Hearings that will determine the fate of FTX, once one of the largest crypto exchanges globally, began Tuesday in the U.S. Bankruptcy Court for the District of Delaware.
“We are here on an unprecedented matter and I don’t say those words lightly,” James Bromley, a partner at Sullivan & Cromwell and co-head of the firm’s global restructuring practice, said during the hearing. “This is a first-day hearing well over a week after they were filed; that in itself is uncommon. But what we have here [ … ] is a different sort of animal.”
Prior to the bankruptcy filing, FTX was “in the control of a small group of inexperienced and unsophisticated individuals,” Bromley said. “Unfortunately, the evidence seems to indicate some or all of them were compromised.”
The crypto exchange fell from grace earlier this month and filed for Chapter 11 bankruptcy on November 11. At the time, FTX CEO and founder Sam Bankman-Fried resigned from his role, and Enron turnaround veteran John J. Ray III was appointed as the new CEO. Ray attended the hearing on Tuesday, along with more than 1,100 people who joined the hearing through a Zoom meeting link and YouTube streaming.
The Chapter 11 case has set out five court objectives: implementation of controls, asset protection and recovery, transparency and investigation, efficiency and coordination, and maximization of value.
“A substantial amount of assets have either been stolen or [are] missing,” Bromley stated. FTX is also “suffering from cyberattacks” both on the petition date and the days following.
“We realized that there are many people who are looking to get their money back immediately and we sympathize with them and we are working toward being able to do that,” Bromley said. “It’s essential that we first maximize the value of assets of the estates. We have to identify those assets, we have to collect them and we have to maximize them. Whether it’s selling assets, selling businesses or reorganizing businesses. All of those things are on the table.”
The debtors are not looking to make any payments to Bankman-Fried; Gary Wang, FTX’s co-founder and former CTO; Nishad Singh, former director of engineering at FTX; or Caroline Ellison, the former CEO of Alameda Research, the legal team stated.
Today, roughly 260 employees remain at FTX, the legal team said. “The advisers and remaining loyal employees are working day and night to identify the assets, secure those assets wherever they are located and start applying necessary controls [ … ] substantial progress has been made.”
Even with that progress, there’s an absence of information, Bromley noted. “We don’t have the traditional amount of information that a debtor would have. But every day we generate more and more.”
After deliberation, Judge John Dorsey of the Delaware Bankruptcy Court granted redaction of customer names and addresses on an interim basis.
“The case with FTX is that this is a bankruptcy that is pure chaos,” Yesha Yadav, professor of law and director of diversity, equity and community at Vanderbilt University, said to TechCrunch. “It is a hellish bankruptcy as far as the general public is concerned.”
Most Chapter 11 bankruptcies don’t have “this intense drama” and typically are orderly, with first-day arrangements in place, Yadav said. “There’s usually some order for Chapter 11s, but in the case of FTX it’s a cluster, and that was made clear by John Ray’s filing last week.”
In a November 17 filing with the U.S. Bankruptcy Court for the District of Delaware, Ray said there was a “complete absence of trustworthy financial information.”
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” Ray said at the time. “From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”
“What we have is a worldwide organization, but an organization run effectively as a personal fiefdom of Sam Bankman-Fried,” Bromley said. “The business only had a short life. It was founded in 2017 at Alameda; the currency exchanges were founded in 2019 and 2020. Here we are less than two years later in bankruptcy having collapsed.”
During that period of time, Bromley said, the company “laundered the world” in places like Berkeley, California; Hong Kong; Miami; Chicago; and the Bahamas, to name a few. “At all times it was effectively under the control of Mr. Bankman-Fried and effectively what we had was a lack of corporate controls at a level none of us in the profession have ever seen.
“We have witnessed probably one of the most abrupt and difficult collapses in the history of corporate America and history of corporate entities around the world,” Bromley said. “When Mr. Bankman-Fried signed over control of these businesses, he signed over control in a way that allowed everyone for the first time to see under the covers and recognize that the emperor had no clothes. These businesses were not operated in a manner that was consistent with traditional best practices.”
The next bankruptcy hearing is scheduled to take place on December 16 at 10 a.m. ET.
“[The hearings are] going to show how deep of a mess FTX is and how long this will take,” Yadav said. “The level of the ‘shitshow’ is going to become obvious.”