FTX’s first-day hearing runs smoothly in the midst of chaos

Chicago, Nov. 23 – FTX Trading Ltd.’s hearing on first-day motions was held on Tuesday, in an atypical calendaring more than one week after the company filed for bankruptcy, in the U.S. Bankruptcy Court for the District of Delaware.

The company filed bankruptcy after there was a proverbial “run on the bank.”

With unreliable books and records and compromised systems, it is estimated, but no firm number has surfaced, that the number of customers will run in the millions.

In a timeline presentation to the judge in the case, John T. Dorsey, it was noted that FTX was basically in business a very brief two years. During that time, the company “wandered the world,” making this very much an international case.

FTX was referred to, during the hearing, as a “personal fiefdom” for former chief executive officer Sam Bankman-Fried.

As details of the company’s governance come to light, it was noted that the lack of corporate controls was at a level that none in the profession have ever seen.

In the first-day hearings, one initial order of business was easily granted: joint administration of the case that spans 102 debtor entities.

Executive transfer

Newly appointed chief executive officer John Ray III’s first order of business, in the midst of chaos, has been to establish five core objectives as he shepherds the company through the bankruptcy process.

First, there is now an implementation of controls, including an independent board and a traditional and dependable governmental structure.

There is an effort to secure the assets of the company and start keeping records. One part of that challenge, obviously, is that so many of the assets are blockchain.

As part of the first objective, various FTX enterprises have been assigned to one of four “silos” with a different entity overseeing each silo.

Asset protection and recovery is the second core objective.

Daunting in execution, a vast amount of assets have been stolen or are missing. This is especially relevant to the asset of information, a key asset beyond just the crypto assets.

Additionally, FTX has been the victim of cyber attacks on the filing date and on subsequent days since the filing.

Third, a core objective is transparency and investigation.

A criminal investigation has already started and it is likely that the new chief executive officer will be speaking at Congressional hearings in December.

Regulators, both in the United States and around the world, are also examining the case.

A fourth core objective is efficiency and coordination, specifically coordinating with foreign entities.

FTX was a worldwide entity, in terms of its workforce, its customer base and its presence.

There is already, for example, an Australian proceeding underway, and the debtors will be working with them as they go forward.

Additionally, there are liquidation proceedings that have started in the Bahamas. Joint provisional liquidators from the Bahamas were in the court on Tuesday. If necessary, there will be recognition hearings held for the Bahamas case under Chapter 15 of the bankruptcy code. Already there has been a granted motion to transfer that part of the case from New York to Delaware, for better collaboration and simplicity.

Currently, the debtors reserve their rights with regard to the Bahamas liquidators in the face of what has been widely reported, that there has been evidence of movements of assets out of the estates to the Bahamas and on the heels of comments from the government of the Bahamas about actions they have taken with respect to certain assets.

Finally, the debtors are seeking to maximize value with the recognition that people want their money back. However, the debtors want to maximize the value of the assets before distributing them. The debtors will, notably, be working to sell some of the businesses quickly to support that objective.

For example, in terms of the Alameda arm of FTX, the debtors are trying to ascertain whether any of the venture investments made by Alameda can be sold and the price on such an asset. Many of the venture investments made by Alameda have been in the crypto universe.

Current status

The debtors also noted some details about the current status of the company.

A tremendous number of employees fled at the time of the bankruptcy filing.

Details are being assembled, but the number of employees estimated to remain on payroll is roughly 260, a response to a question from the judge.

The market cap of the company is currently $422 million. In a filing late on Wednesday, BitGo reported that $740,000,000 in digital assets have been transferred so far to the new custodian's custody as of Nov. 16.

Estimations on the market cap have been at wide variance through the company’s short existence, always in the billions, to its current market cap.

Caroline Ellison, former chief executive officer of related Alameda, posted to Twitter shortly before the bankruptcy filing that Alameda had $10 billion of assets not reflected on the balance sheet, after information was leaked that the company may be insolvent.

Redaction

A significant portion of the time at the hearing was spent on the issue of redaction of customer/creditor information.

Currently, the top 50 creditors list, with over $3 billion worth of claims, is entirely redacted in terms of the identity of the claimants.

The debtors argue that the list of millions of customers and their details including their email addresses is a valuable asset in and of itself.

They also assert that the customers are entitled to some form of privacy.

The U.S. trustee’s office pushed back and some of the little disagreement between the various entities so far has been around the precise details of customer redaction.

First, the trustee’s office asserts that corporate customers should not be entitled to the same privacy as individuals, especially those on the top 50 creditors list.

Second, a later potentially thorny issue is that the trustee’s office will likely be appointing a committee of creditors.

The judge and the trustee agree that under no condition will there be any privacy for any entity willing to serve on such a committee.

The second objection of the trustee has to do with the filing of claims. They are wary that the proofs of claim would be broadly covered under the redaction allowances.

The trustee’s office argued that there may be leeway on the identity of the claimants, but there should be no leeway on the transparency of the filing of claims.

Notably, with a global customer base, the trustee, by necessity, makes allowances for European Union customers who are entitled legally to their privacy.

The debtors point out that in most cases all they have so far for the customer list are emails. Implicitly, this would mean that for the millions of customers’ physical geographical locations will be a full investigational project.

On an interim basis, Judge Dorsey granted the debtors’ request for redaction.

He noted that we all know the “internet is wrought with potential dangers,” citing hacking but also the need to protect individuals and their assets, as the basis for his decision.

The trustee’s office, at the end of the hearing, asked for a court date in mid-December to review the redaction issue.

After some back and forth, the hearing is scheduled for Dec. 16.

Extra order

There was an extra order on the docket on Tuesday, in response to a request.

It was noted that some foreign entities might not have full knowledge of how the U.S. bankruptcy system works, especially regarding the automatic stay.

It was deemed useful if a comfort order was put into the docket to reiterate the part of the bankruptcy code dealing with the protections and restrictions of the automatic stay once a company has filed for bankruptcy.

There was no request for expansion, only restatement of the code, so that all could be made aware of the process.

Presumably, this was, in part, a response to the actions of the government of the Bahamas.

Cash use

Currently there are 216 bank accounts for the debtors.

The debtors sought permission to consolidate the accounts into five pooling accounts, related to the five silos.

There is the possibility that not all of the cash of the company has been found, to date.

A difference between restricted cash and unencumbered cash was delineated.

All reference to cash for the budget only applied to unencumbered cash, not regulatory or custodial restricted cash.

The trustee’s office had asked for an agreed-upon reduction in the central cash pool.

The debtors requested immediate access to the cash to pay vendors, both domestic and international. Vendors mainly relate to vendor data systems, storage and security measures.

An order was submitted and approved, with incorporated modifications from the trustee’s office.

The debtors have approval to pay up to $8.5 million of domestic U.S. critical vendor claims. Initially, the request had been for $9.3 million.

Approval has been granted for up to $1 million of international critical vendor claims, whereas the ask had started with an unlimited amount.

In terms of 503(b)(9) claims, FTX may pay up to $200,000, initially contemplated without a cap.

For lien claimants, there were no trustee revisions to a $125,000 cap.

The hearing for “second-day” motions is currently scheduled for Jan. 11.

FTX has headquarters in The Bahamas. The company filed Chapter 11 bankruptcy on Nov. 11 under case number 22-11068.

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