FTX bankruptcy hits $1B in losses, making it one of the costliest in history

The 2022 collapse of FTX has become one of the most expensive Chapter 11 cases in U.S. history. According to a Bloomberg report, the fees associated with FTX’s bankruptcy proceedings have nearly reached $1 billion.

As of January 2, $948 million had already been paid to a long list of law firms, with court records indicating that more than $952 million in fees had been approved. This figure places the FTX bankruptcy among the most costly legal cases the country has ever seen.

A rare outcome for creditors: Getting more than what they were owed

This comes as creditors are looking forward to getting back 118% of what they were owed, a rare outcome in the Chapter 11 process, where creditors usually end up getting pennies on the dollar.

The debtholders can thank the throngs of lawyers and financial advisers that have tracked down billions of dollars in digital assets and cash scattered across a byzantine network of accounts, legal experts told Bloomberg News.

The beneficiaries include hedge funds that picked up FTX customer claims that traded as low as 10 cents on the dollar after the company collapsed. FTX, which sought protection in November 2022, said last week that it had commenced initial customer distributions.

While the creditors are receiving large payouts, the cost of getting there is staggering. The case has become the most expensive Chapter 11 bankruptcy in the cryptocurrency world, far surpassing other high-profile bankruptcies like Celsius Network, BlockFi, and Genesis Global. The $502 million in fees associated with those bankruptcies combined is nearly half of what’s been spent in FTX’s case.

At the center of this expensive process is Sullivan & Cromwell LLP, FTX’s lead law firm, which has received more than $248.6 million in fees. The financial adviser Alvarez & Marsal has been compensated roughly $306 million.

Lawyers working on behalf of FTX customers and creditors have racked up another $110.3 million in charges. The sum total of these fees makes this one of the costliest bankruptcy cases of recent years, according to data provided by BankruptcyData.

Lawyers believe that the high fees could have been avoided if FTX had managed its finances with more care, according to the Bloomberg report.

Harvard Law School professor Jared Ellias pointed out that the bankruptcy costs would have been significantly lower if the company had maintained proper financial records.

When John Ray, FTX’s new CEO and restructuring expert, took over after the company collapsed, he was struck by the lack of corporate controls and trustworthy financial data.

In his 40-year career, which includes overseeing the Enron bankruptcy, Ray stated that FTX’s failure was unlike anything he had ever seen.

Ray’s consulting firm has also been paid more than $8 million, according to court records, for helping to lead the restructuring process. As the situation unfolds, lawyers continue to sift through FTX’s scattered legal entities, hoping to uncover more assets to pass along to creditors.

Meanwhile, the ongoing complexity of the case is tied to the global scale of FTX’s operations and the lack of regulation in the financial technology sector, as noted by Katherine Stadler, an independent reviewer of FTX’s fees.

Though Stadler’s report said that the bankruptcy was on track to be “very expensive by any measure,” she added that the professionals’ performance was also remarkable.

Research published by Ellias shows that Chapter 11 costs have steadily risen over the past decade, with more and more of a company’s pre-bankruptcy assets being consumed by these professional fees. It is an unfortunate trend, but one that seems to be becoming the norm for large-scale bankruptcies in the modern era.

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