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A former United States Securities and Exchange Commission (SEC) official, John Reed Stark, suggested that the FTX restructuring plan might enable legal teams to profit from bankruptcy.
Overview
On February 3, 2024, in a social media post, Stark suggested that all FTX customers receive a sarcastic “Thank you” note from the bankrupt exchange’s legal team, given its substantial profits during bankruptcy proceedings. Stark sarcastically cited the potential for new beach houses in 2024.
FTX Goes Chapter 7 — and FTX Bankruptcy Lawyers Are Probably Heading to the Beach in 2024
The FTX bankruptcy team’s lawyers should send thank you notes to all FTX customers. Why? Because thanks to the FTX customers, each member of the FTX legal bankruptcy team can now probably… pic.twitter.com/P89w5tS54y
— John Reed Stark (@JohnReedStark) February 3, 2024
On January 31 2024, during a hearing in the US Bankruptcy Court for the District of Delaware, FTX lawyer Andy Dietderich of Sullivan & Cromwell mentioned that despite extensive efforts, there are no plans to relaunch FTX as FTX 2.0 with the current Chapter 11 bankruptcy framework. Stark predicted that Chapter 11 FTX reorganisation wouldn’t work and linked restructuring FTX to reorganising a blend of notorious entities of “Murder Incorporated, The Cali Drug Cartel and Madoff Investment Advisory Services.”
Background
From November 2022 to June 2023, lawyers and the restructuring team managing the bankrupt crypto exchange FTX billed over $200 million. In a report filed on June 20 2023, the court-appointed fee examiner, Katherine Stadler, deemed the fees reasonable and found the fees “not wholly unreasonable at the moment.” According to a recent compensation filing, in the quarter ending October 31 2023, FTX spent around $53,000 per hour on legal and advisory fees, with the bankruptcy legal team billing at least $118.1 million from August 1 to October 31 2023, averaging $1, 3 million per day of $53,300 per hour over the 92 days.
On February 1 2024, FTX filed a request in a Delaware court to sell $175 million of its claim against bankrupt digital financial services from Genesis Global Capital, owned by the associated hedge fund Alameda Research. Currently, claims against Genesis are selling for 65% of their face value, significantly higher than the 38% that the Alameda Research claims are fetching.
The proposed sale order added, “Entry of this Order is in the best interests of the Debtors and their estates, creditors, investment holders, and all other parties-in-interest.” On February 3 2024, FTX was seeking approval from the court to sell its entire stake in artificial intelligence (AI) firm Anthropic.
FTX submitted the motion to sell Anthropic Series B preferred stock, including rights of interest therein owned by Alameda Research. In April 2022, former FTX CEO Sam Bankman-fried invested about $530 in Anthropic before his empire collapsed in November. In October 2023, evidence presented during Bankman-Fried’s legal trial revealed the capital invested in the AI start-up was originally from customer deposits on FTX.
According to the report, FTX is seeking to shorten the review timeline for its sale motion as it is targeting a resolution in the bankruptcy court’s forthcoming meeting on February 22 2024.
The proposed filing noted, “The flexibility to adjust the sale timeline will help facilitate such cooperation, including allowing the Debtors to capture excess demand for Anthropic’s equity securities channelled from any of Anthropic’s financing rounds…. Further, given the significant number and value of Anthropic Shares held by the Debtors, the flexibility to sell portions of Anthropic Shares at different times will help the Debtors monetise their interest.”
The collapse of FTX in November 2022 led to irregularities being uncovered in its accounts, which left Genesis $175 million tied up in the FTX account, which it said did not impact its market-making activities. If FTX is correct, we might see a short review timeline for its sale motion as the bankruptcy’s forthcoming meeting is on February 22 2024.