FTX’s bankruptcy costs have already exceeded $200 million (approximately 28 billion yen, converted to 140 yen to the dollar), and are likely to continue to swell in the future.
In response to the huge amount of money spent on rebuilding the cryptocurrency exchange FTX and recovering victims’ assets from a huge number of recipients, the victims of FTX One questioned. Legal fees are definitely above normal levels and, by various measures, exceed the costs of other complex bankruptcy proceedings.
The amount is significant because the legal fees will be paid out of the assets returned to FTX creditors, including individual clients, at the end of the bankruptcy proceedings.
FTX owes $8.7 billion to defrauded customers, making it likely that much of the lost money will be recovered. At the current pace, however, attorney fees could be close to 10% of what victims receive.
Expensive bankruptcy costs
“Assets due to creditors are being used carelessly,” said former FTX client Sunil Kuvari.
Kubari’s claims are based on comparisons with other bankruptcy proceedings. FTX bankruptcy turned out to be much more expensive than similar bankruptcy proceedings, both in absolute terms and as a percentage of underlying assets and liabilities.
“I would have expected it to be about the same as the Celsius liquidation cost, proportionally. We are receiving a huge bill of yen).”
Celsius Network initially claimed $5.5 billion in debt. In comparison, FTX currently owes former clients $8.7 billion. But after six months, Celsius’ bankruptcy costs were only $87 million. The cost of FTX has already exceeded $200 million over the same period.
Kubari is a former financial worker who had about $2.1 million in assets in FTX at the time of the bankruptcy. Kubari is well-known among creditors for spearheading class-action lawsuits against influencers and celebrities who promoted FTX. He is highly motivated to scrutinize bankruptcy costs. Because he could end up losing more than $100,000 on his own in huge legal fees.
Comparison with Enron
Kubari has sounded the alarm about bankruptcy costs after seeing a June 20 report by bankruptcy attorney Katherine Stadler, the attorney tasked with overseeing restructuring costs. In her report, Stadler said she recommended some cost-cutting, most of which were appropriate costs commensurate with the complexity of the matter.
If FTX’s bankruptcy takes the same two years as Enron’s, the restructuring team would claim about $800 million at its current pace. Enron’s bankruptcy cost $700 million, just over $1.1 billion in 2023 dollars.
That means FTX’s bankruptcy costs about three-quarters of Enron’s. But Kubari said Enron’s revenue and workforce are nearly 100 times larger than FTX’s.
FTX’s residual and recoverable assets were about $7.3 billion as of this month, compared to Enron’s $110 billion and about $190 billion in 2023 dollars. In other words, the turnaround team, led by FTX CEO John J. Ray III, spent about 75% of what it cost Enron to liquidate just 4% of its assets compared to Enron. Momentum to claim %.
FTX’s run was notoriously chaotic, but Enron’s fraud was equally complex. Hundreds of subsidiaries were set up to avoid the eyes of Enron’s auditors.
So why is the liquidation of FTX so costly relative to its size?
Careless or just complicated?
It would probably be inaccurate to estimate the cost to completion based on the cost of the first six months of FTX bankruptcy. Attorney Stadler’s Fees Examiner’s Report admits that the process “is likely to be very expensive by any measure,” but that the early stages of the collection process are particularly chaotic and perhaps wasteful. But he says there’s a good reason for it.
“The bankruptcy law makes it clear that reasonableness and necessity should be evaluated at the time the service is rendered, not in retrospect,” Stadler said.
“(Fees) Some applicants have assembled teams that ended up being too large. Some companies have committed resources from other parts of their organization to fill the void in their teams, and the Fees Examiners have good faith that either of these approaches was completely unreasonable at the time. We cannot conclude that
This chaotic start to the bankruptcy process suggests that costs could come down in the future as the process is streamlined. Stadler emphasized that the bankruptcy team “will continue to refine its processes to identify and eliminate inefficiencies and excesses as the case progresses.” Creditors will want to keep a close eye on future reports to see if this actually happens.
Stadler’s report also advocates improved management of certain aspects of bankruptcy. She found that bankruptcy teams were running higher-than-normal proportions of senior staff, driving up costs. Stadler also encouraged teams to reduce attendance at meetings and hearings.
Law firms and management consulting firms
Most specifically, in a compensation claim filed by law firm Sullivan & Cromwell and management consulting firm Alvarez & Marsal (A&M), attorney Stadler claimed 5% to 10% for reasons such as “excessive meeting attendance.” was imposed after negotiation.
But even after the reduction in compensation claims, comparisons with similar proceedings highlight A&M’s higher-than-usual claims. In fact, A&M has been involved in bankruptcy proceedings for another crypto firm’s blunders, where it claims much less.
“Alvarez & Marsal charges Celsius $1.7 million a month and FTX $11 million a month,” Kubari said. Similar to the Enron comparison, A&M is claiming about six times as much in bankruptcy proceedings with only about 50% more debt. In terms of percentages, A&M received about 11% of the fee in the Celsius bankruptcy, and is about to receive about 30% in the case of FTX.
A&M is responsible for a variety of tasks, including, among other things, asset identification and recovery. This may play a large role in explaining the difference in fees. Former FTX CEO Sam Bankman-Fried seemed desperate to get his customers’ money out as quickly as possible, whether it was family, his favorite “charity,” or strangers. Tracking down that money and fighting to get it back would, of course, take a lot of work.
A&M has also assisted in creating accounting records for this matter, which also appears to be quite complex. Stadler described FTX’s post-bankruptcy state as a “smoldering pile of wreckage” and said many financial records were missing. This is consistent with the remarks of John J. Ray III, who said the situation was even worse than Enron.
Bankman-Fried’s incompetence to torment ex-clients even after bankruptcy
However, Kubari disputes that FTX’s bankruptcy is more complicated than Enron’s.
“In fact, compared to Enron, FTX is like a dot.[FTX]was a company that was in business for three years and had 200 employees at most, compared to Enron with 20,000 employees.”
More important than scale, Kubari argues, Enron’s fraud was as opaque as FTX’s, if not more.
“Enron had 3,000 SPEs[special purpose entities]that weren’t on their balance sheets,” Kubari said. These entities were created specifically by financial industry veterans to hide their liabilities from auditors and the public. In contrast, FTX is “just an exchange embezzlement, and it probably doesn’t get any simpler than that,” Kubari said.
The counter-argument would be that Enron, though cleverly covering its tracks, would at least have kept a record of such actions. In fact, some of the documents documenting the creation of Enron’s SPEs were instrumental in the criminal prosecution of corrupt masterminds.
It is becoming increasingly clear that Sam Bankman-Fried was not, by any stretch of the imagination, as smart as many believed. His completely chaotic approach to handling client funds seemed ad hoc rather than strategic.
Mr. Bankman-Fried’s incompetence has undoubtedly given the people who are supposed to clean up for him a hard time. There are many reasons to scrutinize the FTX clearing team’s spending, but the most obvious is Bankman-Fried himself plucking more money from many of FTX’s victims before going to trial in October. I’m saying that.
｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
｜Image: Sergei Elagin / Shutterstock.com
｜Original: How Much Is Too Much to Spend on FTX’s Bankruptcy?