(Bloomberg) -- Cryptocurrency firm FTX won court approval to fully repay customers whose digital assets were locked on the platform when it imploded nearly two years ago, an unusual result that could net shareholders in Sam Bankman-Fried’s fraud-tainted exchange a slice of $1 billion in seized assets.
US Bankruptcy Judge John Dorsey said Monday he’d approve payments to FTX customers harmed by Bankman-Fried under a sweeping proposal formulated by advisers who took charge of the exchange after it collapsed. In November 2022, crypto prices were so low and FTX was in such chaos that advisers initially concluded creditors would recover only a portion of what they were owed.
But customers’ prospects improved substantially during the bankruptcy. In June, the company had $12.6 billion, an amount that could climb to as much as $16.5 billion after FTX is done tracking down and selling all of the platform’s assets, according to court documents. Sold assets include various venture-capital projects like FTX’s stake in the artificial-intelligence company Anthropic.
“Certainly we benefitted from the bull crypto markets of the last year,” creditor attorney Ken Pasquale told the judge overseeing the insolvency case. The company was able to take advantage of that run up by cutting deals with creditors, government regulators and others, Pasquale said.
The turnaround has been so significant that FTX preferred shareholders could also get some money back. Shareholder payments would come from a portion of the funds seized by the federal government, proceeds that include roughly $626 million generated from the sale of Robinhood Inc. stock previously owned by Bankman-Fried and FTX co-founder Gary Wang. Such payments are rare in Chapter 11, where stockholders are usually wiped-out.
Firms that own preferred shares include Canyon Partners, Tribe Capital Management, and Steadview Capital Management, according to a disclosure filed Sunday in bankruptcy court. Canyon is also one of the largest owners of FTX customer claims, holding more than $600 million in such claims, according to court documents.
Still, some FTX customers have criticized the plan because unlike other bankrupt platforms repayments are being made in cash instead of crypto, meaning they’ll miss out on the full appreciation of digital assets since the firm collapsed. Customers are expected to receive nothing for FTX’s utility token, FTT.
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There have only been a handful of large corporate US bankruptcies that saw creditors get all their money back in recent times. In 2021, car rental company Hertz Global Holdings exited bankruptcy with money left over to repay shareholders, following a strong run-up in used car prices.
Although all debts will be paid in full, plus interest, nothing will be left over for equity holders unless federal prosecutors agree to share the $1 billion they have seized, FTX bankruptcy attorney Andrew Dietderich said in court Monday. Under an agreement with FTX, shareholders could get 18% of any returned forfeiture assets up to $230 million, according to a September court filing.
FTX lawyers said Monday that an agreement with the Justice Department over the potential return of seized funds has not been reached and its possible preferred shareholders receive no distribution under the plan.
Customer recoveries, meanwhile, have been given a massive jolt by the crypto rebound, which has caused the price of Bitcoin to roughly quadruple since late 2022.
The decision to make cash repayments was based on the fact that FTX held substantially less crypto than customers were led to believe, lawyers said during Monday’s court hearing. Instead, FTX CEO John J. Ray III unloaded digital assets FTX did hold like Solana, a token heavily associated with Bankman-Fried, surged.
The firm’s bankruptcy advisers hired Galaxy Digital Capital Management LP to sell and hedge FTX’s remaining digital assets. FTX’s coffers swelled under the arrangement contributing to customers getting repaid with interest.
Customers payments will not occur immediately. Before customers start getting paid, FTX must put together a trust and hire a firm to oversee the process of distributing the money.
FTX filed bankruptcy in November 2022 after Bankman-Fried shut down the company’s crypto-trading platform and handed control to insolvency experts. Bankman-Fried was later convicted of fraud.
The case is FTX Trading Ltd., 22-11068, US Bankruptcy Court for the District of Delaware.
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