became unable

to repay principal. 249 Hua could not identify a serious recourse path for Cred to recall money

from moKredit if moKredit was unwilling or unable to repay principal. 250 Schatt confirmed that

discussions took place internally about retail customer funds being loaned to an insider-affiliate

company that could not repay. 251 Schatt acknowledged that Cred never hired an independent

financial advisor to review proposed transactions with moKredit, nor did it seek a fairness

opinion. 252 However, Schatt advised the Examiner that he had a level of comfort based on

246
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021); Email from L. Hua to D. Schatt,
J. Grogan, and M. Zuppone, Nov. 4, 2020 (Exhibit 179).
247
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).
248
Id.
249
Id.
250
Id.
251
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).
252
Schatt Dep. 45:23–46:2 (Exhibit 4).

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Cred’s supposed long-term relationship with Hua, 253 and because Hua was purportedly not

involved in Cred’s day-to-day operations. 254

5. Diligence and Risk Management Respecting moKredit.

Schatt informed the Examiner that he removed himself from the moKredit due diligence

process due to his relationship with Hua, leaving Alexander to manage such efforts. 255 This,

again, raises serious questions of Board functionality and business oversight. Schatt represented

that, at an incipient stage of this relationship, he sought legal advice from external counsel on a

number of issues regarding Cred’s interaction with moKredit, including whether there were

potential conflicts of interest and what disclosures Cred would need to provide customers. 256

According to Schatt, Cred relied on Wheeler to draft the company’s disclosures to customers.257

Schatt also claims that he consulted external counsel on whether the moKredit loan could be

considered a security and whether a partner could be considered a loan broker and therefore

subject to lending regulations. 258 moKredit did not have any financing licenses in China, but

253
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).
254
Id.
255
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021); Schatt
Dep. 44:23–47:17 (Exhibit 4) (Alexander “was responsible for the whole due diligence and formulation of the
relationship and the contract and evaluating the terms” with moKredit); Schatt Dep. 55:1–7 (Exhibit 4) (confirming
Alexander “was the only employee who performed the analysis of due diligence” of moKredit “in collaboration with
counsel”).
256
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021). Based
on the information provided to the Examiner, the external counsel referenced in this paragraph was not the Debtors’
current bankruptcy counsel retained in these Chapter 11 cases.
257
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).
258
Id.

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Cred and moKredit believed that moKredit did not need a license because, according to them,

moKredit fell into China’s largely unregulated peer-to-peer lending sector. 259

Alexander appears to have performed minimal (if any) due diligence with respect to

moKredit. 260 The Examiner’s review of records and interviews failed to reveal evidence of

substantive due diligence in connection with the moKredit relationship, other than Alexander’s

representations of having done “exhaustive diligence.” 261 It does not appear that Cred’s Board

ever formally approved any moKredit agreements or business dealings. 262

According to Schatt, Alexander’s diligence of moKredit included reviewing financial

statements and an investor presentation. 263 Schatt stated that he tasked Alexander with setting up

a data room and ensuring that Cred had an appropriate understanding of moKredit’s risk profile

and the people to whom it lent funds. Schatt was, however, unaware whether Cred received

documentation or information regarding moKredit’s outstanding consumer loans, and the

Examiner did not find evidence of any such records.

6. Disclosures to Customers Regarding moKredit Relationship.

To raise capital for the moKredit loan, Cred needed to raise funds. Cred, primarily

through Alexander, spent the first quarter of 2019 marketing its business thesis to cryptocurrency

259
Email chain between J. Alexander and A. Derar, Apr. 16, 2019 (Exhibit 85); Interview with Lu Hua, Chief
Executive Officer, moKredit Inc. (Feb. 18, 2021).
260
Interview with James Alexander, former Chief Capital Officer, Cred Inc. (Mar. 3, 2021); see also moKredit
Diligence Checklist, Feb. 11, 2019 (Exhibit 180) (nearly blank due diligence checklist dated after Cred began
loaning moKredit funds).
261
Interview with James Alexander, former Chief Capital Officer, Cred Inc. (Mar. 3, 2021).
262
Schatt Dep. 44:23–45:3 (Exhibit 4).
263
Id. at 46:20–47:2.

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holders. 264 According to its pitch materials, Cred operated similar to a commercial bank –

offering something akin to certificates of deposit to cryptocurrency customers who lent their

assets to Cred through the CredEarn program. Cred would then lend such assets to moKredit at a

higher rate (typically 20%) until Cred had to return the cryptocurrency “deposit” back to its

customer. 265 Cred offered retail customers up to a 10% return on their cryptocurrency if they

agreed to lock up the funds with Cred for at least 6 months. 266 Cred’s return came in the form of

the spread between the 20% interest paid by moKredit to Cred, and the return paid by Cred to its

customers. 267

The Investigation did not reveal evidence that Cred disclosed to retail customers that

funds would be going to China or to an entity founded by a Cred insider. 268 Cred’s culture, at

least at times, appeared to promote secrecy rather than transparency when potential customers

asked questions regarding their assets and the company’s investments. 269 One Cred employee

expressed concern that, “if I were reading [a statement on Cred’s website that pledged assets

were loaned ‘on a fully collateralized and guaranteed basis’] as a consumer, and I later learned

264
See, e.g., Email from J. Alexander to J. Bunting, Mar. 14, 2019 (Exhibit 86); Email chain between J. Alexander
and R. Flowers, Mar. 15, 2019 (Exhibit 87); Email from J. Alexander to D. Davis, Mar. 14, 2019 (Exhibit 88);
moKredit Investment Opportunity Slide Deck, Mar. 2019 (Exhibit 89).
265
UST Motion (Exhibit 27) ¶ 10; see also Interview with Joseph Podulka, former Chief Financial Officer, Cred Inc.
(Feb. 16, 2021).
266
UST Motion (Exhibit 27) ¶ 10; see also Interview with Joseph Podulka, former Chief Financial Officer, Cred Inc.
(Feb. 16, 2021).
267
Inamullah Decl. ¶ 10.
268
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).
269
Cred Employee Chat Logs, Mar. 26, 2019 (Exhibit 90) (Meghan LNU writes: “We should not be disclosing to
the public where exactly we are using the assets to generate interest rates.” Rafael Cosman: “I have not disclosed
anything from any conversations with James to the public and I do not intend on doing so. But I’m concerned
because if I were reading that as a consumer, and I later learned all the details of Cred’s business, I think I would
feel like I was misled.”).

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all the details of Cred’s business, I think I would feel like I was misled.” 270 Another employee

cautioned not to disclose “public[ly] where exactly we are using the assets to generate interest

rates.” 271 Alexander did disclose to certain potential customers that Cred was raising funds to

send to moKredit in China, most notably in connection with placement of the Luxembourg

Bonds. 272

7. Luxembourg Bonds. 273

In late 2019, Alexander identified Income Opportunities (Luxembourg) S.A. (“Income

Opportunities”), a Luxembourg company “acting through its compartment” Cred Global Notes

1, 274 as an entity that might issue bonds backed by moKredit loans. 275 Alexander was a director

on the Income Opportunities board of directors. 276

The initiative culminated in the issuance of $14 million worth of bonds bearing interest at

8%. 277 According to Inamullah, prior to the issuance, Cred’s principal loan balance with

moKredit was approximately $40 million. Cred essentially securitized approximately $15

million of this exposure, selling $14 million of this receivable to investors through bonds issued

by Income Opportunities. Cred retained approximately 10% of the securitization (i.e., the

“equity tranche”).

270
Id.
271
Id.
272
See, e.g., Exhibit 86; Exhibit 87; Exhibit 88.
273
The information contained in this section is based on a review of all relevant documentation available to the
Examiner at the time of drafting. To date, the Examiner has not received, nor reviewed, copies of the individual
notes issued under this program.
274
Income Opportunities Board Minutes, Feb. 4, 2020 (Exhibit 91).
275
Schatt Dep. 58:19–62:8 (Exhibit 4).
276
Exhibit 91.
277
Schatt Dep. 58:19–62:8 (Exhibit 4).

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Alexander and Cred’s capital markets team were responsible for overseeing funds

received in connection with the bond offering. 278 At least two entities purchased the bonds from

Cred: JST 279 and Winslow Strong, an individual investor. JST purchased approximately $9

million worth of bonds in Bitcoin, and Strong purchased 500 BTC worth of bonds in January

2020. 280

The issued bonds were structured as participation interests in moKredit loans, meaning

Income Opportunities was responsible for collecting from moKredit upon redemption.

According to the Base Prospectus, Cred was not a guarantor or an obligor in any other way

respecting the Luxembourg Bonds. 281 By the maturity date (June 30, 2020), Cred was aware of

moKredit’s inability to pay any meaningful amount of its principal balance owed, let alone

between $14 million and $15 million; but, according to the Base Prospectus, it bore no liability if

the Luxembourg Bonds defaulted. Regardless, Cred agreed to purchase the bonds at par, 282

thereby buying back more than $14 million dollars of debt it knew could not be repaid. 283 As

discussed in the next section, Cred was facing an acute liquidity crisis of its own at the time of

this purchase.

278
Id.
279
JST may have functioned as a broker/dealer, i.e., holding the bonds while attempting to sell them to other
investors.
280
Spreadsheet concerning W. Strong’s investment (Exhibit 92).
281
See Exhibit 2.
282
Email chain between A. Khakoo, H. Ha, D. Inamullah, and M. Zhang, June 30, 2020 (Exhibit 42).
283
Based on the terms of the Prospectus and Participation Agreements, it appears that Income Opportunities was
responsible for redeeming the bonds at the maturity date and failure to do so would result in Income Opportunities’
default. See Exhibit 2. However, the Examiner neither received nor reviewed the actual notes issued to investors,
and therefore cannot say, with a reasonable degree of certainty, whether Cred had any obligation under the bonds.

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C. Cred’s Pre-Petition Losses and Liquidity Crisis.

1. JST Capital.

Notwithstanding representations to the market, Cred’s actual business operations carried

significant risks associated with the volatility of digital currency. Converting digital currency to

fiat currency compounded that risk. Cred’s practice was to do just that. As part of CredEarn,

Cred converted customers’ cryptocurrency to fiat currency and then loaned the proceeds to

moKredit, which would, in turn, extend microloans (presumably far and wide) in fiat currency.

Cred sought to mitigate the risk inherent in this strategy by hiring JST as a consultant to assist

Cred with a hedging platform. 284 Illustration 1 below shows Cred’s hedged investment strategy

with respect to CredEarn.

Illustration 1

284
Inamullah Dep. 105:8–14; 110:4–17 (Exhibit 9) (“[W]e’re essentially taking cryptocurrency liabilities in the form
of CredEarn participations and translating that into a dollar asset, which is – in moKred. Now, if crypto starts to
rise, we will not be able to return the same number of cryptocurrency units back to the customer if we do not hedge
the upside exposure.”).

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Illustration 1 explains by way of hypothetical. As part of the CredEarn program, Cred

hypothetically received a 100 Bitcoin cryptocurrency investment from a customer. Cred then

took 60 Bitcoin from that investment and converted it into a USD Stablecoin, which it then

loaned to moKredit. moKredit, in turn, converted these funds to Yuan and loaned the proceeds

to consumers through microfinance loans in China.

Not depicted in Illustration 1 are the payments from moKredit to Cred, which would be

expected to come in the form of interest and principal repayments in USD Stablecoin. These

payments from moKredit would then be converted back into Bitcoin, which Cred would use to

make payments to the customer in respect of the 100 Bitcoin that had been transferred to Cred.

In the hypothetical above, the 60 Bitcoin is converted into USD Stablecoin at an

exchange rate of $8,700. This yields $522,000 worth of USD Stablecoin. If the price of Bitcoin

was fixed against the U.S. dollar (and did not change at all between the time when the 100

Bitcoin investment was initially made by the customer, and when then investment was fully

repaid by Cred), then all interest payments and principal repayments would take place at the

same exchange rate. In this scenario, Cred would not need any hedges because the exchange rate

between Bitcoin and U.S. dollars remains constant.

However, the price of Bitcoin is not fixed against the U.S. dollar and can fluctuate,

sometimes significantly, on a daily basis. If the price of Bitcoin were to increase against the U.S.

dollar, then Cred would have less principal and interest to repay the customer. Conversely, if the

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price of Bitcoin were to decrease against U.S. dollar, then Cred would have a surplus of Bitcoin

and could repay the customer in full with an excess amount. 285

Cred purported to minimize risks from fluctuations in the exchange rate. In an effort to

achieve a fixed exchange rate, Cred purchased hedging contracts. The hedging contracts were

intended to provide Cred with, in effect, a fixed exchange rate based on the time the customer

deposited assets and the time Cred loaned the proceeds of such assets to moKredit.

Returning to Illustration 1, Cred used 20 Bitcoin out of the 100 Bitcoin investment to buy

hedging contracts. These hedging contracts were generally in the form of futures, swaps, and

options contracts. In the hypothetical, Cred used the 20 Bitcoin to buy futures and swaps

contracts to fully hedge the 60 Bitcoin it had lent to moKredit. Because Cred was using 20

Bitcoin to hedge the 60 Bitcoin that it had lent out to moKredit, Cred was effectively using a

leverage ratio of 3x to achieve this hedge. Illustration 2 below shows how the value of Cred’s

position would change with changes in the price of Bitcoin.

285
This is similar to fluctuations in price a person who lives and works in the United States and earns in U.S. dollars
would experience when trying to book a hotel in London. The price of the hotel in London would be quoted in
British Pounds and therefore the price in U.S. dollars would fluctuate with changes in exchange rates between U.S.
dollar and the British Pound. If the U.S. dollar went up in value against the British Pound, the hotel would be
cheaper in U.S. dollar terms (i.e., it would take fewer U.S. dollars to book a night at the hotel). Conversely, if the
U.S. dollar went down in value against the British pound, the hotel would be more expensive in U.S. dollar terms
(i.e., it would take more U.S. dollars to book a night at the hotel). Staying with this example, if the exchange rate
between the U.S. dollar and British Pound was 1:1 (meaning someone can purchase 1 British Pound using 1 U.S.
dollar) and if one night at the hotel in London cost 100 British Pounds, the equivalent cost in U.S. dollars would be
USD 100. However, if before the hotel room was booked the price of U.S. dollars went up by 5%, then the hotel
room would be worth USD 95, even though the price in British Pounds was still 100 pounds. Similarly, if the price
of U.S. dollars went down by 5%, then the hotel room would be worth USD 105, even though the price in British
Pounds was still 100 pounds.

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Illustration 2

Considering the first panel in Illustration 2, the 100 Bitcoin received by Cred is its

liability since it has to pay this amount back to the customer at the end of the term of the loan.

When the loan was made, Cred took 60 Bitcoin and converted it to USD Stablecoin at a rate of

$8,700. In doing so it received $522,000 in USD Stablecoin. The first panel illustrates the

change in value of the $522,000 as the value of Bitcoin changes. Without any hedges, if the

price of Bitcoin were to drop by 20% to $6,960, Cred would need only $417,600 in USD

Stablecoin to repay the 100 Bitcoin that the customer invested. Principal repayments from

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moKredit would have been $522,000. Therefore, in this scenario, Cred would have a surplus.

Conversely, if the price of Bitcoin were to increase by 20% to $10,440, Cred would need

$626,400 in USD Stablecoin to pay the 100 Bitcoin. Since moKredit was paying only $522,000,

in this scenario, Cred would have a loss.

The second panel illustrates the performance of the hedging contract. As the price of

Bitcoin goes up or down, the value of the hedging contract also goes up or down proportionately.

The third panel illustrates the performance of both the 60 Bitcoin liability and the

hedging contract. Because the hedge goes up in value on a dollar for dollar basis as the liability

goes down, and similarly the hedge goes down in value on a dollar for dollar basis as the liability

goes up, the net effect of both positions is that the value of the 60 Bitcoin when converted to

USD Stablecoin, loaned to moKredit, returned back to Cred from moKredit and then converted

back from USD Stablecoin into Bitcoin, does not change. The transaction is, in this example,

considered effectively hedged.

Illustration 3 below demonstrates Cred’s net profit and loss on the 100 Bitcoin

investment from the customer in Illustration 2, after considering all hedges, interest payments

received from moKredit, and interest payments made to the customer. As can be seen, Cred pays

10% to the customer on 100 Bitcoin, and receives 20% on the 60 Bitcoin from moKredit.

Because the transaction is fully hedged, there are no profits or losses from any change in the

price of Bitcoin. The net profit to Cred in this simplified example after paying interest and

principal to the customer is 2 Bitcoin.

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Illustration 3

In the simplified example above, once Cred has established its hedging position using 20

Bitcoin to hedge the 60 Bitcoin it had converted to USD Stablecoin, it was fully protected

irrespective of any price movements in Bitcoin.

In reality, however, the hedge positions implemented by Cred only protected Cred from a

certain amount of decline in Bitcoin prices. This is because, as the price of Bitcoin would

decrease, the value of the hedge would become more and more negative. And, because of the 3x

leverage, the 20 Bitcoin that had been used as collateral (also known as “margin”) to acquire the

hedge position would not be sufficient to continue maintaining the hedging position. If the price

of Bitcoin were to fall below a particular threshold, the exchange where the hedge had been

established could either: (i) issue a “margin call” that would require Cred to post additional

collateral; or (ii) in the absence of additional collateral being posted, liquidate the hedge position.

If a hedge position was liquidated, Cred would first experience a loss on the hedge

position and, if it was not able to reestablish the hedge position, it would no longer be able to

repurchase Bitcoin at the price at which it had originally borrowed funds from the customer. As

a result, if Bitcoin prices were to rise above the price at which Cred had borrowed from the
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customer ($8,700 in the hypothetical above), assuming the hedge position was liquidated and not

subsequently reestablished, then Cred would suffer a loss and may not be able to return the

funds. As discussed further below, between March 11, 2020 and March 12, 2020, Bitcoin prices

experienced a sharp decline (i.e., a “flash crash”), which ultimately resulted in the termination of

Cred’s hedges.

At this point, it bears particular observation that none of the risks associated with

exchange rates were contractually allocated to any of Cred’s customers. Cred did not, for

example, covenant to certain levels of hedging responsibility, leaving customers to “own” losses

beyond those levels. Rather, to the best of the Examiner’s knowledge, 286 Cred assumed all risks

associated with currency fluctuations. During interviews with Cred customers, the Examiner

was told repeatedly that this was an important attribute of Cred’s marketing appeal; it was,

essentially, a commitment to customers that Cred would alone “own” this kind of market

exposure.

To help implement its hedging strategy, Cred retained JST in late 2018. 287 JST helped

Cred establish its hedges using swaps, futures and option positions, 288 and sent daily “Risk

286
See n.3.
287
JST Consulting Agreement, Dec. 25, 2018 (Exhibit 93).
288
A swaps position is generally a contract where two parties agree to exchange cash flows from two different
financial instruments. For example, an investor may agree to exchange principal and interest payments on a loan in
one currency for payments and interest on a loan in another currency. A swaps position typically requires parties to
post margin. If the value of the swaps position falls/rises below a certain threshold, the party that has experienced
losses may need to post additional margin, in the absence of which the position would likely be liquidated by the
counterparty. A futures position is generally a standardized contract that allows the parties to buy or sell a particular
asset or security at a predetermined price at a specified time in the future. Like the swaps position, a futures position
also typically requires parties to post margin. And like the swaps positions, if the value of the futures position
falls/rises below a certain threshold, the party that has experienced losses may need to post additional margin, in the
absence of which the position would likely be liquidated by the counterparty. An options position gives the owner
of the option the right to either buy (call option) or sell (put option) the underlying position at a fixed price within a
certain amount of time. The buyer of the option pays the seller of the option a “premium” for that right. The price
of a call option goes up in value as the price of the underlying instrument increases. The price of a put option

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Reports” to Cred, detailing Cred’s hedge positions and Cred’s exposure to liabilities based on

Cred’s cryptocurrency holdings. 289

As of February 28, 2020, Cred had transferred digital assets valued at between $71.6

million (market value) and $74.7 million (inception value) to JST. 290 Once JST received the

assets, they were allocated as follows:

• JST converted $44 million worth of cryptocurrency received from Cred

into USD/Stablecoin (e.g., USDT), the majority of which was transferred
to moKredit pursuant to loan arrangements with Cred;

• JST allocated/tracked funds to margin accounts of certain exchanges

(including Bittrex, Huobi and Drawbridge) to allow JST to trade on behalf
of Cred; and

• JST entered into options, futures and swap transactions for the purpose of
hedging Cred’s portfolios and generating cash for Cred. 291

Based on the above allocation of funds, including the hedges established, Cred was

essentially fully hedged on a $74.7 million loan book. Therefore, excluding large price

movements that would require the posting of additional collateral in its margin account, Cred

was protected from Bitcoin price movements.

JST established hedge positions on various cryptocurrencies for Cred. 292 Bitcoin, XRP,

Ether and Bitcoin Cash were used to establish the majority of the positions. By February 28,

2020, the market value of Cred’s hedge positions was: negative $4,511,511 for swaps,

increases in value as the price of the underlying instrument decreases. The maximum loss to the buyer of the call
and the put options is limited to the premium amount paid by the buyer to the seller of the option.
289
Interview with Scott Freeman, co-founder and Partner, JST Capital (Mar. 2, 2021); see, e.g., Risk Report, Mar.
12, 2020 (Exhibit 164).
290
JST Risk Report, Feb. 28, 2020 (Exhibit 117).
291
Exhibit 117; Emails between JST and Cred regarding a February invoice, Mar. 3, 2020 (Exhibit 121).
292
BTC, XRP, ETH, BCH, LTC, XLM, OMG and ADA. See e.g., Exhibit 117.

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$12,664,998 for futures, and $61,760 for options. 293 The hedge positions, at different exchanges

like BitMEX and Huobi, were tracked on the monthly risk reports provided by JST.

The following contracts were reported by JST in its February 28, 2020 risk report for

Bitcoin:

As of February 28, 2020, Cred’s swaps contract XBTUSD, listed on the BitMex

exchange, had a mark price of $8,569 and liquidation price of $5,795.13. 294 XBTUSD is known

as a “perpetual swaps” contract. This contract closely tracks the price of Bitcoin in U.S. dollars

and gains and losses are experienced based on the change in the price of Bitcoin relative to U.S.

dollars. This contract hedged Cred to a notional amount of 177.16 BTC ($1.5 million based on

the Risk Report market price of $8,569) using a 3x leverage factor. In other words, Cred had

applied approximately 59 BTC in its margin account to enter into the XBTUSD contract amount

of 177.16 BTC. If Bitcoin dropped below $5,795.13, the hedge position would be liquidated

which is exactly what occurred on March 12, 2020.

The other contracts for Bitcoin traded on the BitMex exchange identified in the JST risk

report were “XBTM20” and “XBTH20.” These two positions are futures contracts that expire at

different dates. XBT-Margin of 1,188.61 Bitcoin reflected the total margin that was posted at the

293
Exhibit 117.
294
Id.

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BitMex exchange. “BTC-Mar” was a futures contract traded on the Huobi exchange. “BTC-

Implied” was a contract that referenced XRP (instead of U.S. dollars) and also traded on the

Huobi exchange. Huobi-Margin of 194.57 was the total Bitcoin in the Huobi margin account.

“Swap#24 3/24” was a bilateral repurchase obligation between Cred and JST. In this

contract Cred deposited 282 Bitcoin with JST and Cred loaned funds to JST on an over-

collateralized basis in U.S. dollars.

The contract “3/27 9250 Call” was a call option that Cred had sold that was held with an

asset manager (Drawbridge), but tracked by JST in its risk report. The “Drawbridge-Margin of

300 Bitcoin” reflected the total Bitcoin that Cred had deposited with Drawbridge.

JST had similar hedging contracts for the other cryptocurrencies as well. Each of these

contracts had a price at which they would be liquidated or require additional collateral to be

posted to their margin accounts. Using Bitcoin as an example, the liquidation prices for these

contracts varied by contract and was between $5,500 and $6,900. This meant that, if the price of

Bitcoin were to drop from the February 28, 2020 price of approximately $8,500 such that the

contract prices were to decrease to their liquidation price (implying drops of more than 20%),

then the contracts would be liquidated if no additional collateral was deposited into the margin

accounts. The charts below illustrate the price of Bitcoin in 2019 and 2020 as well as in March

2020: 295

295
BTC-USD prices from CoinDesk.

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Between March 11 and March 12, 2020, the price of Bitcoin fell from $7,900 to $3,800

overnight. As a result of this price drop, the hedge contracts for all currencies were liquidated.

JST’s March 17, 2020 risk report illustrates the loss suffered by this dip in the market, with each

exposure listed as “0” in the chart below. 296

When the price of Bitcoin fell, Cred lacked sufficient reserves to maintain its hedging

positions. 297 On March 12, 2020, JST informed Cred that a drastic overnight move in the

markets resulted in the liquidation of all of Cred’s Bitcoin futures positions, in addition to the

296
JST Risk Report Mar. 17, 2020 (Exhibit 118).
297
Schatt Decl. ¶ 21 (Exhibit 1).

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liquidation of some of Cred’s XRP futures. 298 Cred’s futures profit and loss went from a profit

of $12.6 million as of February 28th to a loss of $5.8 million as of March 17th. 299 Similarly,

Cred’s Swaps profit and loss went from a loss of $4.5 million on February 28, 2020 to a further

loss of $10.5 million as of March 17, 2020. 300 The total losses resulting from the “flash crash,”

as reflected in the change in values in its futures and swaps positions between February 28th and

March 17th, was approximately $24 million. 301

As discussed, Cred had placed margin in various accounts at JST and at exchanges to

support its hedging positions. 302 The rapid decline in cryptocurrency prices caused Cred to be

overleveraged beyond what was supportable by its margin position, and its futures and swaps

positions were, as a result, liquidated by the exchanges. 303 Cred was left with a net short position

equal to $27,483,181; for every $100 move in Bitcoin, Cred stood to make or lose approximately

$400,000. 304 Further, JST asked Cred to post an additional $3 million of collateral for the

outstanding repos that Cred had with JST. 305 At some point in March 2020, Cred ceased using

accounts at JST. 306

298
Email from S. Freeman to J. Alexander, H. Ng, D. Schatt, J Podulka, S. Zhang, and D. Inamullah, Mar. 12, 2020
(Exhibit 119).
299
Compare Exhibit 117 with JST Risk Report, Mar. 12, 2020 (Exhibit 164).
300
Compare Exhibit 117 with JST Risk Report, Mar. 12, 2020 (Exhibit 164).
301
Compare Exhibit 117 with JST Risk Report, Mar. 12, 2020 (Exhibit 164).
302
Email from J. Alexander to D. Inamullah, Mar. 18, 2020 (Exhibit 120).
303
Inamullah Dep. 105:15-20 (Exhibit 9).
304
Exhibit 119.
305
Id.
306
Chat messages between S. Zhang, Han LNU and S. Hwang, Aug. 20, 2020 (Exhibit 165) (Zhang comments that
Cred stopped using all JST accounts on March 31, 2020. There is a conversation regarding the disposition of the
assets that were held at JST. Han LNU notes that D (Inamullah’s nickname) said: “we had some assets to go to FB
[Fireblocks]. Most of what we had outstanding was liquidated (i.e., the swaps, futures, and options margin).” There
is some confusion as to whether Cred’s relationship with JST ended on March 10 or March 31, 2020).

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The table below summarizes the losses that Cred experienced from its hedge positions as

a result of the March 2020 “flash crash.” For example, as of March 11, 2020, the total margin at

two of the three Bitcoin margin accounts at JST totaled 977 Bitcoin (excludes 300 Bitcoin at the

Drawbridge margin account, which was used for a covered call strategy). After the “flash

crash,” only 90.4 Bitcoin remained on margin in these two margin accounts combined. 307 As a

result, Cred lost 866 Bitcoin from these two margin accounts alone. 308 As illustrated below,

based on the mark prices in the JST risk reports from March 11th and 12th, the total loss across

all margin accounts at JST was 1,130 Bitcoin. 309

307
JST Risk Report, Mar. 17, 2020 Exhibit 118.
308
Id.
309
Id.

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The table below summarizes the repo positions that Cred maintained with JST. As

discussed above, JST issued margin calls and demanded that Cred post additional collateral on

these repo positions. For the reasons discussed herein, Cred lacked the assets to satisfy JST’s

margin call and, as a result, JST liquidated these positions. The liquidation of these positions

resulted in additional losses to Cred. The total amount due to JST from Cred after considering

the repo positions and certain option positions net of the cryptocurrency margin Cred had

deposited with JST (and which JST had liquidated) was approximately $3 million. 310

On April 5, 2020, Inamullah circulated a Cred LLC liquidity analysis prepared by Cred

Capital. 311 The report outlined a liquidity analysis and recommended steps following the March

2020 “flash crash.” The futures and swaps positions had been a hedge to protect Cred from an

increase in the prices of cryptocurrencies. 312 When Cred’s futures and swaps positions were

liquidated, however, Cred lost funds in its margin accounts at JST, as well as lost its hedging

310
JST Cred Exposure Summary (Exhibit 181).
311
Liquidity Analysis Post March 2020 Flash Crash and Recommended Steps, Apr. 5, 2020 (Exhibit 113).
312
Email from J. Alexander to D. Inamullah, Mar. 18, 2020 (Exhibit 120).

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positions (i.e., the right to purchase the underlying assets at the agreed price). 313 Further

exacerbating the problem, Cred lacked sufficient liquidity to reinstate the hedging positions at a

reasonable market price. 314 JST issued margin calls for outstanding repo positions, but Cred did

not have sufficient liquidity to meet those demands. 315

Cred intended to reinstate its hedge position by recalling $10 million from moKredit. 316

As discussed further in Section V(B)(3), moKredit did not pay Cred the requested amount. Hua,

however, agreed to transfer 300 Bitcoin to Cred in multiple transactions (discussed further in

Section V(E)). The 300 Bitcoin was transferred from a Fireblocks wallet at Cred, Inc. to

OKEx, 317 and purportedly used to re-appropriate certain hedges on the long side of Bitcoin in

March, while Bitcoin prices were still at the bottom of the market. 318 It appears, however, that

Cred closed out these hedge position shortly thereafter (at a small profit) and, according to

Inamullah, determined that, because they had terminated their relationship with JST, they no

longer had the ability/skillset to apply hedges using the derivatives market, leaving Cred

effectively “naked” against market fluctuations.

Cred being “naked” against market fluctuation was a significant factor in Cred’s demise.

Though Cred lost approximately $10-$12 million when its positions were liquidated, Cred’s

liabilities effectively decreased two-fold as a result of the >50% drop in Bitcoin price. This is

because, instead of being able to buy one Bitcoin for $7,900 on March 11, 2020, Cred could buy

313
Exhibit 120.
314
Exhibit 113.
315
Id.
316
Id.
317
Cred, Inc Fireblocks logs (Exhibit 124).
318
Inamullah Dep. 167:3-19; 188:11-14 (Exhibit 9).

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a bit more than two Bitcoin for $7,900 on March 12, 2020. Had Cred had access to the $9

million it needed to establish new hedges at 3x leverage, Cred could have made significant

profits on the new hedge positions, both because of establishing the new hedges after the drop in

Bitcoin price and the increase that followed in the coming months. These profits from the hedge

positions could then have netted out against the losses on Cred’s liability positions (Cred’s

liability position would also go up in U.S. dollar terms as the price of Bitcoin went up).

However, because so much of its liquidity was tied up in moKredit, and because Cred had a

month earlier given 500 in Bitcoin to QuantCoin, Cred did not have the capital to establish new

hedges. Thus, with every increase in Bitcoin (and other cryptocurrency) above Cred’s

conversion price, Cred’s liabilities increased proportionately against a class of assets – loans to

moKredit – that Cred never realized. In the months that followed, Bitcoin prices increased from

approximately $4,000 in March 2020 to approximately $10,000 in June 2020. Cred’s inability to

access moKredit capital disabled it from fending off its increasing liability load, until it finally

collapsed into bankruptcy.

2. Cred’s Other Asset Managers.

(a) Elevar.

Cred established a relationship with Elevar LLC (“Elevar”), a secondary lending

company, in October/November 2019. 319 In the summer of 2019, Schatt instructed Cred

employees to seek other income-generating opportunities in order to diversify Cred’s portfolio,

and Elevar became Cred’s first partner toward that end. 320 Inamullah recalled that Alexander

319
Interview with Daniyal Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 23, 2021).
320
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).

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and the founder of Elevar knew each other before Cred’s relationship with Elevar began. 321

Under its relationship with Elevar, Cred would lend Elevar cryptocurrency assets (and

occasionally fiat currency) at interest rates as high as 16% on an annual basis. 322 Elevar would

utilize such assets in lending transactions with consumer lending and telecom receivable finance

companies. 323 Inamullah stated that he did not know who at Cred, if anyone, conducted any

form of diligence on Elevar before Cred entered into its arrangement. 324 By May 31, 2020, Cred

had an asset allocation worth $1,850,000 with Elevar. 325 By September 2020, moKredit and

Elevar were described as Cred’s only “sources” of finance. 326 On November 12, 2020,

Cred attempted to recall its funds with Elevar. 327 However, based on Cred’s contract with

Elevar, it was not able to access such funds until February 2021. 328

(b) Cambrian

Cambrian is an asset manager whose fund (Cambrian Systematic Strategies, LP) Cred

contributed or “subscribed” to. 329 Cred entered into a subscription agreement with Cambrian on

July 29, 2019, 330 and wired a $500,000 investment to Cambrian on July 30, 2019. 331 Cred

321
Interview with Daniyal Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 10, 2021).
Interview with Pablo Bonjour and Paul Maniscalco, Managing Director and Senior Managing Director, MACCO
322

Restructuring Group (Feb. 12, 2021).

323
Interview with Daniyal Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 23, 2021).
324
Id.
325
Email from J. Podulka to D. Schatt, July 24, 2020 (Exhibit 94).
326
Email from D. Inamullah to D. Schatt, A. Khakoo, and J. Podulka, Sept. 16, 2020 (Exhibit 95).
327
Email from D. Schatt to J. Podulka, Nov. 14, 2020 (Exhibit 96).
328
Email from D. Inamullah to J. Podulka and D. Schatt, July 13, 2020 (Exhibit 97).
Email chain between J. Podulka, H. Moore, G. Estrada, S. Hwang, H. Ha, Nov. 5, 2020 (Exhibit 98); Cred LLC
329

Subscription Agreement with Cambrian Systematic Strategies LP, July 29, 2020 (Exhibit 99).
330
Exhibit 99.
331
Chat log between S. Zhang and J. Alexander, July 30, 2019 (Exhibit 100).

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indicated that this figure constituted 1% of the Company’s total assets at that time. 332 Inamullah

did not personally interface with Cambrian and believed that Alexander led the due diligence on

the company. 333 Cred received quarterly statements from Cambrian, 334 and withdrawals were

subject to a 30-day notice period. 335 Cred’s full redemption of its investment in Cambrian

Systematic Strategies, LP was confirmed on January 31, 2020. 336 Cred recalled its assets from

Cambrian because Alexander was purportedly unhappy with Cambrian’s performance, and

because Cred wanted to move assets to another asset manager, 100 Acre Ventures. 337 On

February 21, 2020, Cred withdrew 95% of its investment in Cambrian, 338 with the remaining 5%

to be wired to Cred upon the finalization of Cambrian’s 2020 audit. 339 As of November 5, 2020,

Podulka did not believe that Cred had received the remaining 5% of its investment from

Cambrian. 340

(c) 100 Acre Ventures

Cred began investing with 100 Acre Ventures, a cryptocurrency investment firm,

beginning in or around April 2020 on Alexander’s recommendation. 341 Inamullah stated that he

oversaw the due diligence process for onboarding 100 Acre Ventures, which purportedly

332
Exhibit 99.
333
Interview with Daniyal Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 23, 2021).
Chat log between S. Zhang and J. Alexander, Feb. 14, 2020 (Exhibit 184); Cambrian Systematic Strategies LP
334

Quarterly Statement, Sept. 30, 2019 (Exhibit 101).

335
Email from S. Zhang to J. Alexander, Feb. 6, 2020 (Exhibit 102).
336
Redemption Confirmation, Jan. 22, 2020 (Exhibit 103).
337
Interview with Daniyal Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 23, 2021).
338
Metropolitan Commercial Bank Account Statement, Feb. 28, 2020 (Exhibit 104).
339
Email from HC Global Fund Services to D. Schatt, Feb. 21, 2020 (Exhibit 105).
340
Id.
341
Interview with Daniyal Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 23, 2021); 100
Acres Ventures Mission Page, https://www.100acreventures.com/mission (last visited Mar. 4, 2021).

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included the exchange of standard corporate documents. 342 Inamullah said that, when Bethany

De Lude joined Cred as Chief Information Security Officer in the summer of 2020, she identified

deficiencies in the firm’s diligence responses and initiated a second round of diligence. 343 Cred

paid a 1-2% management fee and 10-20% incentive fee to 100 Acre Ventures for its asset

management services. 344 Cred’s Adnan Khakoo emailed 100 Acre Ventures to request a full

redemption of Cred’s assets on June 29, 2020. 345 However, as of October 2020, 100 Acre

Ventures owed Cred approximately $1 million. 346

(d) Sarson Funds

Sarson Funds LLC is a third-party marketing company that does not directly manage

assets or provide investment advice; rather, the organization is structured in such a way that

different entities carry out investing activities and Sarson Funds markets those entities’

investment strategies. 347 However, Cred considered Sarson Funds to be the functional equivalent

of an asset manager. 348 Sarson Funds also provided certain technical services to Cred. 349

Inamullah proposed Cred engage Sarson Funds to the “investment committee,” 350 and claimed

342
Interview with Daniyal Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 23, 2021).
343
Id.
344
Id.
345
Email from A. Khakoo to P. Collins, June 29, 2020 (Exhibit 106).
346
Email from D. Inamullah to D. Schatt, J. Podulka, D. Wheeler and A. Khakoo, Oct. 1, 2020 (Exhibit 112).
347
Inamullah Dep. 207:9–208:10 (Exhibit 9).
348
Id. at 205:17–22.
349
Id. at 25:3–26:2; 205:17–21.
350
Id. at 95:11–15.

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that he conducted due diligence with respect to the firm. 351 Inamullah now works for Sarson

Funds as its Chief Investment Officer. 352

In March 2020, Cred invested in two Sarson sub-funds: Fifth Khagan, LP, 353 a small

coin/small token fund, and AX Momentum, LP, a covered call options fund. 354 Sarson Funds is

the general partner of these funds. 355 The premise of Fifth Khagan was to send Sarson Ethereum

and invest in products that would outperform Ethereum in the long run. 356 AX Momentum

involved selling an out-of-the-money call against Bitcoin to make premium income and then

permitting the call to expire or buying it back in accordance with specific parameters. 357

According to Matthew Foster, Cred represented a large portion of the investments in AX

Momentum and Fifth Khagan, and profited from those investments. 358 Sarson used an

administrator to provide Cred with daily reports on the performance of its investments. 359 Cred

allegedly grew its assets by $4 million with Sarson and 100 Acre Ventures between April 2020

and August 2020. 360

On November 14, 2020, Brittany Keels of Sarson contacted Sundrania—a cloud based

fund administration service Sarson used to prepare statements and keep track of its funds—

351
Interview with Daniyal Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 23, 2021).
352
Id.
353
Exhibit 14.
354
Inamullah Dep. 208:24–209:1 (Exhibit 9); Exhibit 14; Exhibit 15.
355
Interview with Matthew Foster, Chief Restructuring Officer, Cred Inc. (Feb. 9, 2021).
356
Inamullah Dep. 89:21–90:1 (Exhibit 9).
357
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).
358
Interview with Matthew Foster, Chief Restructuring Officer, Cred Inc. (Feb. 9, 2021).
359
Inamullah Dep. 100:13–16 (Exhibit 9).
360
Email from J. Podulka to D. Schatt, Aug. 8, 2020 (Exhibit 107); Email from J. Podulka to D. Schatt, Aug. 28,
2020 (Exhibit 108).

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investor support seeking to withdraw 75 Bitcoin (approximately $1.2 million at that time) from

Cred’s AX Momentum account. A 30-day notice period was waived in order to provide Cred

with a redemption of 75 Bitcoin on November 30, 2020, and a withdrawal of the remainder of

Cred’s assets at the end of 2020. 361

On January 6, 2021, Foster emailed John Sarson giving formal notice that Cred wished to

redeem its investments in both the AX Momentum and Fifth Khagan funds. 362 Foster explained

that Cred’s initial agreement with Sarson required the Company to give Sarson 120 days’ notice

before retrieving funds. According to Foster, Cred retrieved $4 million worth of Bitcoin in early

February 2021, and expected additional returns of $1.5 million in Bitcoin by the end of February,

the remainder at the end of March 2021. 363 The Examiner has been advised that Sarson Funds

redeemed an additional $1.5 million of Bitcoin in early March 2021.

(e) Blockfills

Blockfills is an electronic, off exchange, digital liquidity provider. Blockfills utilizes a

so-called “alpha strategy” with respect to its investments. 364 Under this strategy, Blockfills seeks

to arbitrage the price difference of its digital currencies and derivatives based on these currencies

across various exchanges. As such, the strategy did not rely on the market moving in a particular

direction, but rather attempted to make an arbitrage profit independent of market conditions. The

risk lay in the technology to be able to execute the arbitrage since, ideally, the arbitrage trades

needed to be applied simultaneously across exchanges. Inamullah claims to have conducted

361
Email from J. Sarson to D. Schatt, A. Khakoo, Nov. 17, 2020 (Exhibit 109).
362
Email from M. Foster to J. Sarson, Jan 6, 2021 (Exhibit 110).
363
Interview with Matthew Foster, Chief Restructuring Officer, Cred Inc. (Feb. 9, 2021).
364
Inamullah Dep. 47:3–7 (Exhibit 9).

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diligence regarding Blockfills consisting of a review of corporate organizational documents and

information requests regarding beneficial owners. 365 But, unlike most of Cred’s asset managers,

Blockfills was considered an “offshore” fund and, so, Cred (principally through Dan Wheeler)

took additional steps in an effort to make sure it could enforce its agreements with Blockfills. 366

Cred profited from its investments with Blockfills, albeit at lower than originally estimated (8%-

10% yield, rather than an estimated 20% yield). 367

(f) Drawbridge Lending

Cred entered into an investment arrangement with Drawbridge Lending in early 2020.

Inamullah does not recall Cred having conducted any material diligence on Drawbridge prior to

entering into its investment. Drawbridge’s model was to act as a fund to run covered calls

against Cred’s cryptocurrency, including Bitcoin. 368 For example, under the strategy, if Bitcoin

was trading at $10,000, Cred sold its covered call options at a strike price of $12,000 for a 3-

month term and received a premium for the same (e.g., a premium of $1,500); the idea being that

Cred would keep the full premium if the price of Bitcoin stayed below the strike price of $12,000

by the time the call option expired. 369 Records reviewed by the Examiner indicate that Cred

entered into only one transaction with Drawbridge, which was closed out by March 2020. 370

365
Interview with Daniyal Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 23, 2021).
366
Id.
367
Id.
368
Id.
369
Id.
370
Id.

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3. Cred Develops, But Does Not Implement, the So-Called “All-

Weather” Strategy.

In November 2019, in an apparent response to Cred’s significant reliance on (and thus

exposure to) moKredit, Cred’s “investment committee” developed a so-called “all-weather”

investment strategy. 371 Under this strategy (purportedly modeled after a strategy developed by

hedge fund manager Ray Dalio 372), Cred would utilize a mixture of lending, hedging, and

arbitrage strategies, with the goal of earning a profit regardless of whether cryptocurrency prices

increased or decreased, as had been promised to customers. As part of this strategy, Cred was

willing to trade expected yield by recalling principal from moKredit for liquidity – which would,

in turn, reduce weighted average return of the loan portfolio for Cred – by allocating more assets

to its investment managers. 373

Although Cred’s target allocation rates changed over time, the strategy emphasized

diversification and a move away from direct lending and avoiding credit risk. 374 But, following

moKredit’s inability to repay principal in March 2020, Cred created an internal liquidity analysis

dated April 5, 2020 that promoted a heavier reliance on the “all-weather” strategy (although by

that time, as described in greater detail herein, a shift in strategy may have been too late) and

Cred was unable to fully implement this strategy due to Cred’s persisting liquidity issues. 375

371
Inamullah Dep. 117:4–16 (Exhibit 9) (describing the strategy as a “diversified allocation of four or five different
types of allocations that Cred should diversify assets into”).
372
Inamullah Dep. 117:4–16 (Exhibit 9); Brett Arends, Opinion: How did these ‘All-Weather’ portfolios weather
2020? MarketWatch (Dec. 21, 2020) (Exhibit 111).
373
Cred LLC Investment Committee: Liquidity Analysis, Apr. 5, 2020 (Exhibit 113)
374
Email with attachments from D. Inamullah to D. Schatt, H. Ng, J. Podulka, S. Zhang, and J. Alexander, Feb. 12,
2020 (Exhibit 114); Cred Asset Management Overview at 3, Aug. 2020 (Exhibit 115).
375
Exhibit 113.

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D. Cred’s Relationship with QuantCoin.

1. Inception of Relationship.

Further exacerbating the liquidity crisis, Cred, beginning in February 2020, transferred

(via a “lockup” agreement) 800 Bitcoin to an entity named QuantCoin, in what Cred alleges was

a fraudulent scheme. Cred has, to date, lost the entirety of this investment.

Cred’s initial contact with QuantCoin occurred at the Consensus Conference, an “annual

gathering of the cryptocurrency and blockchain technology world,” in May 2019. 376 There,

James Alexander allegedly met Richard Chapman, QuantCoin’s purported portfolio manager. 377

According to Joe Podulka, Alexander is the only person who ever met Chapman in person. 378

According to Cred, QuantCoin purported to use a derivatives-based strategy to provide investors

with a return of 20-30% per year. 379

Alexander first mentioned QuantCoin to Dan Schatt in December 2019. 380 According to

Alexander, it was Schatt who brought QuantCoin to Alexander; 381 the Examiner is not aware of

any evidence corroborating this assertion. At the time, QuantCoin was presented as a strong

investment opportunity and, according to Schatt, Alexander indicated that he was performing

diligence on the company. 382

376
Consensus: 2019, Coindesk, https://www.coindesk.com/events/consensus-2019 (last visited Mar. 4, 2021).
377
The record does not reveal who else, if anyone, from Cred attended the conference. Inamullah Decl. ¶ 19
(Exhibit 6); Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).
378
Interview with Joseph Podulka, former Chief Financial Officer, Cred Inc. (Feb. 16, 2021).
379
Inamullah Decl. ¶ 20 (Exhibit 6).
380
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).
381
Interview with James Alexander, former Chief Capital Officer, Cred Inc. (Mar. 3, 2021).
382
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).

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According to Alexander, Schatt served as a reference for QuantCoin and insisted that

Cred invest significantly and immediately. 383 Available documents, however, do not support

Alexander’s version of events. On February 2, 2020, Chapman sent Alexander an email stating,

“[s]ince meeting you at the consensus, our performance here exceeded our expectations and the

numbers are looking even better than they did when I shared them with you then,” and requested

a call to discuss “possible collaboration” with Cred. 384 The email exchange indicates that

Chapman and Alexander, who were both purportedly traveling in Europe at the time, met in

Paris that week to discuss a potential investment by Cred in QuantCoin. 385 Following the

meeting, on February 3, 2020, Alexander told Chapman that Cred would move forward with a

500 Bitcoin investment and asked Chapman to provide the offering documents for a February

subscription. 386

In February 2020, Alexander informed Cred’s “investment committee” of the potential

opportunity with QuantCoin. Based on Alexander’s representations and purported due diligence,

the “investment committee” approved QuantCoin to manage a portion of Cred’s Bitcoin. 387

The Examiner received conflicting accounts regarding the use of a third-party to conduct

due diligence on QuantCoin. It is unclear what, if any, diligence Cred performed on QuantCoin

or Richard Chapman prior to making its investments. Schatt claims that Alexander completed

due diligence himself; Podulka could not confirm what, if any diligence, was conducted (other

than indicating that Alexander did not typically conduct thorough background searches with

383
Interview with James Alexander, former Chief Capital Officer, Cred Inc. (Mar. 3, 2021).
384
Email chain between J. Alexander and R. Chapman, Feb. 2, 2020 (Exhibit 125).
385
Id.
386
Email from H. Ng to S. Foster, J. Alexander, S. Zhang, R. Chapman and L. Tabers, Feb. 5, 2020 (Exhibit 126).
387
Schatt Decl. ¶ 32 (Exhibit 1).

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respect to investment opportunities); Inamullah represented that Cred retained a third-party to

perform diligence, but the Examiner has not been furnished with evidence corroborating this

assertion. 388

As detailed below, Cred made several investments with QuantCoin, totaling 800 Bitcoin

in the aggregate, over several months. Although Cred’s capital markets team (at the time, led by
389
Inamullah) was typically responsible for periodically reviewing asset managers, Inamullah

did not conduct additional due diligence on QuantCoin following Cred’s initial investment,

indicating that “there [was] no reason not to believe the original diligence” because Cred’s

second placement with QuantCoin occurred only ten days after its first. 390 Inamullah stated that

he had searched the email addresses provided for QuantCoin representatives on Google and

found a “slash page” for at least one. 391

After Cred’s initial Bitcoin transfer to QuantCoin in early February, Alexander emailed

Ryan Ortega, a consultant hired by Alexander, on February 11, 2020, seeking diligence support

on three asset managers, including QuantCoin. Alexander stated that “we scrambled to make

these initial allocation [sic] and I need to ensure we didn’t miss anything.” 392 Although Ortega

388
Inamullah Decl. ¶ 19 (Exhibit 6). Ryan Ortega may have been the third-party diligence provider used by
Alexander. See Email from R. Ortega J. Alexander, Mar. 10, 2020, (Exhibit 127) (“Thanks for your time and effort
on sourcing and screening managers.”); Interview with Daniel Schatt, co-founder and former Chief Executive
Officer, Cred Inc. (Feb. 17, 2021); Interview with Joseph Podulka, former Chief Financial Officer, Cred Inc. (Feb.
16, 2021).
389
Interview with Joseph Podulka, former Chief Financial Officer, Cred Inc. (Feb 16, 2021); Inamullah Dep.
180:12–16 (Exhibit 9).
390
Inamullah Dep. 152:6–10 (Exhibit 9).
391
Id. at 152:22–153:5.
392
Exhibit 127.

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agreed to assist Alexander, the Examiner has not been furnished with any evidence that Ortega

carried out any due diligence work for Alexander or Cred. 393

Cred’s server contained minimal documents regarding the QuantCoin investment and no

evidence of material due diligence. 394 Cred apparently did not create a written process governing

transfers of funds to outside parties until a few months after the QuantCoin transfers. 395 Further,

Cred’s General Counsel, Dan Wheeler, did not review the QuantCoin contract before Cred

executed it. 396 In fact, Wheeler stated he had never even heard of QuantCoin until after Cred

uncovered the alleged fraud (discussed below). 397

2. Chronology of Material Events Involving Cred and QuantCoin.

(a) On February 4, 2020, Cred executed a subscription agreement with Quanta

Capital Feeder Fund, L.P. 398 Schatt signed the agreement authorizing a
subscription of 500 Bitcoin in QuantCoin on behalf of Cred, which listed Joe
Podulka, Sally Zhang, and James Alexander as additional relationship contacts. 399
Alexander and Chapman subsequently agreed upon certain additional terms via
email on February 5, 2020 to be contained in a side letter. 400 The agreement
provided that transfers to QuantCoin and interest payable by QuantCoin would be
denominated in Bitcoin to avoid translation. 401

(b) On February 5, 2020, while setting up Cred’s initial subscription with QuantCoin,
Chapman emailed Alexander to loop in his “admin,” a person whom Chapman

393
Id.
394
See Email from D. Inamullah to J. Podulka and D. Schatt, July 13, 2020 (Exhibit 128) (Inamullah told Podulka he
cannot find the fee documents for QuantCoin. It is unclear if these have ever been located); Interview with Daniyal
Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 10, 2021).
395
Inamullah Dep. 153:25-154:5 (Exhibit 9).
396
Interview with Daniel Wheeler, former General Counsel, Cred Inc. (Feb. 12, 2021).
397
Id.
398
Quanta Capital Subscription Agreement, Feb. 4, 2020 (Exhibit 129)
399
Id.
400
Id.
401
Email from J. Alexander to D. Inamullah and S. Zhang, Mar. 10, 2020 (Exhibit 130).

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identified as Scott Foster of Kingdom Trust. 402 Although Kingdom Trust’s

website lists a Scott Foster as a financial services professional with over 25 years
of experience, the Examiner has not been furnished with any evidence indicating
that this real Scott Foster was in any way involved with QuantCoin. Chapman
asserted that “Foster” would serve as the digital asset custodian and account
administrator for the Cred account. 403

(c) On February 5, 2020, “Foster” sent Inamullah an email that included a wallet
address and transfer instructions for the first Bitcoin transfer. 404 Upon receiving
the address and instructions, Alexander asked a Cred employee, Sally Zhang, to
process the transaction. 405 Another Cred employee, Heidi Ng, sent a test
transaction of 0.01 Bitcoin and “Foster” confirmed receipt. Ng then transferred
the remaining 499.999 BTC via BITTREX to the wallet address provided by
“Foster.” 406 Cred completed its initial transfer of 500 Bitcoin to QuantCoin on
February 5, 2020, 407 valued at $4,806,710 at the time. 408

(d) On February 13, 2020, Inamullah sent an email to Chapman inquiring whether
QuantCoin required additional paperwork for a further allocation of Bitcoin. 409
Chapman replied that it did not. 410 “Foster” once again provided the wallet
address for the transaction, which Inamullah sent to Fireblocks to be
“whitelisted,” and sent a deposit address image to “Foster” as a security measure
to “prevent swap attacks.” 411 After “Foster” confirmed the address and receipt of
a test transaction for 0.01 Bitcoin, Inamullah executed a transfer of an additional
200 Bitcoin over two separate transactions: 80 Bitcoin on February 13, 2020
(valued at $817,150); and 120 Bitcoin on February 18, 2020 (valued at
$1,217,040). 412

402
Exhibit 126.
403
Id.
404
Email from S. Foster to D. Inamullah, Feb. 13, 2020 (Exhibit 131).
405
Id.
406
Exhibit 126 (Wallet address: 1HhGiE2JgUqweztdjpd5prpSt3YSkMs5Gk); Transaction Log, Feb. 5, 2020
(Exhibit 132) (Source address: 17Nk1hu2VPRREuANREgASdVyF1HcbY1kJf).
407
Exhibit 126.
408
Exhibit 25 at 23.
409
Exhibit 131.
410
Id.
411
Id.
412
Exhibit 131; Exhibit 25 at 23.

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(e) Beginning in March 2020, “Foster” began providing Cred with monthly investor
statements, all containing positive performance updates. 413 “Foster” subsequently
provided Cred with status updates and investment reports, and answered questions
regarding the QuantCoin relationship. 414 According to Inamullah, the positive
performance reports motivated Cred to invest more with QuantCoin while it
waited to on-board other asset management funds. 415

(f) On March 13, 2020, Inamullah asked Chapman if QuantCoin would be able to
receive another 200 Bitcoin from Cred. 416 In response to this request, Chapman
advised that he could receive 200 additional Bitcoin. 417 Inamullah recommended
to the “investment committee” that Cred invest more assets with QuantCoin. 418
However, due to the crash in March, Cred did not send the additional 200 Bitcoin.

(g) In or around April 14, 2020, Inamullah sought to increase Cred’s allocation by
100 Bitcoin, after QuantCoin informed Cred that its account exceeded 6% profit
in March. 419 Chapman instructed Inamullah to send the funds to the wallet
already “whitelisted” on Cred’s system. Inamullah sent the customary 0.01
Bitcoin test transaction. 420 Once receipt was confirmed, Inamullah sent the
remaining of 99.99 Bitcoin (valued at $711,680). 421 As with prior transfers, the
Fireblocks log shows that Inamullah sent this transaction to a wallet address under
the name “QuantCoin.” 422

(h) Thereafter, Cred continued to receive positive performance reports on its

purported 800 Bitcoin investment. 423

(i) By May 3, 2020, the market value of Cred’s purported Bitcoin investment with
QuantCoin totaled $7,026,402. 424

413
Email from S. Foster to D. Inamullah, Mar. 23, 2020 (Exhibit 133); Kingdom Trust Investor Monthly Statement,
Feb. 2020 (Exhibit 134); Cred Incident Investigation Report, Nov. 25, 2020 (Exhibit 135) (“The false Scott Foster
provided regular performance updates (all positive) on a monthly basis.”).
414
See e.g., Exhibit 135; Email chain between D. Inamullah and S. Foster, May 9, 2020 (Exhibit 137).
415
Interview with Daniyal Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 10, 2021).
416
Email chain between D. Inamullah and R. Chapman, Mar. 15, 2020 (Exhibit 136).
417
Exhibit 136.
418
Email from D. Inamullah to J. Podulka, D. Schatt and J. Alexander, Apr. 4, 2020 (Exhibit 122).
419
Exhibit 137.
420
Exhibit 135; Exhibit 137.
421
Exhibit 135; Exhibit 137; Exhibit 25 at 23.
422
Exhibit 124 (wallet address: 1HhGiE2JgUqweztdjpd5prpSt3YSkMs5Gk).
423
See Email with attachments from S. Foster to A. Khakoo, June 1, 2020 (Exhibit 138).

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(j) By June 2020, QuantCoin representatives had become increasingly difficult to

contact. On June 1, 2020, “Foster” apologized for a delay in sending Cred the
April report, stating that he “was out for the weekend with no internet access.” 425

(k) At a July 9, 2020 meeting of Cred’s Board, Cred identified its QuantCoin
investments as its best source for obtaining much needed short-term liquidity
despite QuantCoin’s positive performance. 426

(l) On July 16, 2020, Inamullah asked Chapman to speak to prospective investors
about Cred during its fundraising process, but Chapman replied that he was
addressing some medical issues and could not assist. 427

(m) On July 28, 2020, Cred notified “Foster” by email that Cred wanted to rebalance
its portfolio and inquired about a receiving a redemption in the first week of
August. 428 “Foster” replied that redemptions generally required one months’
notice and that any August redemption would affect other investors’ positions,
proving costly. “Foster,” however, did indicate that he would agree to fulfill a
redemption request in the first week of September to provide enough time to wind
down the positions. 429

(n) On July 30, 2020, “Foster” confirmed Cred’s request for a $2 million redemption
during the first week of September 2020. 430

(o) After the redemption request, Cred’s follow-up emails to Foster and Chapman
were returned as “undelivered.” 431

(p) In or around August, Joe Podulka requested that Inamullah obtain July financial
statements for the account.

(q) Eventually, Podulka contacted Kingdom Trust directly to verify the account
statement. 432 Podulka contacted Kingdom Trust several times by telephone
before receiving a response from Kingdom Trust’s General Counsel, Tim

424
Email from D. Inamullah to J. Podulka, May 3, 2020, (Exhibit 139).
425
Exhibit 138.
426
Exhibit 44 (July 9, 2020 meeting notes).
427
Email from R. Chapman to D. Inamullah, July 16, 2020 (Exhibit 140).
428
Email from S. Foster to A. Khakoo, July 29, 2020 (Exhibit 141).
429
Exhibit 141; Inamullah Dep. 154:21-156:16 (Exhibit 9).
430
Email from S. Foster to A. Khakoo, July 30, 2020 (Exhibit 142).
431
Email from A. Khakoo to D. Inamullah, Aug. 21, 2020 (Exhibit 143).
432
Interview with Joseph Podulka, former Chief Financial Officer, Cred Inc. (Feb. 16, 2021).

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Kuhman. 433 On August 26, 2020, Kuhman informed Podulka that the emails
from “Foster” were not authentic and that the real Kingdom Trust did not hold
any of Cred’s assets. 434

(r) On August 26, 2020, Kingdom Trust advised Cred to immediately report the
matter to the FBI and other law enforcement in Cred’s jurisdiction. 435 On the
same day, Cred’s security team, Bethany De Lude (Chief Information Security
Officer) and Marie Kacmarik (Director of Information Security) contacted the
FBI’s San Francisco Division. 436 Over the following days, De Lude and
Kacmarik coordinated with the FBI to provide relevant materials and information,
and to discuss next steps. 437

(s) On August 31, 2020, the FBI informed De Lude that it would initiate a formal
investigation along with Assistant U.S. Attorney Barbara Valliere. 438 The FBI
checked the QuantCoin wallet against law enforcement databases but the wallet
came up empty, prompting the need to conduct additional tracing. 439

(t) On September 8, 2020, Dan Wheeler received an FBI subpoena and managed the
information production and submission request with a target completion date of
September 24, 2020. 440 Wheeler collected the documents that the FBI requested
and spoke to agents about the case. 441

(u) On September 14, 2020, De Lude recommended that Cred pursue an insurance
claim related to QuantCoin, but Podulka did not act at that time. 442

(v) On October 14, 2020, Special Agent Bryant informed De Lude that it required no
further information from Cred. 443

(w) On November 24, 2020, Cred notified the FBI about its plans to freeze the
accounts relating to the transferred Bitcoin. 444

433
Id.
434
Email from T. Kuhman to J. Podulka, Aug. 26, 2020 (Exhibit 144); Exhibit 135.
435
Id.
436
Exhibit 135.
437
Id.
438
Id.
439
Id.
440
Email from B. De Lude to D. Schatt, Dec. 8, 2020 (Exhibit 145).
441
Interview with Daniel Wheeler, former General Counsel, Cred Inc. (Feb. 12, 2021).
442
Exhibit 145; Email from T. Khuu to B. De Lude, D. Schatt, and J. Podulka, Oct. 30, 2020 (Exhibit 146).
443
Exhibit 145.

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Kingdom Trust operates, inter alia, as a custodian and escrow agent for digital and fiat

currencies of individuals and institutions. 445 As noted above, Scott Foster is an employee at

Kingdom Trust who, it appears, an unidentified individual impersonated while claiming to

manage the QuantCoin account in his name. While the real Scott Foster has a company email

address of “[email protected],” 446 all emails Cred received from the purported “Foster”

came from “[email protected]” (emphasis added). 447

As part of an internal investigation at Cred, Podulka and Inamullah researched key

contacts and information about QuantCoin and found nothing online or on social media. 448 De

Lude asked Inamullah who at Cred authorized the transfers to QuantCoin, but Inamullah

suggested that he did not actually know how the authorization process worked. 449 Inamullah

recalled that Alexander likely told him to “initiate on the phone or in person” because he could

not find anything in email. 450

As of August 28, 2020, when Cred removed the assets held at QuantCoin and

CredBorrow from its asset calculation, Cred had short-term liabilities (using a 6 month

redemption calculation) of $100 million compared to purported assets of $80 million. 451 Schatt

444
Exhibit 135.
445
Executive Summary, Kingdom Trust, https://www.kingdomtrust.com/qualified-custodian/executive-summary
(last visited Mar. 4, 2021).
446
Exhibit 135.
447
Exhibit 126.
448
Exhibit 135; Email from B. De Lude to D. Inamullah, Aug. 27, 2020 (Exhibit 147).
449
Email from B. De Lude to D. Inamullah, Aug. 27, 2020 (Exhibit 148).
450
Exhibit 147.
451
Exhibit 107 (“Cred Earn liabilities today are about $110M v. assets of about $97M. That asset number includes
the Quanta funds. Removing Quanta assets and those with Cred Borrow and the comparing to short-term liabilities,
assets are $80M v. short-term (next 6 month redemptions) liabilities of $100M assuming full redemption. Expected

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commented to Podulka that the loss of $9 million in assets was “unfortunate,” but did not

“impair the company’s day-to-day operations or pose a significant risk to returning client

funds.” 452

Cred continued to present confidence in its ability to grow assets, manage client

redemptions, and close the asset gap created by the QuantCoin situation. 453 On September 1,

2020, in response to questions on Cred’s write-up of the QuantCoin incident, Podulka stated that

the loss from the situation was approximately $7.4 million if recognized in February, but

“because the funds didn’t actually generate any return, it’s not really a loss.” 454 As Podulka

framed it to a customer, the QuantCoin loss is really “more of a reduction against the budget

expectations.” 455

By September 16, 2020, the market value of the QuantCoin loss was $8,758,872. 456 On

October 28, 2020, Cred sent a notice to customers regarding the QuantCoin loss. 457

E. Lu Hua’s Transfer of 300 Bitcoin to Cred.

According to Schatt, after Bitcoin dropped in value in March 2020, Alexander sought to

recall $10 million from moKredit to provide Cred with liquidity to reestablish its hedge

redemptions would only be about $30M, so we could frame it differently and compare current non-LBA assets of
$84M v. expected redemptions of $30M.”).
452
Exhibit 108. According to Podulka, he made comments to a draft Schatt had already written, which included the
“unfortunate” comment. Interview with Joseph Podulka, former Chief Financial Officer, Cred Inc. (Feb. 16, 2021).
453
Exhibit 108.
454
Email between J. Podulka and S. Ichimiya, Sept. 1, 2020 (Exhibit 149).
455
Id.
456
Exhibit 95.
457
Decl. of Marc Parrish in Supp. of the Mot. of UpgradeYa Investments, LLC for Relief from Stay under
Bankruptcy Code Section 362, Exhibit G (ECF No. 91) (Exhibit 150).

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positions. 458 As discussed in Section V(B)(3), Hua claimed that he was not in a position to

satisfy Cred’s demands. Instead, Hua proposed a twofold solution: a staggered repayment plan

instead, and providing Cred with 300 Bitcoin to assist Cred with reestablishing hedges. 459

According to Schatt, Alexander indicated that he could utilize the 300 Bitcoin to

reestablish Cred’s hedge positions, despite the fact that the market value of the 300 Bitcoin at the

time totaled only approximately $1.5 million ($8.5 million less than the $10 million requested by

Cred). 460 After Cred’s hedges were liquidated in March 2020, Cred had a net short

cryptocurrency position of approximately $27 million. Using Cred’s traditional leverage of 3x,

Cred would have needed approximately $9 million in Bitcoin to hedge itself against this short

position. Utilizing Cred’s traditional leverage of 3x, Cred would only have been able to hedge

approximately $4.5 million of its net short position using the 300 Bitcoin ($1.5 million leveraged

3x).

Hua transferred 300 Bitcoin to Cred over five separate transactions: on March 13, 2020,

Hua made two transfers of .01 Bitcoin and 49.9 Bitcoin to Cred; on March 14, Hua made another

two transfers of 50 Bitcoin and 100 Bitcoin to Cred; and on March 16, Hua transferred the final

100 Bitcoin to Cred. 461

Hua and Schatt both characterize the Bitcoin transfers as a personal loan made by Hua to

Cred. Although the Examiner obtained emails from Hua and Schatt characterizing the transfer as

458
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).
459
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021);
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).
460
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).
Decl. of Matthew K. Foster in Support of Debtors’ Objection to Motion of James Alexander to Dismiss the Cred
461

Capital, Inc. Case ¶ 6 (ECF No. 434) (Exhibit 153); see also Email from S. Hwang to P. Bonjour, H. Ng, and D.
Hummer, Dec. 15, 2020 (Exhibit 154).

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a loan, the Examiner found no contract, loan agreement, or other documentary evidence

supporting this position. Hua did, however, execute a contribution agreement, effective as of

March 31, 2020, in which Hua agreed to make a capital contribution of 300 Bitcoin to Cred

Capital in exchange for an aggregate of 5,000,000 shares of Class B common stock. 462 Along

with Hua, Alexander signed the agreement as President and CEO of Cred Capital. 463

According to Hua, he signed the contribution agreement without reading it, two weeks

after he transferred the Bitcoin to Cred, and had assumed the agreement was a routine Cred

lending document. 464 Hua further states that he did not show the document to an attorney before

signing it and did not learn that what he had signed was an equity agreement until several months

later. 465

According to Inamullah, the 300 Bitcoin was initially used to establish certain swaps

and/or future hedges using Cred’s traditional leverage ratio of 3x on the OKEx exchange. 466

Also according to Inamullah, it was determined that, without JST, Cred did not have the

knowledge necessary to manage hedges in derivate form (i.e., as swaps or futures). At some

point 300 Bitcoin was sent to OKEx; however, the Examiner has not seen any documents

supporting any other hedge positions being reestablished. In any event, insofar as hedges

existed, they were terminated shortly after they were established. 467

462
Exhibit 80.
463
Id.
464
Interview with Lu Hua, Chief Executive Officer, moKredit Inc. (Feb. 18, 2021).
465
Id.
466
Interview with Daniyal Inamullah, former Vice President of Capital Markets at Cred Inc. (Feb. 23, 2021);
Inamullah Dep. 191:16–3:3 (Exhibit 9).
467
Interview with Daniel Schatt, Chief Executive Officer, Cred Inc. (February 17, 2021).

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Cred Capital liquidated 75 of Hua’s 300 Bitcoin and utilized the proceeds to pay Cred

Capital consultants, fund fees associated with the Luxembourg Bonds, and to satisfy minimal

balance requirements for Cred Capital’s bank account. 468

F. Cred’s Dealings with James Alexander.

1. General Background on James Alexander.

Schatt first met Alexander at a venture capital event in or around 2013. 469 The pair had

limited contact over subsequent years, but remained connected via LinkedIn. 470 During Summer

2018, Schatt contacted Alexander and proposed that he provide consulting services for Cred. 471

After working for Cred in this advisory capacity for approximately a month, Alexander met with

Hua, Wheeler, and other members of the Cred team in Shanghai. 472 At that point, Cred offered

Alexander a permanent position as Chief Capital Officer, commencing in August 2018. 473

It does not appear that Cred conducted any formal vetting of Alexander prior to making

him an offer of employment, nor does it appear that Cred contacted any of Alexander’s prior

employers. 474

On December 3, 2007, Alexander was convicted in the United Kingdom for crimes

related to illegal money transfers. He was sentenced to three years and four months in prison to

468
Chat logs between J. Alexander and D. Inamullah, June 24, 2020 (Exhibit 155); Interview with Daniyal
Inamullah, former Vice President of Capital Markets at Cred Inc. (Feb 23, 2021).
469
Interview with Daniel Schatt, Chief Executive Officer, Cred Inc. (February 17, 2021).
470
Id.
471
Id.
472
Id.
473
Compare First Amended Complaint ¶ 14, Alexander v. Schatt, No. 20-CIV-02728 (Cal. Super. Ct. Oct. 15, 2020)
(Exhibit 22) (stating that Cred hired Alexander on Aug. 27, 2018), with Employment Offer Letter for J. Alexander
(Exhibit 16) (Alexander’s unsigned employment offer letter states that his role would commence on Aug. 1, 2018).
474
Interview with Daniel Schatt, co-founder and Chief Executive Officer, Cred Inc. (Feb. 17, 2021).

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be served at HMP Ford Prison in West Sussex, England. On October 15, 2008, while serving his

sentence, there was a prison break at the HMP Ford Prison. It appears that Alexander is a

fugitive in the United Kingdom. 475

In his role as Chief Capital Officer, Alexander was responsible for raising and deploying

capital for Cred. 476 In this role, Alexander was granted broad power and discretion over Cred’s

investment decisions and the control and ability to transfer Cred’s assets with little oversight. 477

Alexander received from Cred an annual salary of $240,000 478 and a $95,523.76 advance

against a future profit share. 479 He also received two different types of loans from Cred: a series

of LBA token loans, and a cash loan. 480 The precise amount of LBA tokens that Alexander

obtained through the loan program is disputed (ranging from 5.2 million to 1.75 million

tokens). 481 Given time and information constraints, the Examiner was unable to ascertain if

Alexander received additional payments from any other organizations or parties referenced in

this Report.

475
Interview with James Alexander, former Chief Capital Officer, Cred Inc. (Mar. 3, 2021); see MN Form UCF-17-
2, Order Granting Name Change, Aug. 18, 1994 (Exhibit 167); see also Letter from Andrew Selous MP,
Parliamentary Under-Secretary of State for Justice, to Philip Davies MP, House of Commons (Nov. 7, 2014)
(Exhibit 168); Rachel Millard, Exposed: inmates on the run from Ford Prison, The Argus (Apr. 7, 2015),
https://www.theargus.co.uk/news/12873674.exposed-inmates-on-the-run-from-ford-prison/.
476
Interview with James Alexander, former Chief Capital Officer, Cred Inc. (Mar. 3, 2021).
477
Interview with Daniel Schatt, co-founder and former Chief Executive Officer, Cred Inc. (Feb. 17, 2021).
478
Exhibit 16.
479
Exhibit 22 at ¶ 14.
480
Id.
481
Compare Exhibit 22 at ¶ 14 (5.2 million LBA tokens), with Employee Loan Agreement I, June 1, 2019 (Exhibit
156) (1,333,333 tokens), Employee Loan Agreement II, June 1, 2019 (Exhibit 157) (375,000 LBA tokens), and
Employee Loan Agreement III, June 1, 2019 (Exhibit 158) (41,667 LBA tokens).

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2. Organization of Cred Capital.

Alexander was closely involved in the formulation and organization of Debtor Cred

Capital. 482 The Examiner notes that, pursuant to its Order entered February 5, 2021, the Court

made certain factual findings regarding the organization of Cred Capital and related matters.483

This Order followed extensive briefing on the matter by the Debtors, the Committee, and

Alexander. Specifically, the Court found that:

• the initial certificate of incorporation for Cred Capital, filed with the
Delaware Secretary of State on March 10, 2020, was improperly filed; and

• upon discovering the improperly filed incorporation filings, Cred took

steps to correct the improper filings and made Schatt and Podulka the
directors of Cred Capital. 484

The Examiner will, therefore, address the facts and circumstances surrounding Cred

Capital’s formation only as necessary to inform other aspects of this Report.

3. James Alexander’s Alleged Misappropriation of Assets.

On June 24, 2020, Alexander instructed Inamullah to transfer 225 Bitcoin and 200,000

USDC to wallet addresses that Alexander provided. 485 Because of the poor state of Cred’s books

and records, the Examiner could not ascertain whether the 225 Bitcoin was among the same

Bitcoin transferred to Cred by Lu Hua.

482
Exhibit 22 ¶ 7.
See Order Denying Motion of James Alexander to Dismiss the Cred Capital, Inc. Case (ECF. No. 487) (“Order
483

Denying Alexander MTD”) (Exhibit 159).

484
See Id.
485
Email from D. Inamullah to D. Schatt and J. Podulka, June 30, 2020 (Exhibit 160); Videotaped Deposition of
James Alexander 72:13–15 (“Alexander Dep.”) (Exhibit 161).

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Inamullah represented that Alexander told him the transfers were being made to a Cred

Capital account. 486 When asked how he confirmed this, Inamullah said that a separate entity was

onboarded for Cred Capital on Cred’s Fireblocks account, and this entity had a separate domain

name. 487 In reality, the addresses that Alexander provided were for wallets belonging to an

individual named Christopher Giovanni Silvio Spadafora, a consultant to Cred Capital since

April 2020. 488 During his deposition, Alexander said he transferred these funds to Spadafora’s

wallets because Alexander did not have a wallet available to receive the funds at that time, and

because he considered Spadafora a “trusted consultant and experienced crypto market

participant.” 489 However, during his interview with the Examiner, Alexander stated that he

transferred the assets to Spadafora’s asset management company “alwayshodl” but decided after

a few days that “hodl didn’t have the standing” to hold and manage the assets so he had them

transferred to himself. 490 Further, Alexander stated that Inamullah understood what Alexander

was attempting to accomplish through the transfer process. 491 According to Inamullah, he

believed that he was, in fact, transferring the funds to a Cred Capital wallet. 492

Inamullah represents that, when initially questioned about these transfers by Schatt, he

believed that the address information had been transmitted by Alexander via Telegram

486
Inamullah Dep. 158:24–159:4, 165:12–16 (Exhibit 9).
487
Id. at 221:8–13.
488
Alexander Dep. 72:17–25 (Exhibit 161).
489
Id. 72:17–73:11.
490
Interview with James Alexander, former Chief Capital Officer, Cred Inc. (Mar. 3, 2021).
491
Id.
492
Interview with Daniyal Inamullah, former Vice President of Capital Markets, Cred Inc. (Feb. 10, 2021).

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messenger and confirmed by Alexander via telephone call. 493 Inamullah said he later

remembered that Alexander provided all the necessary information in person because it is “much

safer that way.” 494 However, Inamullah subsequently advised the Examiner that Alexander sent

the wallet addresses to Inamullah via WhatsApp messenger while they were both in the office,

and Inamullah copied and pasted the addresses from WhatsApp into Fireblocks in order to

complete the transfers. 495 Alexander informed the Examiner that he did not recall his

communication with Inamullah regarding the transfer instructions. 496

Alexander informed the Examiner that he directed the assets be transferred out of the

Cred Capital account because he believed that he was the sole director of Cred Capital and that

Schatt and Podulka were improperly attempting to take control of Cred Capital. 497 The

following provides a chronology and factual observations regarding the relevant asset transfers:

• On July 1, 2020, Alexander received 224.899 Bitcoin from Spadafora. 498

• On July 15, 2020, Cred filed a complaint against Alexander in California state
court seeking, among other things, the recovery of 225 Bitcoin and other assets. 499

• On July 16, 2020, Alexander liquated 65 of the approximately 225 Bitcoin that he
had received by transferring those assets to his Coinbase wallet. 500

493
Inamullah Dep. 158:6–18 (Exhibit 9).
494
Id.at 158:18; 160:13–17.
495
Interview with Daniyal Inamullah, former Vice President of Capital Markets at Cred Inc. (Feb. 23, 2021).
496
Alexander Dep. 71:14–19 (Exhibit 161).
497
Id. at 69:4–11.
498
Id. at 78:5–9.
499
Verified First Amended Complaint, Cred v. Alexander, No. 20-CIV-02915 (Cal. Super. Ct. Aug. 14, 2020)
(Exhibit 23).
500
Alexander Dep. 83:16–85:2 (Exhibit 161).

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• On July 17, 2020, a temporary restraining order and preliminary injunction

enjoining Alexander from using or transferring any Cred or Cred Capital digital
assets was issued by the California state court. 501

• On January 16 and 17, 2021, Alexander transferred Bitcoin valued at

approximately $1.832 million – in evident conflict with the terms
of the California state court’s TRO. 502 Specifically, Alexander transferred 50
Bitcoin on January 16th, and 50 additional Bitcoin on January 17th, into his
Coinbase wallet to be liquidated into USD. Alexander acknowledged that the
transfers did not comport with the TRO, but claimed that a purported medical
emergency precipitated his actions. 503

• At a bankruptcy hearing attended by Alexander on February 3, 2021, the Court

determined that an emergency hearing would be held regarding the January 16th
and 17th transfers completed by Alexander. 504

• That same day, Alexander withdrew $10,000 in the form of a cashier’s check
from an account named “Alexander Custom Management.” Alexander stated that
this withdrawal was a salary payment to himself, 505 and said he deposited it into a
personal account. 506

• The following day, February 4, 2021, Alexander transferred $100,000 from a

Wells Fargo bank account that he managed for Cred Capital to the “Alexander
Custom Management” account, and then withdrew $60,000 in cash from that
account. 507 Alexander stored this money in the trunk of his car, which, at the time
of his deposition, was parked on Finely Avenue in Los Angeles, California, a
street on which Alexander previously resided. 508 Alexander stated that he
withdrew this cash to settle a purported tax liability, which he stated was a part of
his 2020 compensation. 509 Alexander claimed that he had planned to deposit the
cash into his personal account the day he withdrew it, but had not had the chance

501
Id. at 85:11–86:11.
Transcript of Zoom Hearing Re: Emergency Motions of the Official Committee of Unsecured Creditors 5:22–6:4,
502

Feb. 5, 2021 (Exhibit 166).

503
Alexander Dep. 105:20–108:7.
504
Id. at 39:16–40:22.
505
Id. at 47:21–48:18.
506
Id. at 49:24–50:7.
507
Id. at 42:12–45:18.
508
Id. at 14:15–19, 46:15–18.
509
Id. at 47:1–10.

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to do so by the date of his deposition, five days later. 510 When asked how much
cash was still in his car since withdrawing it over a week prior, Alexander stated
that he did not recall and could not remember if he had spent any of the funds,
since, as Alexander stated, “cash is fungible.” 511

• According to information that the Examiner received from the Committee’s

advisors, on February 5, 2021, Alexander returned 49.9980892 BTC and
$2,773,489.24 USDC to the estates. 512

• On February 7, 2021, Alexander returned to the estates an additional $35,000

from a JP Morgan Chase account and $50,355 from a Wells Fargo account. 513

• The proceeds from the January 16th and 17th Bitcoin transactions totaled
approximately $3,437,956.53 in the aggregate. As of the date of his February 9,
2021 deposition, Alexander had returned assets totaling, in the aggregate,
approximately $2,773,488. When asked where the approximately $664,468 dollar
difference in value between transferred and returned assets was, Alexander
refused to answer, stating that the whereabouts of the funds was an “open
question.” 514

• Thereafter, Alexander requested a break in the deposition, during which

Alexander filed a personal Chapter 11 bankruptcy petition in the Central District
of California. Upon return from break, Alexander ended his participation in the
Court-ordered deposition. 515

VI. INVESTIGATIVE CONCLUSIONS

The information that the Examiner was able to obtain and review within the constricted

timeframe of the Investigation lends itself to the following conclusions:

General Management/Oversight

1. Lu Hua and Dan Schatt either failed to acknowledge or failed to realize the likely
conflict of interest, both fiduciary and personal, that existed in their relationships with
each other and between moKredit as a debtor and Cred as a lender.

510
Id. at 52:1–11.
511
Id. at 56:16–19.
512
Email from J. Evans to E. Gilman, Feb. 28, 2021 (Exhibit 162).
513
Id.
514
Alexander Dep. 115:6–117:22 (Exhibit 161).
515
Alexander Dep. 118:3–121:24 (Exhibit 161); Suggestion of Bankruptcy (ECF. No. 500) (Exhibit 163).

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2. Dan Schatt likely failed to make reasonable efforts to investigate James

Alexander’s background prior to hiring him as Cred’s Chief Capital Officer. Had Schatt
done so, he likely would have learned that Alexander was convicted of a felony and
sentenced to prison for acts amounting to fraud, and appears to be a current fugitive in the
United Kingdom.

3. Cred likely failed to develop and maintain a standardized and formal process for
decision-making pertaining to Cred’s liquidity situation, new investment proposals,
investment allocations, and risk management strategies.

Accounting Practices

1. Cred failed to keep reliable, defensible records for its trading accounts and never
adopted a regular practice of issuing transaction statements.

2. Cred did not endeavor to complete account reconciliations. At the time Cred filed
for Chapter 11 relief, it had not reconciled its accounts for fiscal year 2020. The
Examiner could not ascertain the last point at which Cred had a complete and accurate
records reconciliation.

3. Because of the lack of up-to-date books and records, the Examiner could not
ascertain the reliability and efficacy of Cred’s stated financial position at any time, up to
and including the filing of its Chapter 11 petitions.

4. Cred failed to develop and maintain a standardized, comprehensive protocol for

tracking customer deposits and initiating and authorizing transfers. Cred’s method for
initiating, authorizing, and executing transfers appears to have been informal, with all
steps often performed by a single individual without a discernible method for approval or
oversight.

5. Cred did not keep consistent records of Fireblocks transactions, and the records it
did keep were not comprehensive.

6. Customer deposits derived from Uphold, CredEarn, and CredBorrow, were all
maintained together without a standardized, repeatable method for distinguishing whose
assets belonged to whom and from which offering they were derived.

Risk/Due Diligence

1. Cred failed to maintain a comprehensive, standardized process for performing due

diligence on prospective or current asset managers.

2. Cred failed to incorporate and maintain internal compliance policies, including

due diligence policies. It was not until Summer of 2020 that Cred began to initiate
background checks on prospective employees and custodians and, even then, those
checks do not appear to have been conducted retroactively.

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3. Cred’s “investment committee” discussed, at least as early as November 2019,

pursuing an “all-weather” strategy to diversify Cred’s asset allocation and minimize risk.
Cred, however, never fully implemented this strategy due to, among other things,
continued liquidity issues beginning with the March 2020 crash, the inability to obtain
repayment under the moKredit loan, the failed QuantCoin investment, and asset transfers
involving Alexander.

moKredit

1. Cred did not receive or review written due diligence materials (e.g., moKredit’s
asset-to-liability ratio, customer transactions, customer default rate, or customer
receivables) before entering into its loan agreement with moKredit.

2. Prior to entering into the moKredit loan agreement, Cred did not take reasonable
steps to ensure that it could enforce the loan agreement and effectuate repayment in the
event that moKredit, a company located and doing business in China, defaulted or was
otherwise unwilling or unable to satisfy its repayment obligations.

3. Cred and moKredit appeared to operate without “proper controls.” Cred

transferred funds without signed tranche agreements and failed to issue periodic
statements. As a result, Cred’s informal accounting system – comprised of an Excel
spreadsheet and a Google document – remained out-of-date and likely inadequate to track
tens of millions of dollars of transactions between the companies.

QuantCoin

1. Cred did not conduct material due diligence prior to transferring 800 Bitcoin to
QuantCoin. Cred management relied on statements made by James Alexander that
QuantCoin due diligence was properly conducted without receiving any evidence
substantiating such a claim.

2. Dan Schatt signed the QuantCoin subscription agreement before it was reviewed
by Cred’s general counsel and adequate diligence was performed.

3. Despite assertions made by Alexander, it does not appear that he conducted due
diligence of QuantCoin on Cred’s behalf.

4. Daniyal Inamullah also did not conduct any due diligence of QuantCoin and,
despite being the main contact on the account and initiating Cred’s transfer of funds,
Inamullah attempted to distance himself from the relationship thereafter by blaming the
lack of diligence on the absence of a written process.

5. After the series of Bitcoin transfers to QuantCoin, Cred, with reasonable

diligence, could have discovered that, contrary to QuantCoin’s assertions, Kingdom Trust
did not have a relationship with QuantCoin and the real Scott Foster was not managing
the Cred account.
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Hedge Positions

1. Cred hired outside consultant JST Capital to assist Cred in operating a

cryptocurrency hedging program.

2. Certain hedges established under this program failed to protect Cred from a
downturn in the market and, instead, likely caused Cred to incur significant losses when
the price of Bitcoin dropped significantly overnight on March 11, 2020.

3. The decision not to reestablish its hedge positions after the March 2020 “flash
crash” left Cred exposed (“naked”) to market fluctuations. As the price of Bitcoin
increased towards the end of March and beyond, so too did Cred’s liabilities.

Luxembourg Bonds

1. At the time that Cred purchased the Luxembourg Bonds, it knew that moKredit
would be unable to make the payments necessary to repay them.

2. Cred’s decision to purchase the Luxembourg Bonds in June 2020 (at par)
significantly and adversely impacted Cred’s already tenuous liquidity position.

300 Lu Hua Bitcoin

1. After moKredit failed to repay $10 million of its principal balance, Hua sent 300
Bitcoin to Cred. In or around this time, Hua executed an equity contribution agreement
under which Hua agreed to transfer 300 Bitcoin in exchange for equity in Cred Capital.
Thus, despite Hua and Schatt’s characterization of the Bitcoin transfer as a loan, the
documentary evidence suggests an equity placement.

2. Although Cred appears to have indicated that it intended to use the 300 Bitcoin to
reestablish hedges liquidated by JST in the March 2020 crash, it does not appear that 300
Bitcoin would have been sufficient to reestablish such hedges.

Certain Representations Made by or Attributed to Cred

1. It appears that, in certain instances, Cred mischaracterized the nature of its

collateralization. The funds Cred lent to moKredit and other asset managers after
converting CredBorrow and CredEarn deposits to fiat currency were largely not
collateralized.

2. It appears that, in certain instances, Cred mischaracterized the nature of its

insurance coverage.

3. In communications with customers after the discovery of the failed QuantCoin

investment, Cred indicated that the loss was insignificant and did not pose a significant
risk to client funds. At the same time, certain Cred employees were recommending that

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Cred pull 100% of its assets from three asset managers in an effort to address liquidity
concerns stemming, in part, from the failed QuantCoin investment.

4. It appears that Cred understated its assets-to-liabilities gap internally and

mischaracterized its ability to close that gap to customers in or around August 2020, a
time at which Cred knew that moKredit was either unable or unwilling to pay down the
principal balance on the moKredit loan.

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