Last month, lawyers overseeing FTX’s bankruptcy filed a reorganization plan that would not only repay nearly all of the failed cryptocurrency exchange’s customers in full but give them 18% interest for the period in which their investments were tied up. If the majority of creditors and the bankruptcy judge agree to the plan, checks would come within two months.
By typical bankruptcy standards that’s a great deal. Rarely do all creditors get paid in cash, and some can wait years to recoup only a fraction of their claims. But not all creditors are jumping for joy.
Some are dissatisfied because they won’t be getting their cryptocurrency back from the exchange. Instead, former customers will be repaid in dollars based on the value of their holdings at the time of FTX’s bankruptcy filing in November 2022, when cryptocurrencies were depressed by the industry tailspin that brought the company to its knees. Since then, the value of bitcoin has nearly quadrupled, with many other tokens also reaching new highs—a lost opportunity for those investors whose crypto was trapped on the exchange. Many lawyers–including those working for the current version of FTX—contend that is how bankruptcy works, but a chorus of creditors, commentators and academics claim they have been wrongfully deprived of their property, and that’s not the only thing they are upset about.
They say FTX—now led by bankruptcy specialist John J. Ray III and represented by a host of legal and financial firms —is failing to maximize the company’s value, neglecting the best interests of former customers and other creditors. Recurring complaints have been made against Sullivan & Cromwell, the main law firm representing the current FTX and also its counsel for various pre-bankruptcy issues.
Arush Sehgal, a representative of the FTX Customer Ad-Hoc Committee (CAHC), which includes more than 1,700 former customers of the exchange, and a former member of the Official Committee of Unsecured Creditors, summarized the frustration: FTX is “peddling this narrative that everybody's been made whole plus interest, but the fact is that there are assets in the estate that they are valuing at zero. Also by our estimate, they destroyed over $10 billion and up to $16 billion worth of value, and as long as John Ray retains unilateral authority with no creditor-appointed board, there's nothing in this plan that can be trusted.”
Some of the major issues are summarized below, along with detailed responses from FTX:
a) Take Ledger X, a crypto derivatives platform that FTX founder Sam Bankman-Fried bought for nearly $300 million in October 2021. The entity was sold to an affiliate of Miami International Holdings, which operates several options exchanges in the U.S., for $48.8 million in May 2023, far below its net equity as of December 31, 2022, which amounted to $98.8 million, according to a financial statement audited by Grant Thornton in March 2023.
In a class-action lawsuit against Sullivan & Cromwell, filed in February 2024, a group of FTX investors also claimed that the lawyers “decided to intentionally keep FTX US Derivatives (formerly LedgerX) out of the FTX bankruptcy proceedings, with the knowledge that it was in possession of approximately a quarter billion dollars of diverted FTX customer funds from which it could (and has) extracted significant revenue.” The suit alleges that Sullivan & Cromwell was complicit in the fraud that eventually brought down FTX by dint of its relationship before the bankruptcy filing. “FTX could not have achieved fraud of such tremendous scale alone,” the complaint reads. “S&C’s immense resources, connections to regulators, expertise, and assistance were vital to perpetuating the scheme.”
The independent examiner in the case, former federal prosecutor Robert J. Cleary, largely defended the FTX companies involved in the bankruptcy–known as debtors–in a report released on May 28 but recommended a further inquiry into two pre-bankruptcy transactions involving Sullivan & Cromwell: Bankman-Fried’s purchase of shares in online brokerage Robinhood and the acquisition of LedgerX.
b) Millions of SOL cryptocurrency (tokens native to Solana blockchain) owned by FTX, whose dollar value increased more than five-fold since the exchange filed for bankruptcy, were sold at steep discounts—up to 60% of their market prices—to a host of large crypto companies and hedge funds including billionaire Mike Novogratz’s Galaxy Digital, which helped FTX orchestrate the sale. Most of the tokens were locked on multi-year vesting schedules, but Kavuri and others claim those sales were the bankruptcy action most costly to creditors. Firms like Galaxy Digital could reap billions in profits from their opportunistic purchases.
In April 2023, FTX sold its stake in Mysten Labs, a developer of the Sui blockchain, for $96 million, $5 million less than the initial investment. It also sold warrants for 890 million associated SUI tokens that would be exercisable once the platform launched. The following month, the tokens hit the market, quickly surging above $1, which would have made FTX’s initial investment worth nearly $1 billion.
“A simple review of the secondary market for SUI would have shown them that it was not profit-maximizing to sell the tokens at that discounted price and before a public launch. Moreover, it raises questions about whether the estate simply was unsophisticated or negligent in its approach,” writes Rob Hadick, general partner at crypto-focused venture firm Dragonfly, in a statement shared with Forbes.
Creditors claim that FTX could have extracted additional hundreds of millions of dollars in value had it decided to reboot its trading platform, which before the collapse was one of the largest in the world.
“Within our group of 1,600-plus creditors with almost a billion dollars in claim value—that's 10% of the estate’s liabilities—we've conducted a survey and have received commitments amounting to $200-$300 million of claims who are willing to convert their claims to equity in new FTX (FTX 2.0). If debtors allowed FTX 2.0 and a debt-to-equity swap, that would increase everybody's recoveries by 3%. The simple fact of John Ray counting FTX to zero is detrimental to all creditors,” says Sehgal, the Customer Ad-Hoc Committee member.
But Dragonfly’s Hadick is skeptical, citing FTX’s relationship with the hedge fund Alameda Research, which was owned by Bankman-Fried: "The exchange technology itself doesn’t have much value at all. It worked well, in large part, because of the agreement they had with Alameda Research, which acted as the internal market maker and operated at a loss to provide a better experience for FTX traders. This arrangement would clearly not exist in a restarted version of the exchange,” he says. “There is value to the client base if you can retain them when the exchange restarts, but any reasonable estimate would expect large attrition and the valuation depends heavily on an estimate of what that retention would be.”
Still, a number of firms including Bullish, a crypto exchange run by former New York Stock Exchange President Tom Farley; Figure Technologies, a fintech startup; and Proof Group, a private investment firm, expressed interest in buying the exchange last year.
The estate could have leveled claims against other crypto entities. The most stark example creditors point to is Binance. Bankman-Fried spent $2.1 billion worth of FTT (FTX’s token) and stablecoins buying back equity from its early investor, which played a big role in FTX’s collapse. Binance’s founder and former CEO Changpeng Zhao accelerated panic among crypto investors in early November 2022 with a series of social media posts suggesting liquidity issues at FTX.
a) According to recent filings, FTX had reached a settlement with the U.S. government related to tax liabilities claimed by the Internal Revenue Service, amounting to $885 million. Of that, $200 million would be treated as a priority claim and be payable within 60 days of the settlement's effective date. The remaining $685 million would be paid "to the extent of funds available." This is a significant reduction from the IRS’s original demand of more than $44 billion, later amended to $24 billion, but the Customer Ad-Hoc Committee is questioning the validity of the U.S. government’s claim and thinks it’s unfair that customers of the international exchange, which was based in the Bahamas, would have to essentially pay U.S. taxes when they had not traded on the U.S. platform.
b) The debtors proposed to pay creditors with cash by check or wire. “They're actually making it extremely difficult for FTX customers to recover the money,” says Sunil Kavuri, another FTX creditor, citing the difficulty of navigating the claims portal FTX set up for creditors and lack of flexibility for customers from jurisdictions where access to banking is limited or with no dependable mail. An additional provision in FTX’s plan stipulates that claims may be disallowed if any subsequent know-your-customer or withholding tax requirements are not satisfied.
c) “The current draft plan includes a governance structure that gives the debtors broad, sweeping, and unilateral authority, in addition to keeping John Ray and the existing board in place without any creditor oversight of the Wind Down Trust (both of which are atypical of post-confirmed bankruptcy estates),” writes the bankruptcy specialist and FTX creditor advocate known as Mr. Purple on X, who asked not to be further identified, in a message to Forbes.
Beyond these issues, the Customer Ad-Hoc group filed an objection to an FTX disclosure statement on June 5 that calls the plan “unconfirmable by law,” citing inconsistencies, omission of important disclosures and inadequately described releases that discharge the company from liability for certain types of debts. In a separate objection, the litigation administrator overseeing the winding down of crypto lender Celsius, which filed claims against FTX, has also cited incomplete disclosures.
Adds Mr. Purple, “In current form, the draft plan only gives a semblance of clarity to creditors with less than $50,000 in petition date claims—who only represent $1.2 billion of the estimated $16.5 billion in distributable recoveries, according to FTX,—but the timing, treatment, and potential recoverability of claims above $50,000 is devoid of appropriate details needed to make a reasoned decision on whether to vote yes or no on the draft plan.” According to him, those include clarity on the $400 million hack that occurred shortly after the exchange filed for bankruptcy, when the funds controlled by the U.S. Department of Justice will be distributed to the estate for creditors, and details on potential avoidance actions, such as clawing back the payment to Binance.
The bankruptcy plan is expected to be put to a vote later this summer. Kavuri and Sehgal, who are leading the Customer Ad-Hoc group, are urging creditors to vote against it. Vladimir Jelisavcic, founder and manager at Cherokee Acquisition, an investment banking firm focused on bankruptcy claims, expects most will vote for the plan and take the money.
“Sullivan & Cromwell and John Ray have done some really valuable and important things like forensic accounting that the company never had and needed,” says Jonathan Lipson, a law professor at Temple University who has studied the FTX bankruptcy, basing his analysis on bankruptcy documents as well as interviews with Bankman-Fried and his parents, both of whom are lawyers. “It’s also true that bankruptcy is all about spreading the pain. However, the right metric is if you had to maximize the value of this estate, what would you get? And there are, I think, legitimate questions about that.”