How do bankruptcy experts weigh in on the next steps for FTX?
In this episode of The Scoop, host Frank Chaparro speaks with Mark Shapiro, a partner at Shearman & Sterling, & Dan Besikof, a partner at Loeb & Loeb, about the legal underpinnings of FTX’s bankruptcy and restructuring process.
Read our notes below to learn more.
What is Chapter 11 & current situation of FTX
Chapter 11 is a statutory framework under the federal laws for reorganization of corporations & companies.
Main purpose is to provide companies with a breathing spell so they have the time to figure out what to do. Either they run short of liquidity or they’re in a sector that is facing serious financial problems.
Very fast downfall of FTX led to filing for Chapter 11 voluntarily, the company putting into place new people into place running the Chapter 11 case like John Ray, consulting firms & law firms who are representing the company in the cases.
The lawyers are focused on implementing controls over what’s happening in 4 silos identified in a business context which are trading firm Alameda, FTX exchange & 1 or 2 other businesses that house the investments they made.
They are trying to protect the assets.
They have to regularly provide transparency to creditors & other people who may have stakes in it.
They have to coordinate with other jurisdictions.
They need to try to maximize the value of the estates.
Currently in liquidation mode & then distribution mode which is the end of every Chapter 11 case.
There is going to be a lot of litigation.
Big takeaways from the recent FTX hearing
The 240 people remaining on staff have a lot of work to do.
Not surprising that they still have a good number of employees.
The lawyers for the U.S. debtors were kind of planting their flag with a perceived or potential fight with the Bahamas joint provisional liquidators.
Thoughts on how people will be paid back
In terms of how much & when people will get paid back is too soon to say.
In Celsius, it's already 6 months in the case & not a dollar or coin has been given back.
The custodial holder should get their coins out first.
Everybody else is going to get treated in accordance with the bankruptcy code & it has a scheme wherein it pays out secured creditors first, then unsecured creditors, then equity holders.
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Environment & parallels on Lehman Brothers
There was a liquidity problem in Asia that couldn’t be funded.
Decided to file the holding company for Chapter 11 in U.S. & kept the rest of businesses intact long enough to sell them.
The environment was hectic & chaotic.
There was no fraud in Lehman.
There were a lot of differences compared to the FTX situation.
The Lehman incident led to a systemic crisis in the financial system while FTX doesn’t have any systemic impact outside of crypto.
There’s a fundamental difference between a small private firm dealing with crypto & a large global investment bank with relationships across the world, failing.
It is extremely difficult to predict how long it would take.
Litigation might go on for many years from now.
Thoughts on separate filings
The Bahamas appointed the joint provisional liquidators over FTX.
The Bahamas regulators have a significant interest that companies in the Bahamas will behave properly.
They are staking out a position to maximize their influence on the overall restructuring or liquidation of FTX particularly because the records are such a mess.
Liquidators agreed to move the Chapter 15 case to Delaware.
The U.S. debtors and Bahamas liquidators are coordinating with one another regarding issues & working out something that is efficient & effective to get to the end.
Government’s role in Chapter 11 cases
The government might have a multi-faceted role in this case.
There’s a number of regulators looking carefully at what happened.
There’s some legal issues regarding potential securities that might be overlooked by the SEC.
Potential criminal investigation that will be determined by the Department of Justice.
The government is overseeing the bankruptcy indirectly.
How different silos will impact payment
Generally, a creditor has a claim against a particular debtor.
Creditor’s claims are generally against 1 particular entity.
Claims against a debtor that has a lot of assets & not a lot of creditors, might do better.
The interest of creditors & justice requires everybody’s claims against the entity will be treated as one & all the assets will be treated as one.
Thoughts on long-term consequences of bankruptcies
There is going to be a greater regulatory oversight over crypto business especially taking customer or retail deposits & arrangements.
CFTC & SEC will try to figure out what roles they play.
The industry has resisted regulations but atleast letting a customer know the place that’s holding crypto assets is a legitimate business & telling the risks beforehand.
There’s something that could be done to boost accountability & provide protection to investors that would go a long way to help the industry to take the next step to something really adopted by the mainstream society & investors.
It will be difficult for a large pension fund or asset manager to venture in.
Institutional investors will only venture after the incidents are cleared & there’s a framework for safety.
If the regulations were put in place when the prices were high, there could have been a different outcome.
Thoughts on SBF
It is a matter of intent.
An issue in whether it's a criminal liability for doing something on purpose vs. doing something poorly or public’s perception of his legacy whether he was a bad guy or just bad at his job.
One of the many blow-ups of financial firms.
Not so unprecedented in the history of American failures.
Thoughts on other parties involved
Every party that received funds from any of these companies whether they were donations, investments or actual commercial transactions are going to get reviewed.
If someone received money or value in some way at a time when these companies were insolvent & didn’t provide fair consideration, they are at risk for potentially being sued.
It will take a long time to bring the cases, settle the cases & distribute money that have been collected from those affected.
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We are all having problems keeping up with the latest crypto events, whether it’s good or bad news. The Daily Degen is a trusted source curated by rektdiomedes providing daily news on the latest yield opportunities, price moves, hacks, and more.
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