New York Times (unpaywalled):

When the cryptocurrency exchange FTX declared bankruptcy about 15 months ago, it seemed few customers would recover much money or crypto from the platform. As John Ray III, who took over as chief executive during the bankruptcy, put it, “At the end of the day, we’re not going to be able to recover all the losses here.” He was countering Sam Bankman-Fried’s repeated claims that he could get every customer their money back.

Well, it turns out, FTX lawyers told a bankruptcy judge this week that they expected to pay creditors in full, though they said it was not a guarantee and had not yet revealed their strategy.

The surprise turn of events is raising serious questions about what happens next. Among them: What does this mean for the lawsuits FTX has filed in an attempt to claw back billions in assets that the company says it’s owed?

Will the possibility that customers could be made whole be raised at Bankman-Fried’s sentencing? Will potential relief for customers help his appeal?


Some of the clawback cases involve allegations of fraud, but not all do. Before fraud claims are argued, there is typically a legal fight over whether a company was insolvent at the time of the investment or that the investment led to insolvency. If every FTX creditor stands to get 100 cents on the dollar, the clawback cases that don’t involve fraud wouldn’t serve much of a financial purpose and may be more difficult to argue, some lawyers say. “In theory, clawbacks may go away there,” said Eric Monzo, a partner at Morris James who focuses on bankruptcy claims.

Court proceedings:

we can now cautiously predict some measure of success. Based on our results to date and current projections we anticipate filing a disclosure statement in February describing how customers and general unsecured creditors, customers and general unsecured creditors with allowed claims, will eventually be paid in full. I would like the Court and stakeholders to understand this not as a guarantee, but as an objective. There is still a great amount of work and risk between us and that result, but we believe the objective is within reach and we have a strategy to achieve it.

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Bear in mind that even if FTX can pay everyone back now, that does not mean they were solvent at the point they were put into bankruptcy.

and even if they were solvent at the time, that does not mean they were not fraudulent.

If I took all my customers money, which I had promised to safekeep, and went to the nearest casino and put it all on red, even if I won it would still be fraud.

Strong agree -- I enjoyed Brad Delong on this point.

My understanding (for whatever it's worth) is that most of the reason why a full repayment looks feasible now is a combination of:

  • Creditors are paid back the dollar value of their assets at the time of bankruptcy. Economically it's a bit like everyone was forced to sell all their crypto to FTX at bankruptcy date, and then the crypto FTX held appreciated a bunch in the meantime.
  • FTX held a stake in Anthropic, and for general AI hype reasons that's likely to have appreciated a lot too.

I think it's reasonable to think of both of these as luck, and certainly a company relying on them to pay their debts is not solvent.

Perhaps. But it sounds like many[1] have been treating the fact that FTX did in fact face a liquidity crisis as strong (conclusive?) evidence of SBF's excessive risk-taking in a way that's relevant for intent. And now they claim that the extent to which customers are made whole or FTX was insolvent is not relevant.

It feels like people in general are happy to attribute good luck to his decisions but not bad luck.

  1. ^

    Including the prosecution: "its customers were left with billions of dollars in losses", "the defendant talked with his inner circle customers could never be repaid", "Billions of dollars from thousands of people gone", "there is no serious dispute that around $10 billion went missing"...

Well, regarding Anthropic at least, this particular bet may be lucky, but if you make a bunch of high-variance bets and one of them turns out in your favor, is that still just luck?

  • Crypto prices in general also turned out in their favour, and without having looked into it closely I'd guess both of those bets paying off were necessary for people to get paid back,
  • If the bankruptcy hadn't forced dollarization all of FTX's customer deposits, I'm guessing they still wouldn't be able to pay everyone back today,
  • Customer money wasn't supposed to be going into bets with any variance. Having a diversified portfolio reduces variance but doesn't eliminate it (and anyway I suspect FTX's portfolio wasn't in reality very diversified, given that tech stocks and crypto have historically been pretty correlated)

They almost certainly were not. (99%)

Do you want to create a market? I’d be happy to bet 1:70.

Not only they’re returning all the customer money, they were also able to pay somewhere between hundreds of millions and 1.5b (couldn’t find an accurate number) to the lawyers. My impression is that they found a lot of unaccounted money lying around. It’s also not obvious what was the value of Anthropic

The main reason they are in a better position to pay is the massive increase in the value of crypto assets after filing vs. the proposal to pay out the value of customer holdings on the day of bankruptcy. That is irrelevant to whether they were solvent in November 2022.

Surely they don't pay the lawyers. Surely after the debtors are paid they pay the shareholders?

Actually, the bankruptcy lawyers and other professionals get paid by the estate ahead of almost all unsecured claimants. Their claims are generally entitled to administrative expense priority. That priority exists because no sane lawyer or professional would agree to represent the bankrupt while accepting general unsecured creditor status (after all, they already know the debtor is insolvent!). The same is true of many other vendors and service providers who provide services to the estate after the bankruptcy petition is filed.

If everyone else had truly been made whole, equity holders are last in line to get the remainder. But I think the odds of SBF receiving a meaningful distribution here are ~zero; the bankruptcy judge would amend the reorg plan as necessary to prevent him from profiting from his crimes.

No, they already spent at least hundreds of millions (and possibly more than a billion- I saw a $1.5b number somewhere) on the lawyers. The first thing the lawyers did, back in November 2022, was getting paid

Agree. In fact, SBF himself described FTX International as insolvent on his substack. 

Although I think people may be using the term "solvency" in slightly different ways in discussions around FTX. I think that in FTX's case, illiquidity effectively amounted to insolvency, and that it's uncertain how much they could have sold their illiquid assets for. If for some reason you were to trust SBF's own estimate of $8b, their total assets would have (just) covered their total liabilities.

Sullivan & Cromwell's John Ray said in December 2022 "We’ve lost $8bn of customer money" and I think most people have interpreted this as FTX having a net asset value of minus $8b. Presumably, though, Ray was referring either to the temporary shortfall in liquid funds or to the accounting discrepancy that was uncovered that summer/fall.

SBF also claimed that he could have raised enough liquidity to make customers substantially whole given a few more weeks, but was under extreme pressure to declare bankruptcy. I think there's a good chance this is accurate, in part because most of the pressure came from Sullivan & Cromwell and a former partner of the firm, who are now facing a class action lawsuit for their alleged role in the fraud.

(If anyone has evidence that FTX's liabilities did in fact exceed its assets by $8b at the time of the bankruptcy, I would be interested in seeing it.)

SBF also claimed that he could have raised enough liquidity to make customers substantially whole given a few more weeks, but was under extreme pressure to declare bankruptcy. I think there's a good chance this is accurate [. . . .]


This seems unlikely to me. The books were just in too bad of a shape for anyone conducting even a minimum amount of due diligence to fork over the needed liquid assets. Selling the illiquid assets would have taken time, and in many cases doing so quickly would have depressed the value of those assets. Moreover, suspending withdrawals until liquidity could be obtained would have been the death knell for FTX's enterprise value. So, contra the earlier situations in which investors poured money into FTX, the potential upside would be fairly limited for accepting the risk of whatever landmines might be buried in FTX's financials.

The estate hopes everyone can be made whole as far as recovering the value in USD on the date of filing, but that is based in part on appreciation in the value of crypto and to a lesser extent on use of the trustee's muscular powers in bankruptcy (such as clawing back ~$30M from EVF, getting out of expensive sponsorship deals, etc.).

Finally, even assuming it was possible to get FTX into shape to attract liquidity, that would have involved massive effort. The universe in which SBF hires an army of forensic accountants to untangle FTX's disastrous accounting very quickly is a universe in which a lot of outsiders now have proof of very serious fraud. Those people are not likely to allow SBF to hide the extent of the fraud from would-be saviors.

Sorry, I just meant the second part ("was under extreme pressure to declare bankruptcy")

The bitcoin price has increased 3x since the FTX crash. Arguably, those who would have held their assests in crypto since the crash are "morally" owed much more than the dollar value of their assets at the time. They're owed the same assets back or what they'd be worth upon repayment.

There's a class-action lawsuit for this reason:

I'm rooting for the depositors here. Their deal with FTX was that they owned the assets in their accounts, so the increase in value of that crypto morally belongs to them. I don't even think "would have held their assets in crypto since the crash" is a prerequisite. SBF forced them to involuntarily bear the risk that their assets (once recovered and distributed) would be less than their November 2022 value, so the upside to that risk (post-November 2022 appreciation) belongs to them as well.

Simplifying, my general moral priority list for recoveries is vaguely like: depositors (up to their November 2022 values), non-investor unsecured creditors (e.g., trade creditors), depositors (up to FMV of their accounts at time of distribution), investor unsecured creditors (e.g., hedge funds), [1]innocent transferees (e.g., EA and political organizations), equity holders guilty of at most ordinary negligence (if any), forfeiture to the government,[2] recipients of sketchy transfers, including those who were paid way over FMV (e.g., those paid sky-high valuations for vaporware biotech firms), my fireplace, SBF and other insiders. 

  1. ^

    Lower because they had an opportunity and access to do due diligence, and assumed the risk. I am more sympathetic to vendors and other non-investment unsecured creditors than this group.

  2. ^

    Standing in the place of SBF, who morally deserves to forfeit any equity interest he might have. Only after all innocent parties have been fully compensated.

A few quick observations written while not yet caffeinated:

  • I think this kind of thing happened in the Mt. Gox bankruptcy due to appreciation in crypto values after the filing.
  • Because there is a time limit for filing clawback claims, the estate needs to be file them even if it hopes it could be in a position to withdraw them later. Off the top of my head, that time limit is often two years after the filing of the bankruptcy case.
  • I believe that EA-related fraudulent conveyance ("clawback") claims are, by dollar amount, only a portion of the clawback or preference claims filed by the estate. At least early on in the case, these claims were expected to be in the billions. Some relate to SBF shadiness, like asset transfers to insiders, but I believe some related to arms-length commercial transactions that fall under the clawback/preference rules. So the estate can repay everyone after cashing in on clawback/preference claims does not imply that it could if those claims were refunded.
  • That the creditors may eventually be paid in full does not necessarily imply they will be made whole. 
    • First, it's not clear how the time value of money is factoring into FTX's statement. And final resolution is probably many years away. 
    • More significantly, at least as of December, the reorg plan was valuing customer crypto based on its value on the date of bankruptcy filing. So the customers would still be cheated out of their gains. Although I didn't check, I am guessing the value of FTT and maybe other crypto went down in the days before filing as a result of the unfolding FTX fiasco, so those FTX-caused losses would still be locked in for the customers under the plan.

Off the top of my head, that time limit is often two years after the filing of the bankruptcy case.

Do you know where I can find a legal reference with the exact time limit?

If the FTX debtors are paid back without taking back my grant, I'd like to donate it somewhere, but I need to know I'm protected from a clawback in that scenario.

I want to be really careful not to give legal advice here, both for the usual reasons and because this is a complex multijurisdictional bankruptcy affair. 

I think I had the explainer written by Open Phil's outside counsel shortly after implosion in mind, but it doesn't contain a citation. 

This is definitely one of those cases where you should obtain legal advice (perhaps jointly with people in a similar situation) before giving the monies away. 

I suspect it will be a long time before we know "the FTX debtors are paid back," especially since so much of the asset base is highly volatile. Thankfully, interest rates are good at the moment, so you can ~preserve the power of the donation by putting the funds in short-term Treasuries (or equivalent) while you wait.

Insolvency happens on an entity by entity level. I don’t know which FTX entity gave money to EA orgs (if anyone knows, please say), and whether it went first via the founders personally. I would have thought it’s possible that FTX full repays its creditors, so there is value in the shares, but then FTX’s investors go after the founders personally and they are declared bankrupt.

If I remember a report from Ray et al. correctly, there were a bunch of intertwined bank accounts. I believe some transactions were made from Alameda-owned accounts, some from North Dimension-owned accounts, etc. without much rhyme or reason.

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