A US judge has approved a scheme for the collapsed crypto exchange FTX to reimburse former clients, as the lengthy bankruptcy proceedings near completion.
A US JUDGE has paved the path for billions of dollars to be returned to previous clients of the insolvent crypto exchange FTX.
At a court session in Wilmington, Delaware, on Monday, Judge John Dorsey granted final approval to FTX’s restructuring plan, the conditions of which had earlier been presented to creditors and overwhelmingly approved.
“I believe this serves as an exemplary case for managing a highly intricate Chapter 11 process,” stated Dorsey. “I commend all those who participated in the negotiation process.”
FTX declared bankruptcy in November 2022 after depleting its funds needed to handle customer withdrawals. Billions of dollars in FTX customer deposits were unaccounted for. The funds, as later determined by a jury, were funneled into a sister company and used for high-risk trading, investment ventures, paying off debts, personal loans, political contributions, upscale real estate, and various unlawful activities.
One year later, Sam Bankman-Fried, the founder of FTX, was found guilty of several counts of fraud and conspiracy, subsequently receiving a 25-year prison sentence. In September, coconspirator Caroline Ellison was sentenced to two years in prison after her testimony at Bankman-Fried’s trial.
Initially suggested in May, the FTX bankruptcy plan outlines a strategy for a complete reimbursement, along with interest, for previous FTX clients—an extent of recovery seldom observed in bankruptcy cases. “Typically, receiving more than 100 cents on the dollar is nearly miraculous,” states Yesha Yadav, associate dean and bankruptcy expert at Vanderbilt University Law School. “What often occurs is that unsecured creditors receive pennies on the dollar, if they are fortunate.” The anticipation is that it refers to a process of limited resources.
In this instance, however, the FTX estate managers successfully retrieved billions of dollars by selling off investments from the exchange’s venture capital division, FTX Ventures, as well as its affiliated company, Alameda Research, and other assets. An increase in cryptocurrency prices since FTX’s bankruptcy has boosted the worth of the coins remaining in the exchange’s reserves.
According to the plan, U.S. government agencies—including the Internal Revenue Service and the Commodities and Futures Trading Commission—have consented to pause significant claims against FTX until creditors are compensated (though the IRS will obtain a $200 million initial payment as part of the agreement).
Even FTX equity investors, usually the last to receive payments in a bankruptcy, are expected to regain part of their original investment—a total of up to $230 million among them—financed by funds retrieved by the Department of Justice through legal actions against FTX insiders.
However, in spite of the unusually high anticipated recovery, certain creditors feel they are still receiving an unfair arrangement due to the method used to value their claims.
Numerous clients possessed crypto assets such as bitcoin on the FTX platform, but due to a process known as dollarization typical in bankruptcies, their claims have been converted to a dollar value determined by the price of those assets at the time of the bankruptcy declaration. When FTX collapsed, the crypto market was struggling, but it has since surged to unprecedented highs, indicating that some customer claims would significantly increase in value if the refunds were adjusted to reflect the current worth of crypto assets. Consequently, while dollarization is appropriate according to the bankruptcy law, “claiming [the return] exceeds 100 percent is simply incorrect,” Yadav states. “For the typical individual, it is quite distant from that.”
Among the groups likely to benefit the most from the plan’s approval are investment firms that invested millions of dollars acquiring claims from individuals with assets tied up in FTX, who either chose to accept a loss and reinvest the cash or needed the funds immediately. Those claims were usually acquired at a discounted price before a significant recovery was deemed probable—some for under 10 cents on the dollar—but are now valued several times more.
“Regarding internal rate of return—wow.” “It’s the greatest trade I’ve observed in my lifetime,” states Thomas Braziel, cofounder of 507 Capital, an investment firm focused on acquiring bankruptcy claims and which invested significantly in FTX, along with 117 Partners, which facilitates claim transactions. In July, a Delaware court instructed Braziel to return $1.9 million that he misused while serving as receiver for the failed financial services firm Fund.com to fund investments and luxury expenses.
In August, several past FTX clients submitted official objections to the proposal to the bankruptcy court. The customers raised objections regarding the legal immunity granted under the plan to those managing the bankruptcy, the possibility that cash payments might lead to expensive taxable occurrences for creditors, and other aspects of the plan. “I felt justified when Bankman-Fried was incarcerated—and I thought that would carry over to bankruptcy court,” states Sunil Kavuri, an FTX customer who agreed to support an objection. “I’ve been taken aback in a negative way.”
During the five-hour hearing, Brian Glueckstein, a lawyer from the firm Sullivan & Cromwell and representing FTX, addressed each objection one by one. “According to Glueckstein, there is no indication in the record that these debtors are not delivering maximum value—none at all.”
By granting his approval, the judge dismissed the outstanding objections and paved the way for FTX officials to start implementing the plan.
It is still possible to file an appeal against the plan after it has been confirmed under certain limited conditions. Logistical issues might also postpone repayments to creditors, which are anticipated to start by late this year at the soonest. However, only a limited number of viable alternatives are left for parties looking to alter the trajectory of the FTX bankruptcy. Yadav states that the confirmation hearing “represents the final opportunity in a practical manner for modifications to occur.” “This is the pivotal day.”
