Beneficiaries of Legal Expertise
Among those who stand to gain are hedge funds that acquired FTX customer claims, which were trading as low as 10 cents on the dollar following the company’s collapse. FTX, which sought bankruptcy protection in November 2022, announced last week the initiation of initial distributions to its customers. However, lawyers are still navigating through a multitude of disorganized legal entities associated with FTX, in search of additional assets to distribute to creditors. Several lawsuits stemming from the fallout remain unresolved, including a significant claim against Binance Holdings Ltd., seeking nearly $1.8 billion.
Comparative Bankruptcy Costs
Recent court documents indicate that the combined costs of bankruptcies involving other notable crypto entities like Celsius Network LLC, BlockFi Inc., Genesis Global, and Voyager Digital Holdings Inc. totaled around $502 million. In contrast, the ongoing FTX proceedings are approaching double that amount, showcasing an unprecedented financial burden. According to court records, FTX’s primary legal representative, Sullivan & Cromwell LLP, has received over $248.6 million, while financial advisor Alvarez & Marsal has billed approximately $306 million. Additional advisors representing FTX customers and other creditors have incurred about $110.3 million in fees, making this one of the priciest Chapter 11 cases in recent years, as reported by BankruptcyData.
Implications of Poor Corporate Governance
The exorbitant costs associated with FTX’s repayment strategy, which received approval in October, could have been reduced if the company had maintained proper financial documentation, according to Harvard Law School professor Jared Ellias, who has analyzed the expenses tied to large Chapter 11 cases. John Ray, the restructuring consultant who took over as CEO of FTX during its collapse, remarked that he had never encountered “such a complete failure of corporate controls and such a complete absence of trustworthy financial information” throughout his four-decade career, which includes overseeing Enron’s own bankruptcy. Ray’s consulting firm has been compensated over $8 million in connection with this case.
Increasing Legal Costs
Both Sullivan & Cromwell and FTX have opted not to comment on the situation, while Alvarez & Marsal did not respond to inquiries for statements. The high expenses associated with FTX’s bankruptcy come amid a broader trend of rising legal and professional service costs, as noted by Ellias. Research published this month indicates that the daily costs of bankruptcy have surged significantly from 2010 to 2022, with Chapter 11 fees increasingly consuming a greater portion of a corporate debtor’s assets prior to filing.
Analysis of the Extraordinary Case
Katherine Stadler, a lawyer assigned to independently evaluate FTX’s fees, described the case as exceptional due to the “largely unregulated financial system” in which similar financial technology firms operate, its extensive global reach, and the absence of basic corporate governance practices. While Stadler’s report acknowledged the bankruptcy’s trajectory toward being “very expensive by any measure,” it also recognized the remarkable performance of the professionals involved. The bankruptcy of Lehman Brothers remains the most costly Chapter 11 case on record, with expenses nearing $6 billion, according to a 2019 report from the Federal Reserve Bank of New York. The restructuring of Puerto Rico’s public debt has also exceeded $2 billion, marking it as the priciest municipal bankruptcy in U.S. history. Both Ray and James Bromley, an attorney from Sullivan & Cromwell, previously managed the bankruptcy of Nortel Networks, which incurred costs over $2 billion. Recently, pharmaceutical companies like Purdue Pharma LP have also accumulated significant fees in opioid-related bankruptcies, surpassing $939 million since their Chapter 11 filing in September 2019.
