‘Bare-bones’ FTX Bankruptcy Filings Are Likely Bad Investor Omen, Lawyers Say

The “bare bones” initial bankruptcy filings submitted by FTX could portend a poor outcome for customers with frozen funds, partners at law firm Kleinberg Kaplan told Blockworks. 

FTX has been slower than other bankrupt crypto companies to publicly detail the ailing company’s plans to make creditors whole. More clarity around FTX’s balance sheet and creditors is needed to properly parse the odds of the exchange returning funds, according to the attorneys.

The New York firm has been fielding calls from affected investors. FTX founder Sam Bankman-Fried stepped down as CEO on the heels of the blowup, as John J. Ray III, who years ago oversaw the liquidation of scandal-ridden energy company Enron, was named the company’s new chief executive.

Kleinberg Kaplan’s affected clients include investors with frozen FTX accounts and equity shareholders, plus crypto-focused firms with indirect exchange exposures eyeing the likelihood of an even deeper market downturn. The firm declined to identify specific clients. 

“The filing was only made on Friday, so there’s still a lot of market education and getting people up to speed as to what this all means,” partner Jared Gianatasio told Blockworks. 

Lawyers at Landis Rath & Cobb and Sullivan & Cromwell, representing FTX and affiliates, said in a bankruptcy motion on Monday that as many as one million creditors could be named in the suit.

The motion also requested relief from filing a list of the top 20 creditors for each of the 134 FTX affiliated entities that filed for Chapter 11 bankruptcy — asking instead to permit one consolidated list detailing the top 50 creditors across all FTX companies by Friday.

Along with Gianatasio, fellow partners at the law firm, Matthew Gold and Dov Kleiner, below say from a regulatory and legal perspective what has already transpired — and what entities stuck in the lurch can expect as FTX’s bankruptcy plays out.

Blockworks: How would you compare FTX’s bankruptcy to those of Voyager Digital and Celsius earlier this year?

Gianatasio: The speed, in terms of the FTX failure, was so quick. You saw that the Chapter 11 filing was very bare bones. It was very sort of skeletal in its coverage, compared to Celsius and Voyager, where there were more robust filings in terms of a list of creditors day one and just had much more information.

Gold: Definitely, the FTX filing has rolled out at a much slower pace. The debtors in Voyager and Celsius were more organized at the beginning. Presumably, the lawyers had a little more advance notice that a filing was going to take place.

I try to be a little bit cautious in terms of what we can derive from that. It seems this is bad news for the FTX parties — that it, according to lots of reports, is tied into all kinds of regulatory and, possibly, criminal investigations and turnover at the top of the company, all of which has not really been verified.

It’s possible this will just be a blip, and FTX just had a little bit of a delay, because it was getting its independent team in place.

Blockworks: What are the next steps you are expecting as the bankruptcy moves forward?

Gold: What we expect in the short term is that FTX’s new management will start filling in some of the blanks that are missing so far. They’ll start providing some information on who their creditor group is, some information regarding their assets, some official statement on all the rumors swirling about the hacks — and other things in terms of their assets.

And then, possibly, we’d expect some kind of indication from management and their lawyers about what their immediate plans are and how they’re going to proceed. Typically, these would come out in a day or two after a bankruptcy filing, but I’m still hopeful…in the next couple days we’ll get some.

That would typically look at things like, “Are they going to be looking to sell their assets if they think they have things to sell? Are they going to be trying to keep their exchange going in any way? How much of a business do they think they have that they can possibly resuscitate at this point? And how much of it is just a matter of figuring out the value of their remaining assets?”

Blockworks: And then what? 

Gold: Once we have them sketching out what they’re looking to do, we can react, and the community can react, as to what credibility they have.

Then the process [really] starts…and we start talking about when investors and other parties can get their money back.

In Celsius, and Voyager to some extent, which are our closest comparisons, they broke up what they had into various buckets, based on types of agreements investors had and rights they had to those assets.

They turned over some in relatively short order to customers. Some, they said, “You’re not going to get at all,” and others they put into a middle bucket. Basically, of everyone who wasn’t getting it right away, there’s litigation being teed up…that can take months to roll out.

Then, we move to the larger group: In bankruptcy, we call them “general unsecured creditors” who don’t have rights to particular property and are just hoping to get some overall recovery. That can take a year or more.

At this point, the speed at which it moves is less dictated by particular requirements of bankruptcy law and more dictated by the commercial realities of each case. How long, for example, will it take to liquidate assets into cash? 

Blockworks: You mentioned a secondary market could arise, where creditors could sell their rights to assets at a discount?  

Gianatasio: It’s weighing the likelihood of recovery with the timeline of recovery.

[If] retail customers need some of their capital, they might be willing to sell for five or 10 cents on the dollar. It’s a tough position.

Kleiner: This is incredibly early for something like that, particularly [with] so much uncertainty. Not to say people won’t, because it may be high risk and very high reward.

If you look at the cases, from Voyager to Celsius to FTX, they’ve been filed in order of increasing complexity. There’s also increasing [magnitudes] of uncertainty around the filings. So, I’d say there’s hardly any visibility or trust or confidence, at the moment, in what the assets are.

Blockworks: What do you see as the contagion effects of FTX’s collapse?

Gianatasio: Like we’ve seen in Voyager and Celsius, I think these are significant bankruptcy cases, but I think they’re pretty self-contained to the crypto and digital asset ecosystem. I don’t think they’re going to have too much of an impact on the broader financial markets.

FTX is an important example, though, of an operator who was out there holding themselves out as this champion of risk management and investor protection.

The interview has been edited for clarity and brevity.

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