The 3 most important things learned during FTX's first day in bankruptcy court
Attorneys and executives representing the collapsed cryptocurrency platform FTX appeared in court on Tuesday where they revealed a continued investigation into the company’s assets formerly controlled by its founder and former CEO Sam Bankman-Fried.
They also pleaded to keep the names of the company's customers shielded from public view.
The two-hour hearing was a traditional measure meant to authorize FTX’s requests to pay its advisors, employees, and vendors, as well as address disputes over how the case proceeds in its initial stages.
But what unfolded in the first hearing reaffirmed speculation that FTX's Chapter 11 reorganization could be one of the most unusual cases to ever come before a U.S. bankruptcy court — "an unprecedented matter," according to FTX's own lawyer.
Here are the three biggest takeaways.
An ‘absence’ of asset information
As expected, U.S. Bankruptcy Judge John Dorsey, who is presiding over the case, granted FTX the right to pay its ongoing business expenses. Bankman-Fried and his former top deputies who have now stepped down from their roles at the platform were explicitly denied compensation.
However, in a presentation to the court, FTX’s lawyer, James Bromley of Sullivan & Cromwell, noted the extraordinary circumstances that are keeping the crypto exchange’s new managers and forensic investigators from identifying its assets.
“Substantial progress has been made, but we stand here today, your honor, with an absence of information,” Bromley told Judge Dorsey. “We do not have the traditional amount of information that a debtor would traditionally have. But every day, we generate more and more.”
Bromley went on to slam Bankman-Fried for operating FTX under a lack of corporate and accounting controls.
“Your Honor, what we have is a worldwide organization, but an organization that was run effectively as a personal fiefdom of Sam Bankman-Fried,” he said.
Still, the potential that more assets could be recovered is a positive sign for customers and other creditors who hope to recoup lost investments. Bromley said in court “a significant amount of debtor’s assets are stolen or missing.”
To determine whether the $400 million in stolen crypto assets can be recovered, FTX has recruited Nikki Friedlaender, former chief of Complex Frauds and the Cybercrime unit in the Southern District of New York, and Steve Pekin, former director of enforcement for the Securities and Exchange Commission, as well as blockchain analytics firm Chainalysis and investigative firm Nardello.
As of Tuesday, the exchange had disclosed an estimated $9 billion in liabilities and $1.24 billion in cash and cash equivalents. According to FTX’s management, the indebted companies forecast $459 million in cash on hand the week ending December 23, after payments for ongoing expenses.
FTX customer names to remain under seal — for now
A dispute over the identity of FTX’s more than 1 million customers whose funds are now tied up in the bankruptcy also came up during Tuesday’s hearing.
The U.S. Trustee, a government representative appointed in U.S. bankruptcy cases, objected to FTX’s position that its customers’ names should remain under seal.
“We submit that overbroad redactions do not serve transparency in these cases,” Ben Hackman argued on behalf of the U.S. Trustee, noting that names should be made public unless a foreign law such as the European Union’s GDPR prohibits their disclosure.
Judge Dorsey ultimately granted FTX’s request to keep the identifying names and addresses hidden from the public on an interim basis only, until the matter is taken up at a later hearing.
Redacting names of creditors for crypto companies remains an open question in U.S. Federal Bankruptcy courts. In September, Celsius Network lost its bid to keep its creditor names private in the Southern District of New York.
“The court took the safe route for the time being and put customer privacy and security concerns first,” Jason DiBattista, head of legal analysis with Levfin, told Yahoo Finance of today’s decision.
Jurisdiction
In anticipation of disagreement over which country has authority to administer FTX’s assets — the U.S. or The Bahamas where FTX is headquartered — FTX noted two factors that could weigh in favor of the U.S. Bankruptcy court.
As of October 31, 2022, the debtor companies in the U.S. filing collectively employed 330 workers around the world, with the largest number —127 — working in the U.S.
As for the company’s global customers, he added, most reside in the Cayman Islands and the Virgin Islands, followed by customers from China, Great Britain, and Singapore. Among FTX’s international entities, 94% of their customers were customers of U.S. debtor, FTX Trading Ltd. Around 6% were customers of FTX Digital Markets Ltd., a Bahamian entity.
Through FTX.com, the company has also made $300 million in Bahamian real estate purchases.
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed. David Hollerith is a senior reporter at Yahoo Finance covering the cryptocurrency and stock markets. Follow him on Twitter at @DsHollers.
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