FTX Scrapped Relaunch Raises Legal Team’s Profit Alarm

Former Securities Exchange Commission (SEC) official John Reed Stark has expressed concerns about the FTX restructuring plan, suggesting that the legal team involved may be profiting from the bankruptcy process. Stark took to a social media platform to share his views, stating that all FTX customers should receive a sarcastic “Thank You” note from the bankrupt exchange’s legal team, considering the significant profits they have made during the bankruptcy proceedings. In fact, Stark went as far as to suggest that each member of the legal team might be able to afford a new beach house in 2024.

During a hearing on January 31 in the U.S. Bankruptcy Court for the District of Delaware, FTX lawyer Andy Dietderich of Sullivan and Cromwell clarified that there were no plans to relaunch FTX, also known as FTX 2.0, within the current Chapter 11 bankruptcy framework. This statement aligns with Stark’s earlier assertion that the Chapter 11 FTX reorganization plan was unlikely to be successful. Stark likened the task of restructuring FTX to attempting to reorganize criminal organizations such as Murder Incorporated, The Cali Drug Cartel, and Madoff Investment Advisory Services, indicating his skepticism towards investing in the legal team.

The lawyers and restructuring team managing FTX, which is currently bankrupt, have billed over $200 million between November 2022 and June 2023. This amount has been deemed reasonable by the court-appointed fee examiner Katherine Stadler, who stated in a filed report on June 20 that the fees were “not wholly unreasonable at the moment.” Recent compensation filings show that FTX spent approximately $53,000 per hour on legal and advisory fees in the quarter ending October 31. Documents from December 5 to December 16 further revealed that the bankruptcy legal team billed at least $118.1 million from August 1 to October 31, averaging $1.3 million per day or $53,300 per hour over the 92-day period.

On February 1, FTX submitted a request in a Delaware court seeking to sell its $175 million claim against bankrupt Genesis Global Capital. This claim is currently owned by the associated hedge fund, Alameda Research. If granted, FTX would have the option to sell the claim in its entirety or in parts, strategically timing the sales to optimize conditions.

FTX faced collapse in November 2022 following the discovery of irregularities in its account books. At that time, Genesis had $175 million tied up in its FTX account, although it stated that this did not impact its market-making activities.