Forbes: Fully Compensated, So Why Are FTX Creditors Still Unhappy?
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Forbes: Fully Compensated, So Why Are FTX Creditors Still Unhappy?
FTX claims it has recovered enough funds to repay most creditors, but some remain dissatisfied.
Navigating Web3 tides with focused insightsBy Nina Bambysheva, Forbes
Translated by Luffy, Foresight News
Last month, lawyers overseeing the FTX bankruptcy filed a reorganization plan that would not only fully repay nearly all customers but also provide them with an additional 18% interest. If the majority of creditors and the bankruptcy judge approve the plan, repayment checks could be mailed out within two months.
Compared to typical bankruptcy cases, the FTX payout is substantial. Rarely do creditors receive cash compensation, and some may wait years to recover only a fraction of their claims. FTX creditors are among the lucky ones—but not everyone is celebrating.
Some are dissatisfied because they cannot reclaim their original cryptocurrencies from the exchange. Instead, customers will be compensated in U.S. dollars based on the value of the crypto assets FTX held when it filed for bankruptcy in November 2022—a period when crypto prices were depressed due to industry turmoil. Since then, Bitcoin has nearly tripled, and many other tokens have reached new highs. For investors whose digital assets remain trapped on the platform, this represents a missed opportunity. While many lawyers—including those currently working with FTX—argue that this is how bankruptcies work, creditors insist they have been wrongly deprived of their property, and this is not the only source of their frustration.
They claim that FTX—currently led by John J. Ray III and represented by multiple legal and financial firms—has failed to maximize the company’s value and has disregarded the interests of former customers and other creditors. Sullivan & Cromwell, the primary law firm now representing FTX and its pre-bankruptcy legal advisor, faces constant complaints.
Arush Sehgal, representative of the FTX Customer Ad Hoc Committee (CAHC), composed of over 1,700 former FTX customers, summarized this frustration: “FTX promotes the narrative that everyone is being fully repaid with interest, but the reality is they’ve valued certain FTX assets at zero. In our estimation, they’ve misvalued $10–16 billion in assets. As long as John Ray retains unilateral power and there are no creditors on the board, this plan lacks any credibility.”
Below are summaries of key issues raised by creditors, along with detailed responses from FTX:
1. Creditors Accuse FTX of Selling Assets Below Market Value
a) Take LedgerX, a crypto derivatives platform acquired by FTX founder Sam Bankman-Fried in October 2021 for nearly $300 million. In May 2023, the entity was sold for $48.8 million to a subsidiary of Miami International Holdings, which operates several options exchanges in the U.S. According to Grant Thornton’s March 2023 audited financial statements, this price was significantly below its net asset value of $98.8 million as of December 31, 2022.
In a February 2024 class-action lawsuit against Sullivan & Cromwell, a group of FTX investors alleged that the law firm “intentionally excluded FTX US Derivatives (formerly LedgerX) from the FTX bankruptcy proceedings because they knew the company held approximately $250 million in customer funds from FTX that could—and did—generate significant revenue.” The lawsuit claims Sullivan & Cromwell participated in the fraud that ultimately led to FTX’s collapse, leveraging their pre-bankruptcy relationships. “FTX could not have executed such massive fraud alone,” the complaint states. “Sullivan & Cromwell’s vast resources, regulatory connections, expertise, and assistance were essential to carrying out the scheme.”
Robert J. Cleary, the independent examiner appointed in the FTX case and a former federal prosecutor, defended the FTX entities involved in the bankruptcy (the debtors) in a report released on May 28, but recommended further investigation into two pre-bankruptcy transactions involving Sullivan & Cromwell: Bankman-Fried’s purchase of shares in Robinhood and the acquisition of LedgerX.
As with most responses, FTX referenced this report: “The court-appointed independent examiner investigated and reported on this matter. He found that ‘S&C did not make any final decisions about which entities would file for bankruptcy’ and that ‘John Ray and the directors made the final determinations.… At the time of filing, Ray believed LedgerX was solvent.… The examiner saw no evidence that the decision to exclude LedgerX from the bankruptcy filing was problematic.’”
The examiner noted that “the debtors received six non-binding letters of intent,” but only two actual bids—$35 million and $14 million. The debtors negotiated a final sale price of approximately $50 million, and “the agreement (1) was approved by the debtor’s board, (2) required stakeholder review and feedback (no objections were received), (3) required an auction process allowing higher or better offers, and (4) was approved by the court,” based on undisputed “evidence showing the sale transaction represented the ‘highest or best offer.’” The examiner concluded that the lower sale price compared to the purchase price indicated FTX overpaid for LedgerX in October 2021, suggesting potential claims should be pursued against certain original sellers.
b) Millions of SOL tokens owned by FTX have increased more than fivefold in dollar value since the exchange filed for bankruptcy. These tokens were sold at steep discounts to major crypto companies and hedge funds, including billionaire Mike Novogratz’s Galaxy Digital, which helped FTX orchestrate the sale. Most tokens were subject to multi-year vesting schedules, but Kavuri and others argue these sales harmed creditor interests. Companies like Galaxy Digital stand to profit billions from speculative purchases.
In April 2023, FTX sold its stake in Sui blockchain developer Mysten Labs for $96 million—$5 million less than its initial investment. It also sold warrants for 890 million SUI tokens, exercisable after the platform launch. The following month, these tokens entered the market and quickly surged above $1, implying FTX’s initial investment was worth close to $1 billion.
“A simple review of the SUI secondary market reveals that selling tokens at a discount before public issuance fails to maximize profits. Moreover, it raises questions about whether the handling of FTX’s estate reflects mere immaturity or negligence,” wrote Rob Hadick, general partner at Dragonfly, a crypto-focused venture capital firm, in a statement shared with Forbes.
FTX response: The sale of tokens was approved by the debtors, the bankruptcy court, and its advisors prior to token issuance. Token prices often start high but decline sharply within months and have remained highly volatile since launch. Certain tokens may be extremely illiquid and volatile, lacking fundamental drivers to sustain price levels. While short- or long-term assets may experience extreme price swings attractive to gamblers, FTX’s assets are not hedge funds, long-term investors, or speculators. Additionally, auctioned tokens had a four-year lock-up period. Due to this vesting schedule, locked tokens were priced well below market rates.
2. FTX 2.0
Creditors claim that if FTX had chosen to relaunch its trading platform—one of the world’s largest before its collapse—it could have generated hundreds of millions more in value.
“Within our group of over 1,600 creditors holding nearly $1 billion in claims, we conducted a survey and received commitments of $200–300 million in claims willing to convert into equity in a new FTX (FTX 2.0). If the debtors had allowed FTX 2.0 and debt-for-equity swaps, every creditor’s recovery would have increased by 3%. John Ray’s simple decision to abandon restarting FTX disadvantages all creditors,” said Sehgal, a member of the Customer Ad Hoc Committee.
However, Dragonfly’s Hadick expressed skepticism, citing FTX’s relationship with hedge fund Alameda Research, owned by Bankman-Fried: “The exchange technology itself wasn’t particularly valuable. It worked well largely because of agreements with Alameda Research, which acted as an internal market maker and operated at a loss to provide better trading experiences for FTX users. That clearly wouldn’t exist in a relaunched FTX,” he said. “If you can retain customers upon relaunch, then the user base has value, but realistic estimates suggest significant customer attrition. The valuation of a new exchange depends heavily on user retention.”
Nonetheless, last year several companies expressed interest in acquiring the exchange, including Bullish—a cryptocurrency exchange run by former NYSE president Tom Farley—fintech startup Figure Technologies, and private investment firm Proof Group.
FTX’s response refers to the disclosure statement released alongside its reorganization plan (pages 45–49): The restart proposal was thoroughly considered and rejected only when it became clear it was unworkable. Through a process designed with the Official Committee of Unsecured Creditors and under supervision of the U.S. Bankruptcy Court, the debtors contacted dozens of investors. Every investor conducting due diligence reached the same conclusion: the offshore exchange’s operational systems were flawed. The exchange lacked adequate custody, security, and financial reporting arrangements, and there was no reconciliation between customer “positions” and actual underlying assets. Bankman-Fried left behind a mess, partially documented in Chapter 11 case records and criminal trial transcripts detailing the problems within FTX’s operations. After exhaustive investigation, no investor was willing to spend the necessary time and money to build these systems and revive the offshore exchange. The asset and its creditors’ trustee also explored selling the offshore business to a third-party operator or merging with another exchange. In each scenario, weighing costs, delays, and other factors, no serious investor offered a meaningful bid. We didn’t even receive any credible offers for intellectual property, as the code was outdated and the brand became synonymous with fraud.… The fairest thing we can do is prioritize returning as much cash as possible to victims so they can decide how to use it themselves.
3. Unpursued Claims
FTX may have had grounds to file claims against other crypto entities. The most obvious example cited by creditors is Binance. Bankman-Fried used $2.1 billion worth of FTT (FTX’s token) and stablecoins to buy back equity from early investors, a move that played a key role in FTX’s downfall. In early November 2022, Binance founder and former CEO Changpeng Zhao posted a series of messages on social media suggesting liquidity issues at FTX, intensifying panic among crypto investors.
FTX response: The timing and sequence of investigations and lawsuits by the debtors are based on multiple considerations, and laws allow ample time for such litigation. The debtors have not yet made a final decision regarding matters related to Binance.
4. Objections to the Reorganization Plan
a) According to recent filings, FTX has settled tax liabilities with the U.S. government for $885 million. Of this, $200 million will be treated as a priority claim and paid within 60 days of the settlement becoming effective. The remaining $685 million will be paid “as funds become available.” This is a sharp reduction from the IRS’s initial demand of over $44 billion (later revised to $24 billion). However, the Customer Ad Hoc Committee questions the validity of the U.S. government’s claim, arguing it’s unfair for customers of this Bahamas-based international exchange to owe U.S. taxes without having traded on a U.S. platform.
FTX response: Income tax withholding is governed by applicable tax laws, which specify certain reporting and withholding exemptions. Where such exemptions apply, no tax withholding occurs.
b) The debtors propose paying creditors via check or wire transfer. “They’ve effectively made it harder for FTX customers to recover their funds,” said Sunil Kavuri, another FTX creditor, noting that the claims portal set up for creditors is difficult to navigate and lacks flexibility for customers from jurisdictions with limited banking services or unreliable mail delivery. An additional clause in the FTX plan states that claims may be denied if subsequent KYC or withholding tax requirements are not met.
FTX response: The debtors are currently discussing the possibility of appointing a distribution agent with various parties and exploring different distribution methods, including cash or stablecoins. Customers who did not attempt to withdraw funds from the exchange first need not worry.
c) “The current draft plan includes a governance structure that grants the debtors broad, sweeping, and unilateral powers, while retaining John Ray and a board free from any creditor oversight,” wrote Mr. Purple, a bankruptcy expert and FTX creditor advocate, in a letter to Forbes.
FTX response: The bankruptcy court order confirming the plan requires it to be administered according to its terms or other provisions of the court order. During the post-confirmation period, the U.S. Bankruptcy Court will maintain full oversight of the bankruptcy estate.
Beyond these issues, the Customer Ad Hoc Committee filed an objection on June 5 to FTX’s disclosure statement, arguing the plan is “legally unconfirmable” due to inconsistencies, omissions of material information, and inadequate descriptions of releases from liability for certain types of corporate debts. In a separate objection, the claims administrator overseeing the liquidation of crypto lending firm Celsius—who has filed a claim against FTX—also cited incomplete disclosures.
Mr. Purple added: “Currently, the draft plan provides only surface-level clarity to creditors with claims under $50,000 as of the petition date. According to FTX’s data, these creditors account for only $1.2 billion of the estimated $16.5 billion in total recoveries. But for claims above $50,000, timelines and processing lack sufficient detail, making it impossible to make an informed voting decision.” These include clarifications on the $400 million hack shortly after FTX filed for bankruptcy, when DOJ-held funds will be distributed to creditors, and details on potential avoidance actions, such as recovering payments made to Binance.
The bankruptcy plan is expected to go to a vote by creditors late this summer. Kavuri and Sehgal, leaders of the Customer Ad Hoc Committee, are urging creditors to vote against the plan. Vladimir Jelisavcic, founder and manager of Cherokee Acquisition, a boutique investment bank focused on bankruptcy claims, expects most will vote in favor and accept the payout.
“Sullivan & Cromwell and John Ray have done something very valuable and important,” said Temple University law professor Jonathan Lipson, who has studied the FTX bankruptcy, basing his analysis on bankruptcy documents and interviews with Bankman-Fried and his parents. “Bankruptcy is indeed about sharing pain. But the right metric is how to maximize the value of the estate—what do you get? I think there are reasonable questions about that.”
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