Over the weekend, FTX and affiliated debtors sent confidential letters to politicians, PACs and other recipients of donations to return the funds given by the formerly massive crypto exchange. It might seem like an odd request, but it was unsurprising to some legal experts who keep tabs on the space.
“Given the sheer scale of the political donations — as well as allegations that these were potentially financed through FTX customer funds (through Alameda) — current FTX management has strong reasons to seek a return of these funds as a way to meet creditor shortfalls,” Yesha Yadav, professor of law and director of diversity, equity and community at Vanderbilt University, told TechCrunch.
FTX and about 130 of its affiliated companies filed for Chapter 11 bankruptcy in mid-November after it failed to keep itself afloat and misused an “excess of $7 billion” in customer funds, the company’s new CEO, John J. Ray III, said at a hearing in mid-December.
But the request for donations to be returned is an “appropriate move in order to attempt to obtain as much of the misused customer deposits as possible, given the circumstances,” Michael Fasanello, crypto compliance officer at AnChain.AI, said to TechCrunch.
“Bankruptcy Code sections 548(a) and 550(a) give Chapter 11 debtors in possession (and appointed trustees) the power to sue and recover money and other forms of property the debtor sold, loaned, gifted, or otherwise transferred to third parties within two years of the bankruptcy filing if the transfers were (literally or constructively) designed to defraud other creditors,” Fasanello said.
“It is also likely that FTX or a liquidating trustee and their legal team will specifically cherry-pick cases where there is both (1) high value of funds to recover and (2) some level of awareness by the recipient that the source of funds is not wholly pure,” Fasanello added.
Yadav agrees. The main targets for donation returns will be larger recipients, where potential litigation (if needed) will be worth it, she said. But the hope is that recipients return the cash, and the tone of the notice, as well as its terms, “make clear that FTX management wants to motivate voluntary give-ups, opposed to pursuing legal action,” she added.
Last month, FTX debtors identified $1.7 billion of cash and $3.5 billion of crypto assets and $3 million of securities, according to a company statement. This totals about $5.5 billion in liquid assets, which Ray referred to as a “herculean” effort to assess the firm’s financial position.
One of the biggest difficulties for FTX right now is providing evidence of the “complex transaction trails that led money from customers to Alameda to an FTX executive — like [former FTX CEO] Sam Bankman-Fried — to a PAC,” Yadav said.
“We’re dealing with literally sort of a paperless bankruptcy in terms of how they created this company; it makes it very difficult to trace and track assets particularly in the crypto world,” Ray said during the hearing in December. “It’s unprecedented in the lack of documentation.”
Given this lack of record-keeping, proper accounting or auditing, tracking money through the FTX accounts will require a lot more detective work and analysis, Yadav said.
While FTX debtors didn’t disclose to whom they sent confidential letters, many of the donations to politicians and PACs are a matter of public record.
A public spreadsheet by OpenSecrets, a nonprofit that monitors money in politics, tracked over $84 million in donations to political candidates and organizations between Bankman-Fried, former FTX co-CEO Ryan Salame, and FTX’s former engineering head, Nishad Singh.
The biggest single recipient was Protect Our Future, a PAC that aims to “help elect candidates who will be champions for pandemic prevention.” The group got $28 million from Bankman-Fried, according to OpenSecrets. He also contributed donations to Democratic senators Debbie Stabenow, Kirsten Gillibrand, Maggie Hassan and Cory Booker, as well as Republican senators John Boozman, Lisa Murkowski and Susan Collins.
Looking forward, “it’s nearly impossible to determine the success of the attempted clawbacks,” Fasanello said. “What’s more important is that we make careful note of which individuals or entities actually comply with the clawback requests, and which choose to dig in and fight the battle in court.”
And there are certainly defenses to clawbacks, Yadav said.
“But the issue here is that recipients will have to litigate to show that they have a right to the money,” Yadav added. “They may choose to do this if they do not have the funds, or if the sums are large. In any event, it can be a painful process, and a costly one, so the easier course of action may be to return the funds.”
It’s a “time will tell” situation on whether candidates and PACs will return the funds, Fasanello thinks.
In general, those who have received donations have been pretty tight-lipped, but this may be a tactic to see what others do first, he added. “One domino in a certain direction will certainly push others in that same direction, particularly in the political realm, where birds of a feather flock together.”
While much is up in the air at the moment, Fasanello believes FTX will likely have some success in recouping these donations.