The bankruptcy proceedings of cryptocurrency exchange FTX have raised eyebrows, as former United States Securities and Exchange Commission (SEC) official John Reed Stark suggested that the legal team may be profiting substantially from the process. Stark’s comments come in the wake of a significant amount of legal fees accrued during the bankruptcy proceedings, prompting questions about the transparency and fairness of the restructuring plan.
FTX, a cryptocurrency exchange that collapsed in November 2022 due to irregularities in its accounts, has been undergoing Chapter 11 bankruptcy proceedings in the U.S. Bankruptcy Court for the District of Delaware. During these proceedings, FTX’s legal team, led by Sullivan & Cromwell attorney Andy Dietderich, has billed over $200 million from November 2022 to June 2023.
In a surprising revelation, it was disclosed that in the quarter ending October 31, 2023, FTX was spending approximately $53,000 per hour on legal and advisory fees. Documents filed in December 2023 revealed that the bankruptcy legal team had billed at least $118.1 million from August 1 to October 31, 2023, averaging an astonishing $1.3 million per day or $53,300 per hour over 92 days.
While the court-appointed fee examiner, Katherine Stadler, initially deemed these fees “not wholly unreasonable,” the sheer magnitude of the costs has raised concerns among observers like John Reed Stark. Stark pointed out that the legal team’s fees and the overall circumstances surrounding FTX raise questions about the bankruptcy process’s integrity.
FTX’s unlikely reorganization
During a January 31st hearing, FTX lawyer Andy Dietderich made it clear that there were no plans to relaunch FTX, referred to as “FTX 2.0,” within the Chapter 11 bankruptcy framework. This revelation came as a disappointment to those who had hoped for a restructured and revitalized FTX.
John Reed Stark likened the efforts to reorganize FTX to trying to restructure a combination of notorious entities, saying it was akin to attempting to reorganize “Murder Incorporated, The Cali Drug Cartel, and Madoff Investment Advisory Services.” This analogy underscores the complex and challenging nature of the bankruptcy proceedings.
On February 1st, FTX requested a Delaware court to sell its $175 million claim against the bankrupt Genesis Global Capital, with the associated hedge fund, Alameda Research, being the claim’s owner. If approved, FTX would have the option to sell the claim in its entirety or parts, timing the sales for optimal conditions.
Genesis Global Capital had $175 million tied up in its FTX account at the time of FTX’s collapse in November 2022. The bankruptcy of FTX did not affect Genesis’s market-making activities, but it did leave them with a significant financial stake in the proceedings.
Concerns raised about the legal team’s motivations
The revelation of FTX’s legal team’s substantial fees and the lack of plans for the exchange’s reorganization have raised concerns that the legal team may exploit the bankruptcy process for financial gain. John Reed Stark’s sarcastic remark on social media, suggesting that FTX customers should receive a “Thank You” note from the legal team for their substantial profits, highlights the proceedings’ skepticism.
FTX customers and stakeholders are now left questioning the transparency and fairness of the bankruptcy process as the legal team’s fees continue accumulating. As the bankruptcy case unfolds, it remains to be seen how the court will address these concerns and whether FTX’s claim against Genesis Global Capital will relieve the exchange’s creditors.
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