FTX has billions more than needed to pay bankruptcy victims

(Bloomberg) — Cryptocurrency exchange FTX has accumulated billions of dollars more than needed to cover what customers lost in the November 2022 meltdown, setting them up to receive full recoveries plus interest, a rare outcome in lawsuits bankruptcy in the USA.

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Lower-rated lenders typically receive just pennies on the dollar for their holdings, but FTX has benefited from a sharp rally in cryptocurrencies, including Solana, a token heavily backed by convicted fraudster and FTX founder Sam Bankman-Fried. The company also sold dozens of other assets, including several venture capital projects such as a stake in artificial intelligence company Anthropic.

“In any bankruptcy, this is an unbelievable outcome,” said FTX CEO John Ray, who took over the company when it went bankrupt.

FTX claims prices jumped Wednesday morning to 101 cents on the dollar from 95 cents last week, according to Cherokee Acquisition.

Once it finishes selling all of its assets, FTX will have up to $16.3 billion in cash to distribute, according to a company statement. It owes more than 2 million customers and other non-governmental creditors around $11 billion.

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The latest numbers underscore the surprising result of FTX, whose collapse has drawn comparisons to Enron Corp.’s fraud-fueled fall. and with the dismantling of Bernie Madoff’s Ponzi scheme. At the beginning of this year, the company had about $6.4 billion in cash.

There have only been a handful of major corporate bankruptcies in the US that have caused creditors to recoup all of their money in recent times. In 2021, car rental company Hertz emerged from bankruptcy with money left over to reimburse shareholders, following a sharp rise in used car prices. In 2013, the parent company of American Airlines Group Inc. also emerged from bankruptcy with a plan to distribute to shareholders and fully reimburse unsecured creditors.

Although all debts will be paid in full, plus interest, nothing will be left for shareholders, according to court documents filed Tuesday night in federal court in Wilmington, Delaware, where the FTX case is being handled. In bankruptcy, business owners cannot collect anything until all debts are paid in full. In this case, US regulators and the Internal Revenue Service have claims that are large enough to likely wipe out shareholders.

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FTX’s major shareholders include Sequoia Capital, Thoma Bravo, Singapore’s Temasek Holdings Pte and Ontario Teachers Pension Plan, according to a court document from last year. Individuals such as Tom Brady and Gisele Bündchen also own common stock.

Big recoveries

The company, now run by restructuring consultants, also proposed creating a fund to pay some creditors, including those who lent crypto to FTX, with money that would otherwise have gone to government regulators. They are also tracking the company’s assets and uncovering a network of accounts spread across the world.

These recoveries have taken a major hit due to the crypto rally, which has seen the price of Bitcoin nearly quadruple since late 2021.

Depending on the type of credit they have in the case, some creditors may be able to recover up to 142% of what is owed to them. The vast majority of customers, however, will likely get 118% of what they had on the FTX platform the day the company filed for Chapter 11 bankruptcy. Payments will likely occur over several months as FTX moves into the final stages of bankruptcy process.

Still, the prospect of such big gains is driving up the price of creditors’ claims, some of which are now trading at more than 100% of their face value, according to two people familiar with the transactions. Many of these claims traded for just three cents on the dollar shortly after the bankruptcy.

The Great Crypto Revival

The rising value of claims also reflects a notable recovery in crypto markets. Bitcoin, for example, rose to over $62,000 from around $16,000 shortly after FTX’s bankruptcy.

That has fueled discontent among some creditors, who argue they are being scammed even though they end up recovering more than the dollar value of their claims.

“In reality, I’m only getting 25% of my Bitcoin back, and that will take many years,” said Arush Sehgal of the United Kingdom, a member of FTX’s unsecured creditors committee who had more than $4 million tied up in the exchange. when it was knocked down.

Sehgal and other cryptocurrency holders missed out on a price surge because, under US bankruptcy rules, their claims are fixed at the date FTX opened its insolvency proceedings in 2022. Since then, the value of crypto assets has risen dramatically.

“All we can do as a bankruptcy team is monetize the value and distribute it,” Ray said in an interview. “We cannot create coins and tokens that do not exist. And this is the next best alternative.”

In a document filed Tuesday, the restructuring consultants laid out new details of their proposal to distribute the money to creditors and close the Chapter 11 case. Known as a disclosure statement, the document was designed to help creditors vote on the plan. proposed payment.

Such a vote is unprecedented in bankruptcy. No other case has involved so many plaintiffs, Ray said. There are more than 2 million customers and other creditors eligible to vote.

“I’ve never seen a case with 2 million customers,” Ray said. “I’ve just never seen anything like this.”

In the Enron bankruptcy, which Ray also oversaw, claims from creditors were much higher — about $50 billion — but the number of people demanding repayment was only in the tens of thousands, Ray said.

U.S. Bankruptcy Judge John Dorsey will take that vote into consideration when he decides whether to approve the plan later this summer. Dorsey is expected to hold a hearing in late June on the disclosure statement and voting procedures.

FTX filed for bankruptcy in November 2022 after Bankman-Fried closed the company’s crypto trading platform and handed control over to insolvency specialists. Bankman-Fried was later convicted of fraud.

The case is FTX Trading Ltd., 22-11068, U.S. Bankruptcy Court for the District of Delaware.

–With assistance from Lucca de Paoli and Sidhartha Shukla.

(Adds rising FTX claims prices in fourth paragraph and comments from CEO John Ray in 20th paragraph.)

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