Some creditors of the bankrupt crypto exchange FTX are preparing to reject a plan that would see them recover 118 percent of the money they lost. The proposal is far less generous than it might seem, they claim.
Starting in January, the FTX creditors began to form a voting block, now made up of 1,600 claimants. The new plan is due to be put to a vote in June; the leaders of the block—Sunil Kavuri and Arush Sehgal—will urge members to vote against its approval. “The recovery percentages are drawn from a fake baseline. It’s a false narrative,” says Sehgal. “It’s an insult to creditors.”
FTX fell to pieces in November 2022 after running dry of funds with which to process customer withdrawals. Billions of dollars’ worth of customer funds was missing. A year later, FTX founder Sam Bankman-Fried was convicted of multiple counts of fraud and conspiracy in connection with the collapse of the exchange. In April, he was sentenced to 25 years in federal prison.
Filed on Tuesday, the FTX bankruptcy plan charts a path to a full recovery, plus interest, for practically all creditors—made possible, according to FTX, by the liquidation of billions of dollars’ worth of investments made by the exchange’s venture capital arm, FTX Ventures, and its sister company, Alameda Research.
Under the proposed plan, government bodies in the United States—including the Internal Revenue Service and the Commodities and Futures Trading Commission—have agreed to suspend high-value claims against FTX until creditors had been repaid (although the IRS will receive a $200 million upfront payment as part of the settlement).
“We are pleased to be in a position to propose a Chapter 11 plan that contemplates the return of 100 percent of bankruptcy claim amounts plus interest for nongovernmental creditors,” said John Ray III, the veteran bankruptcy professional in charge of the estate, in a statement. “I want to thank all the customers and creditors of FTX for their patience throughout this process."
Although the plan affords creditors a greater recovery than FTX had previously indicated would be possible and assigns their claims priority over others, the creditors leading the voting block object to the plan on a variety of different grounds.
They take issue with the way claims have been valued under the plan. Many customers held crypto assets like bitcoin on the FTX platform, but through a process common to bankruptcy proceedings known as dollarization, their claims have instead been assigned a dollar value based on the price of those assets on the date of the bankruptcy petition. The issue is the subject of a lawsuit filed by the creditors within the bankruptcy proceeding.
When FTX fell, the crypto market nosedived, but has since rebounded. The value of bitcoin, for example, has risen from roughly $16,000 in November 2022 to more than $60,000 per coin. The market recovery is part of the reason FTX is in a position to repay customers in full, but it also means that customer claims could be less than a third as valuable under the plan—even accounting for the 18 percent interest—as they would be if mapped to the present value of crypto assets.
The plan also includes a range of small-print stipulations that the creditor group considers unfavorable, or even antagonistic. Under one particular clause, FTX pledges not to pursue preference actions—a type of lawsuit that aims to claw money that had left company coffers in the period immediately before a bankruptcy back into the estate—against customers who raced to withdraw their crypto, but only if they vote in favor of the plan. Some have interpreted the condition as a veiled threat: Vote in favor of the plan, or risk a clawback. “What they're doing with those with preference risk is disgusting,” says Pat Rabbitte, an FTX creditor who played a role in recruiting customers to the voting block. “They're putting a gun to their heads to get their plan through.”
Even if the plan were favorable to creditors, claims Sehgal, there is nothing under the present terms to prevent Ray and his team from changing course after it has been approved. Under the plan, FTX will replace its present board of directors with new members of its choosing, and the Committee of Unsecured Creditors (UCC), which has a formal voice in the bankruptcy, will be disbanded. “[Ray would] be operating with impunity,” claims Sehgal, who previously served on the UCC. “There are a million ways that creditors can get screwed over. The plan administrator can go back on the promises in the plan. These are all estimates.”
According to an FTX spokesperson, bankruptcy law stipulates that a UCC is “always disbanded” at the effective date of the plan, and that the court system will have “complete oversight of the bankruptcy estate” once the post confirmation plan is in place.
The plan may also limit the ability of creditors to pursue other means of recovering their money. In a class action, FTX creditors are seeking damages from parties including Sullivan & Cromwell, one of the law firms acting for FTX, which they accuse of aiding and abetting the FTX fraud, and of conflict of interest in the bankruptcy case. But a clause included in the bankruptcy plan would shield attorneys acting for FTX from liability “for any act or omission in connection with, related to, or arising out of” the bankruptcy proceeding. “Our goal is to make the victims whole—not from getting the money from FTX, but from all of the the aiders and abettors that enabled this fraud to grow so large,” said Adam Moskowitz, managing partner at the Moskowitz Law Firm, counsel to the plaintiffs in the case against Sullivan & Cromwell, speaking to WIRED in April.
In a statement provided to WIRED, FTX rejected the idea that it will be free to operate without oversight or diverge unilaterally from the plan if it is approved by creditors, and says that the bankruptcy court will continue to have “complete oversight” over its actions. The company also disputed the idea that it had attempted to solicit favorable votes from creditors with preference exposure. “Customers who did not take monies from the exchange in preference over other customers should have no concern with this provision,” the FTX spokesperson said. The spokesperson described the lawsuit brought by creditors in relation to the dollarization of claims as a delay that is “costing other customers to bear unnecessary expenses.”
The FTX plan will pass in June if accepted by more than half of the creditors that turn out to vote, and if those creditors represent at least two-thirds of the total sum owed to the voters. The voting block does not represent a majority of creditors, by number or claim value, but a poor turnout could increase its weight. “I think we’ll have the numerosity vote,” says Sehgal.
The challenge will be in ensuring the members of the block vote in concert. It could be that some are willing to accept the offer of interest presented by FTX. Others, sick of the uncertainty, may simply vote for the speediest possible resolution.
The creditors in search of a swift recovery have long since sold off their claims on the secondary market, says Sehgal, leaving behind a core group of creditors committed to maximizing their recovery. “The people that are still in this fight are those that are extremely disadvantaged by this plan,” he says.
But the level of “creditor fatigue” means there is a risk that the block may not vote as their leaders advise, says Rabbitte. “I’ve been trying to impress on fellow creditors that simply agreeing to this plan in no way guarantees a wholesome end to the whole sordid bankruptcy affair.”
Updated: 5/8/2024, 9:25 PM EST: WIRED has clarified elements of the UCC and how US bankruptcy court will continue to oversee the estate during the post confirmation period.
