The multibillion-dollar FTX bankruptcy case has stalled at the starting line, reflecting murkiness and disarray inside the crypto platform before it sought US court protection from creditors last week.
FTX had not filed so-called first-day motions to formally commence proceedings as of Monday, according to court records. Companies are usually quick to provide such documents to describe the circumstances leading up to their bankruptcy and ask the court to approve emergency financing to pay employees and vendors during the proceedings.
The crypto exchange and dozens of its subsidiaries filed for bankruptcy protection in a Delaware court on Friday after FTX said it could not meet customer withdrawal requests. A day before, FTX’s main international exchange held less than $1bn in liquid assets against $9bn in liabilities, the FT has reported.
The Delaware bankruptcy court has appointed Judge John Dorsey to oversee the case, but a customary initial hearing to consider such motions has yet to be scheduled.
“This is playing out in a much more slow and opaque way than usual,” said one restructuring adviser who has been fielding calls from people seeking aid. The dearth of information and legal filings has been an obstacle to giving advice to creditors, said this person.
FTX has announced that John Ray III would serve as chief executive after the resignation of founder Sam Bankman-Fried. Ray is a seasoned restructuring executive, having served in oversight positions in the bankruptcies of Residential Capital, Overseas Shipholding Group, Nortel Networks and Enron.
The company also named Stephen Neal, a Silicon Valley lawyer, as FTX board chair. But Neal later said that he had decided to not take the post.
According to one person in contact with the company, FTX is trying to quickly secure new directors experienced in bankruptcy cases who will become responsible for making decisions for FTX stakeholders.
Previously, Bankman-Fried appeared to have had almost free rein at the company despite a nominal board of three people, said a person approached about becoming an FTX director, describing governance inside the company as the “wild west”.
This person also described the company’s current liquidity as “low”, leaving it uncertain how it will pay legal and administrative expenses in the bankruptcy.
Sullivan & Cromwell, FTX’s longtime legal counsel, has been advising the company on the bankruptcy process and working with FTX general counsel Ryne Miller, himself a former Sullivan lawyer. Miller did not immediately respond to a request for comment.
Sullivan’s lead partner on the case, Andrew Dietderich, is a restructuring attorney who most recently assisted FTX win a bankruptcy auction for the assets of Voyager Digital, another crypto exchange which went bust this year after the collapse of the terra and luna digital tokens.
Jay Clayton, a former chair of the US Securities and Exchange Commission, and now an adviser to Sullivan, has also been working with FTX, according to a person familiar with the matter. Bankman-Fried is being personally represented by the law firm Paul, Weiss.
Restructuring advisers told the FT that the court has the option of appointing an independent “Chapter 11 trustee” who would replace Ray to manage FTX. Such trustees are typically appointed when judges believe control of the business should be taken away from the company itself.
The trustee would then hire its own advisers to manage the case, displacing lawyers and advisers who otherwise would be in line for tens of millions of dollars of in fees. FTX’s search for experienced directors is an attempt to show the court that the company is capable of managing the process itself in order to maximise recoveries for creditors, said a person briefed on the reasons for the move.
Once the case begins, the Office of the US Trustee, the bankruptcy agency of the Department of Justice, will appoint a committee of unsecured creditors which is likely to be composed largely of FTX account holders. FTX’s bankruptcy petition last week said it has about 100,000 creditors and $10bn-$50bn of assets and liabilities.
“The whole thing looks super-messy. First, there will no doubt be many claims of wrongdoing and a long process of figuring out what legal actions arise from that wrongdoing — think MF Global, Enron and WorldCom,” said Anthony Casey, a law professor at the University of Chicago and a former corporate attorney, referring to previous blockbuster bankruptcies. “Second, I imagine there is going to be a lot of time and energy spent locating assets and value and undoing transfers.”
Another observer speculated that creditors may get some money back through lawsuits against Bankman-Fried or others.
“The real recovery here will come from the impending litigation storm. There’s billions in potential preference actions and SBF and his crew are likely to get sued up the wazoo,” said Adam Levitin, a crypto expert and law professor at Georgetown who works at Gordian Crypto Advisors, which may seek a role in the case.
Preference actions refer to payments made just in advance of a bankruptcy filings that can be clawed back by creditors to satisfy their claims
Still, the information vacuum has not prevented some dealmaking activity from revving up. At Cherokee Acquisition, a marketplace for trading bankruptcy claims, bidders are already offering between 10 and 14 cents on the dollar to FTX account holders.
“FTX seemed completely unprepared for a bankruptcy and the state of internal records appear chaotic,” said Vladimir Jelisavcic, Cherokee Acquisition’s founder. “I imagine large teams of lawyers and financial advisers are struggling to piece together the data to be ready for a first-day hearing.”
Additional reporting from James Fontanella-Khan in New York
