FTX Collapse Background

• FTX was one of world's largest crypto exchanges in 2022
• Owned/run by Sam Bankman-Fried (SBF)
• November 2022: Allegations surfaced of co-mingling client funds with Alameda Research (SBF's hedge fund)
• FTX lent $10 billion of client money to Alameda for trading/debt payments
• Funds locked up in crypto projects or lost by Alameda
• Company unable to meet withdrawal demand, froze withdrawals
• Filed Chapter 11 bankruptcy November 11, 2022

Legal Consequences

• SBF sentenced to 25 years in prison
• Caroline Ellison (Alameda CEO) received 2 years sentence in September
  • Lighter sentence due to cooperation and testimony against SBF
• John J. Ray III appointed as FTX CEO (previously handled Enron bankruptcy)

Initial Bankruptcy Assessment

• Ray wrote: "Never in my career have I seen such a complete failure of corporate controls"
• Records in complete disarray
• Assets fraction of expected for $32 billion valued company
• Company held only 1% of Bitcoin and 1.2% of Ethereum customers believed it had
• Most customer funds appeared lost

Recovery Plan Approval

• October 7th: Bankruptcy judge approved FTX repayment plan
• Plan first announced May 2024, now officially approved
• Effective date: October 31st (Halloween)

Customer Repayment Details

Convenience Class (98% of customers)

• Account balances $50,000 or less
• $1.2 billion in aggregate claims
• Receive 118% of account balances within 60 days
• 18% represents 2 years interest at 9% rate (9% × 2 = 18%)

Entitlement Class (2% of customers)

• Larger account holders
• $9 billion in claims (lion's share of money owed)
• Recovery rate: 129-143% depending on timing/final liquidation amounts
• Begin receiving distributions in 2025, no deadline for completion

Claim Valuation Issues

• Claims based on November 2022 account values (near crypto market bottom)
• Bitcoin has risen ~300% since then
• Some customers dissatisfied they can't get back actual cryptocurrencies
• Forced to effectively "sell at the low"

Sources of Recovery Funds

Asset Recovery

• Tracked down some lost client funds
• Benefited from crypto market rebound since November 2022
• Sold assets company held at profit

Investment Sales

• $500 million Anthropic (AI startup) investment sold for ~$900 million
• Real estate purchased by SBF: hundreds of millions recovered
• Assets recovered from Caroline Ellison

Legal Actions

• Litigation claims settlements
• Clawback efforts on SBF donations to various causes (mixed results)
• Attempting recovery of celebrity endorsement payments (e.g., Shaquille O'Neal)
• $18 million in prepayments to teams/celebrities
• Unclear success rate on celebrity/influencer recoveries

Government Cooperation

• IRS: Reduced $24 billion tax claim to $200 million cash + $685 million subordinated claim
• Commodity Futures Trading Commission: Subordinated their claims, agreed to contribute recoveries to customer restitution fund
• Bahamas liquidator: Agreed to work with FTX management despite previous challenges

Bankruptcy Success

• Judge John Dorsey called it "model case for how to deal with very complex Chapter 11 bankruptcy proceeding"
• Even FTX shareholders may receive up to $230 million
• Comprehensive effort across all fronts to make customers whole

Future Outlook

FTX Operations

• Chapter 11 typically leaves door open for return to operations
• This plan is for full liquidation
• Company explored comeback possibility but proceeding with liquidation

FTT Token

• Still trading around $2 (speculative)
• No plan to bring back FTT
• FTT holders receive no compensation in liquidation

SBF Appeal

• Recently appealed sentence
• Lawyers argue FTX was never insolvent, SBF treated unfairly
• Evidence still shows lying, using backdoor program against terms of service
• Judge analogy: "thief who takes loot to Las Vegas and successfully bets stolen money not entitled to sentence discount"
• Unlikely to see sentence reduction

Key Lessons

• Importance of caution with finance startups, especially unregulated crypto
• Only invest money not needed immediately
• Check what protections exist with investment services
• Traditional institutions have bankruptcy insurance protections
• Crypto offerings typically lack these protections