FTX’s Freefall Into Bankruptcy Shows Why Case File Is Empty

(Bloomberg) — The collapse of Sam Bankman-Fried’s crypto empire has been chaotic, fast and full of unknowns. The world should soon get some answers via a Delaware federal court.

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FTX is what’s known in the industry as a “free fall” bankruptcy. More than 130 related companies sought court protection at the end of last week without filing any of the usual court motions or explanatory documents seen in a big US insolvency case. Two days later, the companies’ main court docket contains only a 23-page fill-in-the-blank petition. In nearly every other multi-billion dollar Chapter 11 case in recent years, lawyers quickly file a smattering of routine requests designed to stabilize operations.

In a statement, the company’s new chief executive officer — a man who helped oversee the unwinding of Enron Corp. — told customers that details about the bankruptcy would hit the court docket “over the coming days.”

“It’s not like a normal filing where you’re lining up papers literally for weeks,” said Eric Snyder, chair of the bankruptcy department at law firm Wilk Auslander, which isn’t part of the case. “Within 24, 48 hours this was on the ropes and done.”

Free Fall

Typical paperwork filed in the immediate aftermath of a bankruptcy include a detailed narrative of why the company sought court protection, what kind of judicial help it needs immediately and a general outline of what the company hopes to accomplish in bankruptcy.

A judge handles those immediate requests at a company’s first court hearing, which is typically held within a few days of the Chapter 11 petition. As of Sunday afternoon in Delaware, FTX hadn’t said when it would appear before US Bankruptcy Judge John Dorsey, who has been assigned to the case.

When FTX does get its first hearing, Dorsey is likely to ask many of the same questions that customers and creditors are asking: Where are the company’s assets? What is the company’s goal for the bankruptcy?

One of the last major financial companies to file for bankruptcy with little warning to investors was MF Global Inc., the Wall Street broker-dealer run by former New Jersey governor and ex-Goldman Sachs Group Inc. co-chairman Jon Corzine. Wrong-way bets on European sovereign debt caused ratings firms to begin downgrading MF Global at the end of October 2011, and within days the company filed bankruptcy.

Even in the case of MF Global, customary motions were filed the same day that the company went bankrupt. Requests included permission to continue managing cash in the ordinary course of business and the disclosure of important bank account information.

FTX’s filings shift the enterprise into a universe governed by strict procedural guardrails and an emphasis on transparency.

Were there “lots of lawyers working this weekend to prepare these papers? Absolutely,” Snyder said. Advisers need to get a sense of what FTX is worth and what, if anything of the businesses can be salvaged, and who its creditors are, all of whom need need to informed about the proceedings.

It’s no small task for an enterprise like FTX: the company has both US and international operations and is in some way intertwined with Bankman-Fried’s trading house, Alameda Research. In initial filings, FTX estimated both its assets and liabilities fell in the range of $10 billion to $50 billion.

Adding complications, the company is subject to multiple investigations, including a criminal probe by authorities in the Bahamas. The US Securities and Exchange Commission is looking into potential securities rules violations, and the Justice Department is also involved.

To be sure, free-fall bankruptcies can spark fast, dramatic resolutions when crisis is afoot. When it plunged into Chapter 11 protection in 2008 with little plan for a path forward, Lehman Brothers sold its core capital markets business to Barclays Plc for $1.75 billion just days after filing. The deal transferred jobs and clients to a solvent firm and helped stabilize the global economy.

Just weeks ago, FTX was on the hunt for assets itself. In September, the company won an auction to take over the assets of bankrupt crypto lender Voyager Digital Ltd. with a bid worth about $1.4 billion. Voyager said Friday it is reopening the auction process.