FTX to set aside up to $230 million for shareholders, not creditors, from gov't forfeiture proceeds

As part of a newly-revealed provision, the debtors in charge of collapsed cryptocurrency exchange FTX will set aside up to $230 million from government forfeiture proceedings for preferred shareholders.

The agreement, which was revealed in a recent filing, came as a surprise to creditors, who are traditionally reimbursed before shareholders in bankruptcy proceedings, and who were unaware of the provision when they voted overwhelmingly to approve the plan before the August 16 voting deadline. 

"Ordinary creditors had no input," Sunil Kavuri, a representative of the largest FTX creditor group, said. "FTX customers following me have commented how they feel scammed and robbed again by the estate." 

As part of the agreement , the FTX debtors' estate, led by lawyers from Sullivan and Cromwell, will contribute 18% of all proceeds from government forfeiture actions to a special fund for the "exclusive benefit" of certain shareholders, up to $230 million in total. Though the agreement was officially executed on August 28, nearly two weeks after the deadline for creditors to vote on the plan, the agreement was only revealed on September 27—the 30th and final day the estate was allowed to file the amended plan, according to the agreement. 

"The Debtors and the Preferred Shareholders each have an interest in avoiding the cost, expense and delay that would be associated with litigation in connection with the Plan and the Forfeiture Proceeds," the filing argues. The FTX estate did not immediately respond to a request for comment from The Block. 

The FTX estate estimated the proceeds from forfeiture actions in a filing from June : about $626 million seized from the Emergent entity used to purchase shares in Robinhood , fiat and digital assets "secured from certain accounts on third-party cryptocurrency exchanges" worth about $379 million (as of June), about $150 million in cash "seized from accounts registered in the name of FTX DM" and "two private planes that were purchased ...using approximately $35 million of estate assets."

Summed together, the value as of June appears to be about $1.19 billion, 18% of which would come out to $214.2 million, within a reasonable range of the $230 million provided for by the agreement. The plan also provides for each shareholder to receive up to $250,000 for legal fees, paid out through the segregated fund. 

Under the FTX bankruptcy plan that received "overwhelming preliminary support" from creditors, 98% of creditors will receive at least 118% of their claim value in cash, according to FTX press releases . However, Kavuri has argued that since the bankruptcy claims were evaluated based on the value of the relevant cryptocurrencies at the time, creditors in actuality will receive more like "10% to 25% of their crypto back." 

The price of Bitcoin hovered around $16,000 at the time of FTX's bankruptcy, for example, and has since risen to nearly $66,000. Under the plan, a creditor who lost 1 BTC +0.13% in the bankruptcy will only receive $16,000, about 24% of the value they would have received had claims been repaid in-kind (with the original asset rather than a cash equivalent). 

While the SEC had previously warned FTX that repaying creditors in stablecoins or other "crypto asset securities" could open the estate up to legal challenges from the agency , the bankruptcy plans for other cryptocurrency companies including Genesis and BlockFi provided for some in-kind repayments. 

The FTX reorganization plan's confirmation hearing, at which Judge John Dorsey of the United States Bankruptcy Court for the District of Delaware will decide whether or not to approve it, is currently scheduled for 10:00 am ET on October 7. The FTX estate is legally mandated to report the full results of the creditor vote by September 30, seven calendar days before the hearing, which is also the deadline for the estate to file any responses to objections to the plan in support of the plan's confirmation.