What should you do now as a Cred customer with an outstanding loan?
1. Confirm your balance at Cred.
2. Check your contract with Cred and contact an attorney for legal advice. If there is an automatic renewal term, consider opting out of it.
3. Sign up for email notifications concerning the progress of the Cred bankruptcy proceedings here.
4. Keep an eye out for communications from the bankruptcy claims and noticing agent, Donlin, Recano & Company, Inc. Be sure to check your spam folder regularly.
13/11/2020 – Affidavit/Declaration of Service Filed by Donlin, Recano & Company:
From this filing we learned the structure of Cred’s business, a history of the company, their corporate and capital structure and the events leading up to the Chapter 11 bankruptcy filing.
- Nature of Cred’s Business
Customers transferred crypto to Cred, which they generally sold and then invested the dollars in different ways to generate revenue. Cred would then use the yield from their investments to pay a return to the customers, e.g. via crypto interest rates in CredEarn. To get returns, customers had to commit their assets for fixed periods of 3-6 months. Cred didn’t make it clear how LBA, their “utility token” to get premium rates, fits into their business model.
- History of Cred
Daniel Schatt and Lu Hua founded Cred in 2018 after having previously met whilst both working at PayPal. Cred launched with their first partner, Uphold, in early 2019.
- Cred’s Corporate Structure
Daniel Schatt and Lu Hua each own 50% equity in Cred. There are four wholly-owned subsidiaries, all of which are incorporated in Delaware and operate in California, except Cred Puerto Rico LLC:
- Cred (US) LLC
- Cred Capital
- Cred Merchant Solutions LLC
- Cred Puerto Rico LLC
- Cred’s Capital Structure
As of 9th November 2020, Cred owed approx $140million to customers. However this fluctuates with crypto prices in the sense that the higher the price, the more they owe. Therefore as a result of the latest crypto market rally this figure could be significantly higher.
- Events leading to Chapter 11 Bankruptcy Filing
CEO Dan Schatt basically blames two causes for the difficulties Cred faces:
- Former Chief Capital Officer, James Alexander’s, alleged fraudulent behaviour that led to significant losses of customer funds. This includes misappropriation of funds, lack of due diligence and ongoing legal costs to litigate against Mr Alexander.
- COVID-19 restrictions drastically reducing revenue and the Black Thursday Bitcoin price crash and subsequent fallout as a result of being improperly hedged.
12/11/2020 – CoinDesk article sheds more light on Cred’s negligence with funds:
“…as of Nov. 7, Cred had $67.8 million in assets, supporting $136 million in liabilities, according to a slide presented by law firm Paul Hastings LLP in a bankruptcy hearing Tuesday.”
Allegedly, Founder and CEO Dan Schatt rejected a liquidation plan that would have prioritised repayment to CredEarn note holders in case of failure. It remains to be seen if this was by his own negligence, or by design? In either case CredEarn note holders have been left out to dry…
“Of Cred’s $136 million in liabilities, $114 million is owed to holders of Cred Earn notes, who number somewhere between 500 and 1,000”
11/11/2020 – Crypto Briefing publish excellent article on the series of events leading up to the Cred bankruptcy filing:
According to a Cred insiders, they lent $39M of their crypto assets to a Chinese gaming payment service provider, moKredit. moKredit was founded by Lu Hua, also a founder of Cred.
The loan repayment was severely impacted by China telling citizens they could pause paying unsecured loans, as a result of Covid-19.
When crypto prices crashed on Black Thursday, Hua loaned them 300 Bitcoin to keep Cred afloat. Interest was paid back on this loan with Cred customer’s assets. Apparently Cred did not attempt to recoup the funds initially lent to moKredit.
There appear to be a number of examples of heavy losses as a result of negligent lending practices. According to Crypto Briefings’ article the writing was on the wall in August 2020, which leaves us asking why it took so long to learn this and why customers were still encouraged to invest with Cred? For example Dan Schatt held an AMA in August and gave the impression that everything was fine.
10/11/2020 – Cred (US) LLC First Day Hearing at United States Bankruptcy Court District of Delaware:
At 3pm EST (8pm UTC), Cred will give notice of Filing of Chapter 11 bankruptcy:
First day declarations will be given by Dan Schatt, Cred CEO, and Drew McManigle, CEO of the restructuring group.
09/11/2020 – Uphold announces it will sue Cred (US) LLC:
“Cred filed for protection under Chapter 11 of the U.S. Bankruptcy Code yesterday. The firm is apparently unable to meet its customer obligations owing to a hole in its balance sheet, which we believe results from the alleged actions of a former executive of Cred.
In breach of its contractual and fiduciary responsibilities, Cred failed to inform Uphold about the issue until Uphold contacted the firm on Friday, October 23rd, having been approached that day by a journalist investigating potential issues at Cred.
As a result, Uphold today announces that it plans to sue Cred LLC, the corporate entity, its affiliates, as well as Cred’s founders for fraud, breach of contract, and reputational damage.
Any proceeds Uphold receives from these actions will first be distributed among Uphold customers who have lost money at Cred. Uphold will fund the costs of this litigation.
Within hours of the disclosure on October 23rd, Uphold blocked deposits into Cred to protect Uphold customers, terminated our relationship with the firm, and insisted that Cred inform their regulators and publicly disclose the matter…”
08/11/2020 – Cred (US) LLC files for Chapter 11 bankruptcy:
“Thank you for your outsized patience over the past two weeks. During this time, our burning desire to communicate with you conflicted with our legal obligation to remain silent until we could arrive at a clear understanding of next steps. We know this period has been concerning and stressful for you, and it has been difficult for all of us at Cred that we could not communicate more. We have been working around the clock in discussion with many parties, including insurance providers, investors, restructuring specialists, and legal counsel to understand how Cred has been impacted from recent events and what it means for you. We have come to the conclusion that it is in the best interest of our customers and all stakeholders for Cred to file for Chapter 11 of the US Bankruptcy Code.
Why Chapter 11 Bankruptcy? We can operate this process according to three principles that you deserve:
Transparency. You will have full and continuous access to every disclosure about Cred, its history, and the recent events leading to our decision to file for Chapter 11 bankruptcy. Everyone will have the same information, and you can access all information here, by phone (1-877-739-9988), or by email (firstname.lastname@example.org). The self-serve portal will provide you with a frequently asked questions section, and give you a deeper understanding of the process. It will be updated with new information regularly and you can sign up to receive email alerts.
Fairness. In a bankruptcy proceeding, every customer will have the opportunity to participate in the process. There are no special deals that would favor one customer over another, and you will have an opportunity to review all documentation.
Efficiency. Chapter 11 has a well-established set of processes, and we expect to come to a resolution within a few months.
As we work through a comprehensive plan to recover assets, we will be evaluating several options, including sale of the company or company assets, restructuring, and liquidation of assets. To that end, we have added Grant Lyon to Cred’s Board of Directors to oversee the restructuring process. Grant has more than 30 years of experience in corporate restructuring, and I have great confidence in his fair and objective analysis of company operations, development of strategic plans, and liquidity alternatives that serve the best interests of Cred stakeholders. Cred has also engaged Paul Hastings LLP as its legal advisor during the Chapter 11 process , and MACCO Restructuring Group as financial advisor to evaluate M&A and other restructuring opportunities.
On a personal note, my thoughts and deepest apologies to our community, those who were willing to take a risk on us – our partners, investors, employees, and customers – for the anxiety, stress, and concern we have caused you. Many Cred employees, including myself have significant amounts of money that have been entrusted with Cred. We are committed to do whatever we can to arrive at the most favorable outcome we can for all of our customers.
Co-Founder & CEO of Cred”
29/10/2020 – Cred (US) LLC sends a follow up regarding CredEarn programs:
“We are writing to update you with additional information on your CredEarn Program. Cred is still in the process of assessing the business impact of a fraud incident in consultation with its Counsel and specialists. We are working hard to assess the situation and expect to share more next week. For now, all inflows and outflows of funds will remain temporarily suspended for the November 1 program. We also want to acknowledge the concerns expressed about Cred being hacked. We can tell you that’s not the case. No Cred systems, customer accounts, or customer information have been compromised.
We know this limited information is not sufficient to understand the status of your funds, we deeply regret any stress this ambiguity has put on you. Many Cred employees, family members, and partners have their funds with CredEarn as well.
Thank you for being vocal. We want you to know your voice is being heard; and we are committed to keeping you updated on the situation.”
27/10/2020 – Cred (US) LLC sends an email to their customers:
“Cred has experienced irregularities in the handling of specific corporate funds by a perpetrator of fraudulent activity that has negatively impacted Cred’s balance sheet and precipitated a law enforcement investigation into the loss of these funds. Cred is cooperating fully with law enforcement authorities in connection with the investigation into the incident. Cred is in the process of carrying out an internal accounting of its assets and assessing the impact of the incident on its current business and in consultation with legal counsel has determined to temporarily suspend all inflows and outflows of funds relating to the CredEarn program. No client personal information or other account data has been compromised. Given the circumstances, we are unable to comment further at this time but we will undertake to provide an update within the next 2 weeks. We regret having to relay this disheartening news. However, we assure you that we will share as much information as we can, to keep you abreast of this matter. Thank you for your patience.”