Prime Core fell victim to mismanagement, felt ‘ripple effect’ from crypto winter

In a motion on Thursday, Prime Core’s interim chief executive pointed to a number of instances of improprieties within the company in voicing support for its Chapter 11 bankruptcy proceedings. 

Jor Law, the firm’s interim CEO, highlighted some of Prime Core’s purported more glaring missteps and failures in the filing, extending to the $8 million loss it faced after Terra collapsed — noting that $6 million of that was customer funds — and discussed what he calls the “wallet event.”

Prime Core is the parent company of Prime Trust, the crypto custodian and on- and off-ramp provider that declared bankruptcy earlier this month. The company at the time said it faced a shortfall of customer funds, which had evidently started earlier in the year, without publicly specifying the cause of the discrepancy.

In 2018, Prime Core created cold storage wallets to oversee the storage of ether (ETH), bitcoin (BTC) and other “compliant” crypto tokens. But the brand’s 98f Legacy Wallet, used to store amounts of customer crypto, was able to be accessed by multiple signers — an evident security shortfall. 

The company then used the custodian Fireblocks to store customer assets. 

However, when a customer made a request to withdraw a “significant” amount of ETH in 2021, “certain Company employees discovered that cryptocurrency assets had been forwarded to the 98f Wallet, which was outside of the Fireblocks Platform,” the filing said. 

The improper effort in accessing “wallet access devices” devolved into a number of employees tapping fiat currency from customer accounts, then using those funds to purchase ether to fulfill customer withdrawals, Law said. 

Roughly $76 million was spent on ETH to fund the customer withdrawals, the filing said. 

“Despite these realities, the Company under prior management continued to ramp up spending, at times incurring seemingly excessive expenditures,” Law wrote. He explained that, in October 2022, management “spent approximately $10.5 million against revenues of approximately $3.1 million for a net loss of approximately $7.4 million.” 

That kind of spending wasn’t abnormal either, with Law giving a November example that demonstrated similar amounts.  

He also outlined the regulatory issues the company faced. As previously reported by Blockworks, Prime Trust attempted to quickly raise cash before announcing a deal with BitGo. 

BitGo later terminated its plan to buy Prime Trust.

Law said that during that time, “the Company was in the midst of this capital raise when state regulators began taking actions that resulted in the revocation or suspension of certain of the Company’s Licenses.”

This led to customers leaving and “a precipitous decline in the Company’s revenues, and led to the issuance of the Cease and Desist Order,” the filing said.

According to the filing, the company seeks to protect assets, “maintain and reinstate licenses” and pursue “third-party financing, a recapitalization, and a potential sale.”

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