FTX Bankruptcy Case Stuck as Lawyers Face Crypto Chaos

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The multibillion-dollar FTX bankruptcy case has stalled, reflecting the darkness and disarray inside the crypto platform before it sought protection in US courts from creditors last week .

FTX had not filed so-called first-day motions to formally commence proceedings on Monday, court records show. Companies are usually quick to provide such documents to describe the circumstances that led to their bankruptcy and ask the court to approve emergency financing to pay employees and vendors during the proceedings.

The crypto exchange and dozens of its affiliates filed for bankruptcy protection in a Delaware court on Friday after FTX said it could not meet customer withdrawal requests. The day before, FTX’s main international exchange held less than $1 billion in liquid assets against $9 billion in liabilities, the FT reported.

Delaware Bankruptcy Court has appointed Judge John Dorsey to oversee the case, but a customary initial hearing to consider such motions has yet to be scheduled.

“It’s going much slower and more opaque than usual,” said a restructuring adviser who fielded calls from people asking for help. The lack of information and legal documents has been an obstacle to giving advice to creditors, said this person.

Sam Bankman-Fried, founder and CEO of FTX © Saul Loeb/AFP/Getty Images

FTX has announced that John Ray III will serve as chief executive following the resignation of founder Sam Bankman-Fried. Ray is a seasoned restructuring executive, having held supervisory positions in the bankruptcies of Residential Capital, Overseas Shipholding Group, Nortel Networks and Enron.

The company also named Stephen Neal, a Silicon Valley lawyer, chairman of the board of FTX. But Neal later said he decided against taking the job.

According to a person in contact with the company, FTX is trying to quickly find new administrators experienced in bankruptcy cases who will become decision-makers for FTX stakeholders.

Previously, Bankman-Fried seemed to have had almost free rein at the company despite a nominal three-person board, said a person approached to become an FTX director, describing governance at the company as the “Far West”.

This person also described the company’s current liquidity as “poor”, leaving it uncertain how it will pay for legal and administrative costs in the event of bankruptcy.

Sullivan & Cromwell, FTX’s longtime legal counsel, advised the company on the bankruptcy process and worked with FTX’s general counsel, Ryne Miller, himself a former attorney for Sullivan. Miller did not immediately respond to a request for comment.

Sullivan’s lead partner in the case, Andrew Dietderich, is a restructuring lawyer who recently helped FTX win a bankruptcy auction for the assets of Voyager Digital, another crypto exchange that went bankrupt this year after the collapse of terra and luna digital tokens.

Jay Clayton, former chairman of the U.S. Securities and Exchange Commission and now an adviser to Sullivan, also worked with FTX, according to a person familiar with the matter. Bankman-Fried is personally represented by the law firm Paul, Weiss.

Jay Clayton, former SEC Chairman
Former SEC Chairman Jay Clayton worked with FTX in its bankruptcy filing © Andrew Harrer/Bloomberg

Restructuring advisers told the FT that the court had the option of appointing an independent “Chapter 11 administrator” who would replace Ray to manage FTX. These trustees are usually appointed when judges feel that control of the business should be taken away from the business itself.

The trustee would then hire its own advisers to handle the case, displacing lawyers and advisers who would otherwise be in line for tens of millions of dollars in fees. FTX’s search for experienced administrators is an attempt to show the court that the company is able to handle the process itself to maximize recoveries for creditors, a person briefed on the reasons for the move said.

Once the case begins, the Office of the US Trustee, the bankruptcy agency of the Department of Justice, will appoint a committee of unsecured creditors which will likely be made up largely of FTX account holders. FTX’s bankruptcy filing last week said it had about 100,000 creditors and $10 billion to $50 billion in assets and liabilities.

“The whole thing looks super messy. First, there will undoubtedly be many claims of wrongdoing and a lengthy process to determine what legal actions arise from those wrongdoings – think MF Global, Enron and WorldCom,” said Anthony Casey, professor of law at ‘University of Chicago and former corporate lawyer, referring to previous successful bankruptcies. “Secondly, I imagine there’s going to be a lot of time and energy spent locating assets and value and undoing transfers.”

Another observer speculated that creditors could recover money through lawsuits against Bankman-Fried or others.

“The real recovery here will come from the impending storm of litigation. There are billions in potential preference shares and SBF and his team are likely to be sued,” said Adam Levitin, a crypto expert and Georgetown law professor who works at Gordian Crypto Advisors, who could seek a role in the case.

Preference shares refer to payments made just before a bankruptcy filing that can be recovered by creditors to satisfy their claims.

Yet the information vacuum has not prevented some trading activity from accelerating. At Cherokee Acquisition, a marketplace for bankruptcy claims, bidders are already offering between 10 and 14 cents on the dollar to FTX account holders.

“FTX seemed completely unprepared for bankruptcy and the state of internal records seems chaotic,” said Vladimir Jelisavcic, founder of Cherokee Acquisition. “I imagine large teams of lawyers and financial advisors struggle to put together the data to be ready for a hearing on day one.”

Additional reporting by James Fontanella-Khan in New York

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