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Crypto exchange FTX is the rare financial explosion that will fully reimburse victims
FTX said in court documents Tuesday that it will have $14.5 billion to $16.3 billion in cash after liquidating its cryptocurrency holdings and other investments, more than enough to cover the roughly $11 billion owed to customers and non-government creditors.
This customer money has been trapped since November 2022, when Sam Bankman-Fried handed over control of FTX to a new management team who filed it for bankruptcy, launching one of the largest efforts ever to recover the funds diverted.
The management team found enough funds for FTX’s creditors through a rise in cryptocurrency prices and the sale of stakes that the company acquired – with users’ money – in speculative crypto projects and other technology companies. The bankruptcy proceedings gave FTX the time it needed to find buyers and fill the nearly $9 billion hole in its balance sheet by the time it was placed under Chapter 11.
If approved by the court, the repayment plan would make FTX the rare case of financial fraud that fully compensates its victims relatively quickly. For comparison, account holders at Bernard Madoff’s office waited more than a decade and a half to recover money stolen after his 2008 arrest for operating a Ponzi scheme.
In addition to FTX’s millions of individual customers, some of Wall Street’s largest investment firms are among the winners. They are betting that when FTX files for bankruptcy, many of its customers will want or need to cash out their claims on the exchange rather than wait years to see how much they could recover.
The asset managers, including Oaktree Capital Management, Attestor, Canyon Capital, Farallon Capital Management and Silver Point Capital, hold more than $3 billion in client receivables that they purchased, according to court filings. The companies did not respond to requests for comment.
Shortly after FTX filed for bankruptcy, customer receivables could be purchased for as little as 3 cents on the dollar, said Thomas Braziel, an investor in distressed debt and crypto assets whose receivables the company purchased. of FTX customers. Customers who sold their receivables for pennies on the dollar may experience seller’s remorse. FTX said Tuesday that 98% of its users are now expected to recover 118% of their account balances.
“It’s historic,” Braziel said. “This has to be the highest yield ever” for creditors in bankruptcy.
FTX previously said it would be able to pay its millions of users more or less in full for the amounts they had in their crypto trading accounts when the company filed for Chapter 11. On Tuesday, it said it would not only cover those account balances in full, but would also pay 9% interest to most users, dating back to the bankruptcy filing.
U.S. prosecutors have called FTX a massive fraud and charged Bankman-Fried and other former executives with fraud. Bankman-Fried was sentenced in March to 25 years in prison for stealing billions of dollars from clients. The bankruptcy plan filed Tuesday marks the first time FTX has confirmed that it expects users to get their funds back in full.
The recovery in user fortunes was driven by the rebound in cryptocurrency prices. Much of FTX’s assets are tied to the volatile digital asset market, many of which have risen in value since the bankruptcy filing, particularly Solana, a token closely tied to Bankman-Fried that has increased sevenfold since the filing. balance sheet.
However, some customers complained that they were being refunded in cash, not cryptocurrencies, based on the values of their frozen FTX accounts. This means they missed out on the appreciation of cryptocurrency assets as prices skyrocketed after the 2022 collapse.
Saul Ewing bankruptcy attorney Candice Kline said getting paid in full in bankruptcy differs from getting paid in full in an economic sense.
“The real market value, the time value of money beyond a certain interest and the opportunity cost will continue to prevent creditors from digesting this good news,” she said.
In addition to the recent price rally of bitcoin, ether and solana, customers and investors can thank the growing value of FTX’s venture investments and its success in finding and recovering assets that have transferred out of the company shortly before its bankruptcy. filing, said Erin Broderick, an attorney for a group of FTX debt holders. For example, FTX sold most of its stake in Anthropic, an artificial intelligence startup backed by Google and Amazon.com, for $884 million this year, 267% more than the purchase price initial.
Brook Gotberg, a law professor at Brigham Young University, said valuing claims in bankruptcy is not always straightforward and depends on the type of relationship a company has with its customers.
“If the claim is only for the dollar value of the cryptocurrency at the time of the bankruptcy filing, then FTX’s creditors will be paid in full,” she said. “If the claim is for the cryptocurrency itself, then FTX creditors are not getting their full value.”
Holders of FTX’s proprietary FTT token – another Bankman-Fried creation – will not receive anything under FTX’s plan. The exchange’s stock owners, which include Sequoia Capital, Ontario Teachers’ Pension Plan and SoftBank Group, as well as FTX’s various celebrity backers, including NFL Quarterback Tom Brady and model Gisele Bündchen won’t either.
Under Bankman-Fried’s leadership, the firm spent clients’ money on “questionable or illiquid investments, vanity projects, celebrity endorsements, political donations and lavish personal spending,” the company said Tuesday. FTX court documents. real estate in FTX’s former home in the Bahamas as well as two private jets. The company explored, then abandoned, plans to restart its crypto exchange.
Prosecutors said Bankman-Fried’s theft of client funds caused $10 billion in losses, drawing comparisons to Madoff. After FTX’s bankruptcy, Bankman-Fried argued that clients could be compensated. Before his sentencing, Bankman-Fried claimed that FTX was “solvent at the time of the bankruptcy petition” and that “the harm to clients, lenders and investors is nil” because of the likely outcome of FTX’s Chapter 11 case.
John J. Ray III, the turnaround specialist who took control of FTX from Bankman-Fried, said in response that the company’s asset recovery efforts since 2022 “do not mean things haven’t been stolen.”
“That means we got some of it back,” Ray said in a March filing as part of Bankman-Fried’s criminal case. “And there’s a lot of stuff we didn’t get back.” »
U.S. District Judge Lewis Kaplan said whether customers got their money back didn’t matter in his sentencing decision against Bankman-Fried, who is appealing his conviction and sentencing. penalty.
Write to Becky Yerak at becky.yerak@wsj.com, Soma Biswas at soma.biswas@wsj.com and Andrew Scurria at Andrew.Scurria@wsj.com