When the cryptocurrency exchange FTX declared bankruptcy about 15 months ago, it seemed few customers would recover much money or crypto from the platform. As John Ray III, who took over as chief executive during the bankruptcy, put it, “At the end of the day, we’re not going to be able to recover all the losses here.” He was countering Sam Bankman-Fried’s repeated claims that he could get every customer their money back.
Well, it turns out, FTX lawyers told a bankruptcy judge this week that they expected to pay creditors in full, though they said it was not a guarantee and had not yet revealed their strategy.
The surprise turn of events is raising serious questions about what happens next. Among them: What does this mean for the lawsuits FTX has filed in an attempt to claw back billions in assets that the company says it’s owed?
Will the possibility that customers could be made whole be raised at Bankman-Fried’s sentencing? Will potential relief for customers help his appeal?
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Some of the clawback cases involve allegations of fraud, but not all do. Before fraud claims are argued, there is typically a legal fight over whether a company was insolvent at the time of the investment or that the investment led to insolvency. If every FTX creditor stands to get 100 cents on the dollar, the clawback cases that don’t involve fraud wouldn’t serve much of a financial purpose and may be more difficult to argue, some lawyers say. “In theory, clawbacks may go away there,” said Eric Monzo, a partner at Morris James who focuses on bankruptcy claims.
we can now cautiously predict some measure of success. Based on our results to date and current projections we anticipate filing a disclosure statement in February describing how customers and general unsecured creditors, customers and general unsecured creditors with allowed claims, will eventually be paid in full. I would like the Court and stakeholders to understand this not as a guarantee, but as an objective. There is still a great amount of work and risk between us and that result, but we believe the objective is within reach and we have a strategy to achieve it.
I'm rooting for the depositors here. Their deal with FTX was that they owned the assets in their accounts, so the increase in value of that crypto morally belongs to them. I don't even think "would have held their assets in crypto since the crash" is a prerequisite. SBF forced them to involuntarily bear the risk that their assets (once recovered and distributed) would be less than their November 2022 value, so the upside to that risk (post-November 2022 appreciation) belongs to them as well.
Simplifying, my general moral priority list for recoveries is vaguely like: depositors (up to their November 2022 values), non-investor unsecured creditors (e.g., trade creditors), depositors (up to FMV of their accounts at time of distribution), investor unsecured creditors (e.g., hedge funds), [1]innocent transferees (e.g., EA and political organizations), equity holders guilty of at most ordinary negligence (if any), forfeiture to the government,[2] recipients of sketchy transfers, including those who were paid way over FMV (e.g., those paid sky-high valuations for vaporware biotech firms), my fireplace, SBF and other insiders.
Lower because they had an opportunity and access to do due diligence, and assumed the risk. I am more sympathetic to vendors and other non-investment unsecured creditors than this group.
Standing in the place of SBF, who morally deserves to forfeit any equity interest he might have. Only after all innocent parties have been fully compensated.