(Bloomberg) — Cryptocurrency exchange FTX collected billions of dollars more than it needed to cover what customers lost in its November 2022 collapse, seeking full refunds and interest, a rare outcome of U.S. bankruptcy proceedings.
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Low-ranking lenders typically receive pennies on the dollar, but FTX has benefited from a strong rally in cryptocurrencies, including Solana, which is heavily backed by convicted fraudster and FTX founder Sam Bankman-Fried. The company has sold dozens of other assets, including various venture-capital projects such as a stake in artificial intelligence company Anthropic.
« In any bankruptcy, this is an incredible decision, » said FTX CEO John Ray, who took over the company when it collapsed.
Prices for FTX claims rose to 101 cents on the dollar Wednesday morning, according to Cherokee Acquisition.
According to a company statement, once all of its assets are sold, FTX will have to distribute $16.3 billion. It owes about $11 billion to more than 2 million customers and other non-governmental creditors.
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The latest figures underscore FTX's surprising result, drawing comparisons to the fraud-fueled collapse of Enron Corp. and the unraveling of Bernie Madoff's Ponzi scheme. Earlier this year, the company had about $6.4 billion in cash.
There have only been a handful of major corporate US bankruptcies in recent times that have seen creditors get their money back. In 2021, car rental company Hertz emerged from bankruptcy with cash left over to repay shareholders following a strong run in used car prices. In 2013, American Airlines Group Inc. Its parent company also emerged from bankruptcy, with a plan for distributions to shareholders and full repayment of unsecured creditors.
According to court documents filed Tuesday evening in federal court in Wilmington, Delaware, where the FTX case is being handled, all debts are owed in full, plus interest, leaving shareholders with nothing. In bankruptcy, company owners cannot collect anything until all debts are paid in full. In this case, US regulators and the Internal Revenue Service have claims large enough to wipe out shareholders.
FTX's major shareholders include Sequoia Capital, Thoma Bravo, Singapore's Temasek Holdings Pte and the Ontario Teachers' Pension Plan, according to a court filing last year. Individuals including Tom Brady and Gisele Bundchen also own common stock.
Big recoveries
The company, which is now run by restructuring advisers, has proposed setting up a fund to pay some of its creditors, including creditors to FTX Crypto. They are tracking the company's assets and unraveling the web of accounts scattered around the world.
Those recoveries have been given a major shock by the crypto rebound that has roughly quadrupled bitcoin's price since late 2022.
Depending on the type of claim they have in the case, some creditors can recover up to 142% of what they owe. However, most customers will likely receive 118% of what they had in the FTX platform on the day the company entered Chapter 11 bankruptcy. As FTX moves through the final stages of the bankruptcy case, the payment will take several months.
However, the prospect of such big hits is driving up the price of creditor claims, some of which are now trading at more than 100% of their face value, according to two people familiar with the transactions. Most of those claims traded for three cents on the dollar immediately after the bankruptcy.
Crypto's Great Revival
The rising value of claims also reflects a significant recovery in crypto markets. Bitcoin, for example, has risen from around $16,000 to over $62,000 since the FTX bankruptcy.
This has fueled discontent among some creditors, who argue that even though they will eventually recover more than the dollar value of their claims, they are being shortchanged.
« Actually I only get 25% of my bitcoin back, and it's been for years, » said Arush Sehgal, a member of the FTX Unsecured Lenders Group from the UK, who was stuck with more than $4 million in the exchange. overturned.
Segal and other crypto holders missed out on the price increase because their claims under US bankruptcy rules are timed in 2022, the date FTX files its bankruptcy case. The value of crypto assets has risen dramatically since then.
« What we can do as a bankruptcy group is monetize the value and distribute it, » Ray said in an interview. “We cannot create coins and tokens that are not there. And this is the next best alternative.
In a document filed Tuesday, restructuring advisers released new details of their proposal to distribute money to creditors and close the Chapter 11 case. Known as a disclosure statement, this document is designed to help creditors vote on a proposed payment plan.
Such votes are unprecedented in bankruptcy. No other case has involved so many claimants, Ray said. More than 2 million consumers and other lenders are eligible to vote.
« I've never seen a case with 2 million customers, » Ray said. « I've never seen anything close to it. »
In the Enron bankruptcy that Ray oversaw, creditor claims were huge — about $50 billion — but the number of people seeking repayment was only in the tens of thousands, Ray said.
U.S. Bankruptcy Judge John Dorsey will consider that vote when he decides whether to approve the plan later this summer. Dorsey plans to hold a hearing in late June about the disclosure statement and voting practices.
FTX filed for bankruptcy in November 2022 after Bankman-Fried closed the company's crypto-trading platform and handed over control to bankruptcy professionals. Bankman-Fried was later charged with fraud.
The case is FTX Trading Ltd., 22-11068, U.S. Bankruptcy Court for the District of Delaware.
–With assistance from Luca de Paoli and Siddhartha Shukla.
(The fourth column includes FTX's claims of price increases, and the 20th column includes comments from CEO John Ray.)
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