FTX In Holiday Season - What We Know So Far
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The world is in a somehow murky situation ever since FTX Trading Ltd. (along with its affiliates and subsidiaries) ("FTX") filed for Chapter 11 in this November. Luckily, the new management of the FTX ("FTX Management") held a creditor meeting on December 20 to provide more information to the public, and below we sum up all of the available information for you, as well as share common things to look out for as the case develops.
What We Know from the December 20 Creditor Meeting
1. Availability of Tax-Related Data and Information
One worth noting aspect from the creditor meeting is that the current FTX Management is putting together a plan to compile and release trading data, records and other information necessary for tax-filing purposes so as to allow the affected creditors to meet their tax reporting obligation next year. The FTX Management did not specify a timeline for the contemplated release, but creditors should be able to expect some material progress in the coming weeks or months given the looming tax deadline in 2023.
2. Assets Identified as of December 20
The FTX Management indicated in the creditor meeting that as of December 20, over $1 billion in assets have been identified, including: (i) approximately $720 million in cash assets (not yet consolidated but deposited in licensed and authorized U.S. financial institutions), (ii) approximately $500 million held in U.S. institutions, (iii) approximately $130 million in cash assets in Japan (subject to applicable lock-up requirements in the given jurisdiction), (iv) approximately $423 million maintained with an unauthorized U.S.-based broker , and (v) approximately $6 million reserved for FTX's ongoing operation. (Note: The actual numbers are subject to the recording and/or transcript of the meeting made available by the FTX Management.)
As the FTX Management suggested, FTX's assets that are subject to this proceeding have not yet been fully identified and the management has been compiling and verifying other assets as well as account information that may or may not be deemed as avoidable transfers and/or assets subject to this proceeding. (For instance, claw-back of certain charitable donations made by FTX may be sought after by the management.) Needless to say, assets stored on FTX-maintained platform(s) are subject to access and withdrawal restrictions, so creditors having certain assets (e.g., NFT) stored thereon are temporarily barred from accessing or disposing of such assets.
What are the Implications of Criminal Charges against SBF and Key Employees
Criminal prosecutions against Sam Bankman-Fried ("SBF") and the key employees might prolong or complicate FTX's Chapter 11 proceeding to a certain extent. In general, parties involved in a bankruptcy proceeding may seek to depose witnesses for certain material aspects relating to the contemplated reorganization or liquidation, and the deposition made in such proceeding is under the penalty of perjury, meaning that inaccurate and/or incomplete statements would lead to criminal liabilities of the witness making such statement. Accordingly, if SBF plans to put up a good fight in trial rather than pleading guilty to Department of Justice's charges, he could decline to testify in the bankruptcy proceeding by invoking his Fifth Amendment right and thus leaving material facts (e.g., flow of funds or location of assets) in the dark unless other witnesses step up and disclose. Such potential is further implicated by the fact that two key employees of FTX (i.e., Caroline Ellison and Gary Wang) have plead guilty to the federal prosecutor on December 21. With the guilty plea reached by such key personnel, SBF might end up aiming for a guilty plea deal with the prosecutor, but whether he would take such route is to be closely watched in the coming weeks or months.
Another aspect worth monitoring closely is the restitution sought by the federal prosecutor pursuant to the criminal proceedings against SBF, Caroline Ellison and Gary Wang. In general, it is very common for federal prosecutors to seize and forfeit illicit gains in connection with their prosecution as the Mandatory Victim Restitution Act generally imposes an affirmative obligation on federal prosecutors to act with their best efforts and have the victims of crimes compensated with the forfeited gains. Such obligation to make restitution, however, may face competition in this incident given that FTX's assets are also subject to the bankruptcy proceeding in Delaware (and are thus assets distributable to eligible creditors) and the enforcement actions that may or may not be brought by the SEC and CFTC. It thus remains uncertain as to how the prosecutions would ultimately impact the available assets that are distributable to creditors in FTX's Chapter 11 proceeding.
What should Individual Creditors or Creditors Having Small Claims Expect
For creditors that are not likely to play a significant role in the creditor's committee or actively participate in the proceeding, there are several things that such creditors could still do to ensure the timely exercise of their rights.
1. Keep an eye on major announcements and deadlines:
At the risk of stating the obvious, creditors should pay close attention to the developments and deadlines as FTX's Chapter 11 proceeding progresses. The first thing to look out for is the deadline for filing creditors' proof of claim, which has not been fixed as of this writing. Additionally, creditors should keep an eye on the announcements or decisions made by the unsecured creditors' committee (which was appointed and formed on December 15) as the committee is tasked with representing the unsecured creditors throughout the proceeding and has the authority to consult with the debtor, investigate the debtor and its operations and participate in the formulation of a plan of reorganization. Also, to the extent possible, creditors are encouraged to look at FTX's filing docket (available here through its appointed agent) from time to time to gain a better grasp of what is happening at each stage of the proceeding. For instance, with a concurrent notice logged in the filing docket, the FTX Management may hold creditor's meeting (like the one held on December 20) from time to time and such meeting offers a great venue for creditors to (i) obtain the most updated information and (ii) have questions answered by the FTX Management (although the management would not answer legal-related questions or questions that, judging by the current developments and available information, are deemed inappropriate for such meeting).
In addition to FTX's Chapter 11 proceeding, creditors should also pay attention to relevant Bahamian bankruptcy proceeding initiated by Bahamian liquidators overseeing the liquidation of FTX Digital Markets (which is FTX's Bahamian entity) and the ancillary Chapter 15 proceeding because all these proceedings could ultimately implicate one another and affect the rights of the involved creditors. For instance, FTX Digital Markets' Bahamian liquidators have filed a motion on December 12, 2022 to request the U.S. Bankruptcy Court for the District of Delaware to dismiss FTX Property Holdings from FTX's Chapter 11 proceeding on the ground that "all the assets and the creditors [of FTX Property Holdings] are located [in Bahama]". Although it is uncertain as to how the court would rule on such motion, one thing that can be said with certainty is that such jurisdictional-related issue will continue to arise and bring challenges and uncertainties to the creditors participating in different FTX proceedings.
2. Formulation and approval of reorganization/liquidation plan:
It is too early to say how the plan will be formulated and administered as FTX's assets are still to be located, the unsecured creditors' committee has just appointed its counsel and everything is still at the early phase. That being said, continuous monitoring of the plan is essential for creditors and in certain circumstances, as briefly touched upon below, would affect creditors' fundamental rights in the proceeding.
Also, creditors might also want to monitor the development of FTX's proposed sale of certain part of its businesses (i.e., Embed Technologies, LedgerX LLC, FTX Japan and FTX Europe), which is brought to the court for approval by the FTX Management with a motion filed on December 15, 2022. The sale of these four entities could generate proceeds that could bolster FTX's future distributions to creditors, but such sale, as the FTX Management expressed in the motion, might require an expeditious sale process because the value of these four entities might diminish quickly due to the suspension of certain entities' local licenses and significant customer and employee attrition. The hearing date for this motion is set on January 11, 2023, after which more information should be available for assessment.
3. Should each of the creditors retain a counsel?
Whether to retain legal counsel to represent a creditor in FTX's Chapter 11 proceeding is a fact-specific consideration. While it is not uncommon to see creditors successfully riding out the whole proceeding without retaining legal counsel, the creditors are still encouraged to have at least a few trusted legal and financial professionals to consult with in the event where aspects of the formulation or administration of the plan implicate the creditor's rights down the road. For instance, it is fairly common to see that following the approval and several years of administration of a liquidation plan, the plan administrator, with appropriate approval, offers certain creditors, whose claim amount falls under a specified threshold, to either opt in or opt out for a one-time distribution that, on the one hand, permits the plan administrator to significantly cut costs and expenses incurred in connection with its administration, and, on the other hand, extinguishes the participating creditors' right to receive future distribution from the plan. Whether to participate in such one-time, lump sum distribution requires some understanding of law and finance because the creditors might or might not be better off from such participation. For instance, creditors in the Madoff proceeding (the one concerning the Ponzi scheme orchestrated by Bernie Madoff) are less likely to opt in to this one-time distribution because it is possible (if not likely) that such creditor will receive more distributions down the road than the amount received from this one-time distribution (given the nature and facts underlying the Madoff proceeding). However, such one-time distribution offer might be more appealing in the FTX proceeding because of all the uncertainties surrounding this case. When the time comes and requires creditors to make a decision, it would be in the best interest of the concerned creditors to seek the advice of legal and financial professionals to fully understand the consequences and implications from such decision.
All in all, the FTX Chapter 11 proceeding is still at its very early stage and more information will be made available down the road.
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