FTX Scrapping Raises Concerns Over Legal Team’s Profits

The scrapped relaunch of FTX, a bankrupt cryptocurrency exchange, has raised concerns over the profits made by the legal team involved in the bankruptcy process. Former United States Securities and Exchange Commission (SEC) official John Reed Stark criticized the FTX restructuring plan, calling it a “highway robbery of highway robbers.” Stark suggested that the legal team should send sarcastic “Thank You” notes to FTX customers, highlighting the substantial profits they made during the bankruptcy proceedings. The lawyers and restructuring team managing FTX billed over $200 million in fees from November 2022 to June 2023, which were deemed reasonable by the court-appointed fee examiner. However, recent compensation filings revealed that FTX spent around $53,000 per hour on legal and advisory fees in the quarter ending Oct. 31, 2023. This article explores the concerns raised over the profitability of the legal team involved in the FTX bankruptcy process.

1. Background

FTX, a now-defunct cryptocurrency exchange, has recently undergone a restructuring plan that has raised concerns about the profits of its legal team. The restructuring process, which took place during the bankruptcy proceedings of FTX, has prompted criticism and skepticism from former SEC official John Reed Stark and others in the industry.

2. John Reed Stark’s Criticism

John Reed Stark, a former official of the United States Securities and Exchange Commission (SEC), has voiced his criticism of FTX’s restructuring plan. Stark suggested that the legal team involved in the bankruptcy process may be profiting from it. In a post on social media, Stark sarcastically proposed that all FTX customers should receive a “Thank You” note from the legal team, highlighting the substantial profits they made from the proceedings. Stark went on to suggest that each member of the legal team could potentially afford a new beach house by 2024.

3. FTX Bankruptcy Proceedings

During a hearing in the U.S. Bankruptcy Court for the District of Delaware, FTX lawyer Andy Dietderich of Sullivan & Cromwell stated that there were no plans to relaunch FTX in the Chapter 11 bankruptcy framework. The restructuring team and lawyers managing FTX’s bankruptcy billed over $200 million between November 2022 and June 2023. The fees charged by the legal team were deemed reasonable by the court-appointed fee examiner, Katherine Stadler, according to a filed report. While the fees are considered reasonable at the moment, they have raised some eyebrows within the industry.

4. Stark’s Prediction

John Reed Stark expressed his belief that the Chapter 11 reorganization plan for FTX is unlikely to succeed. He likened the restructuring process to trying to reorganize criminal organizations such as “Murder Incorporated, The Cali Drug Cartel, and Madoff Investment Advisory Services.” Stark’s comparison highlights the skepticism surrounding the effectiveness of the current bankruptcy proceedings.

5. Sky-High Legal and Advisory Fees

In the fourth quarter of 2023, FTX reportedly spent approximately $53,000 per hour on legal and advisory fees. This significant expenditure on fees raised eyebrows within the industry and drew attention to the amount being charged by the legal team. Between August 1 and October 31, 2023, the bankruptcy legal team billed a total of $118.1 million in fees. This equates to an average of $1.3 million per day or $53,300 per hour over a span of 92 days.

6. Sale of Claim against Genesis Global Capital

FTX has recently submitted a request to sell its $175 million claim against bankrupt Genesis Global Capital in a Delaware court. The claim is owned by associated hedge fund Alameda Research, and if granted, FTX will have the opportunity to sell the claim either in its entirety or in parts. The timing of the sale will be strategic, aiming to maximize the conditions for a favorable outcome.

7. FTX Collapse and Genesis’ Loss

FTX collapsed in November 2022 after accounting irregularities were discovered. At the time of the collapse, Genesis had $175 million tied up in its FTX account. Genesis has stated that the loss of funds did not significantly impact its market-making activities, but the collapse of FTX has undoubtedly had implications for both the exchange and its clients.

8. Trust in Crypto Exchanges

The collapse of FTX has raised concerns about the level of trust that investors can have in cryptocurrency exchanges. The incident has highlighted the potential risks involved in trading and storing funds on exchanges, and has prompted individuals to reevaluate their trust in the industry as a whole. Trust has always been a key factor for the widespread adoption of cryptocurrencies, and incidents like the FTX collapse have the potential to erode that trust.

9. Bitcoin Price Volatility

Bitcoin, the flagship cryptocurrency, has experienced muted price volatility in recent times. This has prompted traders and investors to shift their focus to other cryptocurrencies such as Chainlink (LINK), Internet Computer (ICP), Render Token (RNDR), and Suterusu (SUI). The shift in focus to these alternative cryptocurrencies highlights the versatility and diversity of the cryptocurrency market.

A recent report has also highlighted concerns over job losses in the entertainment industry due to the muted price volatility of Bitcoin. The entertainment industry, which has seen significant investment and interest from individuals involved in the cryptocurrency space, may face challenges if the expected returns are not achieved. This could have broader implications for the industry as a whole.

10. Conclusion

The scrapping of FTX’s relaunch and the handling of its bankruptcy proceedings have raised questions about the profits being made by the legal team involved. The sky-high legal and advisory fees associated with the proceedings have drawn attention and criticism from industry experts. The collapse of FTX has also had implications for trust in the crypto exchange industry as a whole. Investors and traders are reevaluating the level of trust they have in exchanges and the broader industry. The impact of the FTX collapse on trust and the ongoing discussions around legal and advisory fees remains a point of contention within the industry.