After cryptocurrency exchange FTX filed for bankruptcy last year, Thomas Braziel, an investor specializing in bankrupt companies, began trading an unusual type of transaction: a market to profit from FTX’s fall.
Mr. Braziel put one of his clients in touch with a large financial firm that had lost nearly $100 million in the FTX bankruptcy. Last December, the company agreed to sell its claim in the FTX bankruptcy – essentially an iou from the stock market collapse – for 6 cents on the dollar, betting that it was better to raise cash quickly rather than to wait years for the FTX envelope to start. repay creditors.
Then the FTX receivables market exploded. Mr. Braziel recently negotiated the sale of $19 million in FTX debt for 68 cents on the dollar, earning a commission of nearly $100,000, he said. Some claims are selling for more than 70 cents, as investors become optimistic that FTX’s new management will recoup a significant portion of the roughly $8 billion that founder Sam Bankman-Fried was convicted of having stolen from his customers.
“The market is crazy,” said Mr. Braziel, a partner at the investment firm 117 Partners. “It is so hot.”
The initial despair over FTX’s failure has given way to a strange life after the exchange’s collapse: a trading frenzy that has intensified in recent weeks as major financial firms search for opportunities in the rubble of the one of the worst business collapses in decades. The FTX story has come full circle, as investors who once used the platform to place risky crypto bets are now betting on the company’s prospects in bankruptcy court – and plowing all their winnings back into the resurgent market of cryptography.
For speculators, the math is simple: They are betting that if they buy a $10 million debt for, say, 50 cents on the dollar, they will pocket substantial profits if more than $5 million is ultimately repaid by the crowd. of bankruptcy. In total, between $1 billion and $1.5 billion in FTX claims have changed hands since the bankruptcy began, according to Xclaim, a company that matches buyers and sellers.
Most of the claims represent crypto and cash holdings that FTX customers stored on the exchange when filing for bankruptcy in November 2022. Some of the claims have a face value of just a few million dollars, while others worth tens of millions. In recent weeks, a few $100 million claims have been negotiated, according to market participants.
The market has attracted a number of well-known hedge funds and investment firms, including Farallon Capital, Silver Point Capital, Hudson Bay, Contrarian Capital Management and Canyon Partners, according to court records.
But it has also attracted investors with a more checkered history in the financial sector. In June, a Delaware court-appointed investigator accused Mr. Braziel of falsifying bank records and embezzling funds from a bankruptcy case he was handling. Mr. Braziel’s lawyers responded by objecting to these findings regarding his “actual or potential criminal liability.”
Another figure involved in the claims market is a former FTX executive who worked closely with Mr. Bankman-Fried. Ramnik Arora, one of FTX’s top fundraisers, recently launched a online claims negotiation platform for FTX clients and began buying smaller claims for itself, according to company records and two people familiar with the matter. Mr Arora was due to testify for the prosecution at Mr Bankman-Fried’s criminal fraud trial in October, but was ultimately not called as a witness; he has not been accused of any wrongdoing.
An FTX spokesperson declined to comment.
Claims trading is not new, particularly in complex bankruptcies that take years to unfold. But recent bankruptcy filings by high-profile crypto companies, including lending firms Genesis Global, Celsius Network and BlockFi, have created a cottage industry of brokers specializing in matching buyers and sellers.
The market gives creditors whose money is tied up in legal proceedings the ability to collect immediately rather than wait years for payment. The trade-off is that they must accept far less than the face value of a claim – and potentially less than what the bankruptcy estate could ultimately distribute.
Still, hundreds of crypto investors are accepting this deal. Over the past 18 months, Xclaim processed $70 million in Genesis transactions and $4 million in Celsius transactions, according to Andrew Glantz, the company’s chief strategy officer.
The FTX bankruptcy is by far the one that has generated the most interest. After the company’s bankruptcy, Mr. Bankman-Fried was succeeded by John Ray, a turnaround veteran who handled the dismantling of Enron. In court filings and before Congress, Mr. Ray called FTX the worst corporate mess he had ever seen, raising fears that the money would be impossible to recover.
But the recovery process was faster than expected. Mr. Ray estimated in August that FTX had recovered $7 billion, although it was unclear how much of that money would go to creditors, given the number of outstanding claims.
Yet claims that once traded for just pennies on the dollar have increased in value. “Our first trade was around 15%,” said Jay Conklin, managing partner of hedge fund Park Walk, which began working with institutional investors to buy and sell securities shortly after FTX’s collapse. “Now there are deals in the 70s,” Mr. Conklin said.
One of the claims market’s most vocal evangelists is Mr. Braziel, who lives in Forte dei Marmi, a seaside town in Italy, and has become a familiar face on the crypto conference circuit. Not long ago, he said, he persuaded Scott Galloway, the popular podcaster, buy $2.5 million worth of FTX debt. Mr. Galloway discussed the investment on one of his shows.
“He was lucky – we bought him a basket in the 1920s,” Mr Braziel said. “He’s going to make at least three or four times his money.”
In the event of bankruptcy, transfers of debts are generally recorded in the court docket a few weeks after closing. The filing almost always identifies the buyer, but the seller’s identity is often redacted for privacy reasons.
There are risks on all sides. Brokers operate with limited oversight and no one regulates who can buy debt or enter into transactions. Some matchmakers require sellers to give them an exclusive period of time to find a buyer, which can limit a creditor’s ability to shop around for a claim.
Bradley Max, director of claims broker Cherokee Acquisition, said some sellers have difficulty negotiating deals on their own because they have to comply with “know your customer” rules that buyers institute to avoid dealing with bad actors.
“Nobody wants to buy Vladimir Putin’s FTX stock or anyone else like that,” said Mr. Max, whose company runs a online platform for commercial complaints.
It is also unclear how much FTX will ultimately reimburse. This fall, lawyers and other professionals working on the bankruptcy case had collected more than $300 million in fees — money subtracted from the pool of funds that goes to creditors.
And in recent months, the Internal Revenue Service has filed $24 billion in claims, arguing that FTX owes the government “income taxes, employment taxes, and penalties” from 2018 to 2022. (The IRS did not respond to a request for comment.)
The IRS is generally paid before all other creditors in bankruptcy, so a large tax debt could significantly reduce the funds available to clients. But how much FTX actually owes remains controversial, with a hearing scheduled for early next year.
For the moment, speculators are not worried.
“A stupid, stupid thing,” Mr. Braziel said of the IRS’s efforts to pursue billions of dollars in unpaid taxes. “No factual basis.”
Kirsten Noyes And Sheelagh McNeil contributed to the research.
