Even FTX stockholders, typically the last to receive payouts in bankruptcy, can get back some of their original investment — a maximum of $230 million between them — paid to use funds recovered by the Justice Department through prosecutions of FTX insiders .
But despite the unusually high expected recovery, some creditors believe they are still getting a harsh deal by virtue of the way their claims are valued.
Many customers held crypto assets like bitcoin on the FTX platform, but through a process called dollarization common in bankruptcies, their claims were instead given a dollar value based on the price of those assets on the date of the bankruptcy filing. When FTX fell, the crypto market was in decline, but it has since rallied to new all-time highs, meaning that some customer claims would be much more valuable if the recovery was compared to the current value of crypto assets. Therefore, although dollarization is appropriate under the bankruptcy code, “saying [the return] is over 100 percent is just wrong,” says Yadav. “For the average person, it’s a long way from that.”
Among the parties that stand to gain the most from the plan’s approval, meanwhile, are investment firms that have spent millions of dollars buying claims from people with assets locked up in FTX who either chose to take a haircut and reinvest the money, or had an urgent need for funds. These claims were typically bought at a discount before it was thought a significant recovery was likely – some for less than 10 cents on the dollar – but are now worth multiples.
“In terms of internal rate of return — shit. It’s the best deal I’ve ever seen in my life,” said Thomas Braziel, co-founder of 507 Capital, an investment firm that specializes in bankruptcy buyouts and has a large position in FTX, and 117 Partners, whose brokers said sales. (In July, Braziel was ordered by a Delaware court to repay $1.9 million he appropriated as receiver of bankrupt financial services company Fund.com to make investments and luxury purchases.)
In August, a number of former FTX customers filed formal objections to the plan in bankruptcy court. Clients objected in various ways to the legal immunity granted under the plan to those who managed the bankruptcy, the possibility that cash payments would trigger costly taxable events for creditors and other elements of the plan. “I felt vindicated when Bankman-Fried went to jail — and I believed it would go to bankruptcy court,” said Sunil Kavuri, one FTX client who signed an objection. “I was unpleasantly surprised.”
Over the course of the five-hour hearing, Brian Gluckstein, an attorney at the law firm Sullivan & Cromwell and counsel for FTX, responded to each objection in turn. “There is no evidence in the record that somehow these debtors are not maximizing value — none,” Gluckstein said.
In granting his approval, the judge dismissed the pending objections and cleared the way for FTX administrators to begin implementing the plan.
It remains possible to appeal the plan after it has been confirmed in limited circumstances. Logistical complications may also delay payments to creditors, which are expected to begin later this year at the earliest. But there are now few realistic options left for parties hoping to reverse the course of FTX’s bankruptcy.
A confirmation hearing “is the last chance in a practical sense to make changes,” Yadav says. “This is the defining day.”
