After months of negotiation, bankrupt cryptocurrency exchange FTX and the United States Commodities and Futures Trading Commission (CFTC) have settled on a $12.7 billion agreement.
“The Proposed Settlement is an integral and valuable component of the Debtors’ proposed chapter 11 reorganisation plan”, said CFTC senior trial attorney Carlin R. Metzger and FTX’s CEO John J. Ray III.
The agreement aims to resolve ongoing litigation and disputes with one of the debtors’ largest creditors, thereby avoiding further litigation costs and delays, and mitigating the risk of significant asset reductions available for creditors.
FTX acknowledged the CFTC as the “single most significant creditor” in its Chapter 11 cases, highlighting the substantial liabilities faced by the debtors due to the actions and convictions of FTX insiders.
The settlement includes $8.7 billion in restitution and $4 billion in compensation, with the latter subject to the advance payment of all creditor claims.
This agreement, concluding a lengthy 19-month lawsuit, now awaits court approval as detailed in a 12 July filing.
CFTC’s fraud allegations
In December 2022, the CFTC filed a lawsuit against FTX, its former CEO Sam Bankman-Fried, and FTX’s sister trading firm Alameda Research.
The lawsuit claimed the firm committed fraud and made misrepresentations by marketing FTX.com as a digital commodity asset platform.
Court records filed on 13 December in the Southern District of New York revealed that the CFTC sought injunctive and other equitable relief, as well as civil monetary penalties against Bankman-Fried, FTX Trading, and Alameda Research.
The complaint alleged that Bankman-Fried personally directed FTX executives to set up features allowing Alameda to use the crypto exchange as a line of credit for its lenders.
The CFTC stated, “Contrary to [Bankman-Fried’s] representations and without disclosure to FTX customers, Alameda and FTX commingled funds and freely used FTX customer funds as if they were their own”.
The CFTC accused Bankman-Fried, his parents, and other FTX and Alameda employees of using FTX customer funds for personal expenditures, including luxury real estate purchases, private jets, and personal political donations.
Notably, the CFTC did not seek a civil monetary penalty, with FTX stating: “Given the conduct, guilty pleas and convictions of the FTX Insiders, the Debtors face very substantial potential liability to the CFTC”.
Reorganisation plan
FTX’s proposed reorganisation plan aims to provide a 118% return for 98% of the creditors, specifically those with claims under $50,000.
This calculation is based on the US dollar value of asset prices at the time of FTX’s bankruptcy filing in November 2022.
However, many creditors have expressed a preference for a cryptocurrency payout in-kind, which would take into account the market’s 166% increase in market cap since FTX’s bankruptcy filing.
This preference among creditors for a crypto payout highlights the ongoing trust and belief in the value of digital assets despite the turmoil surrounding FTX’s collapse.
Creditors are currently voting on their preferred payout method, with the deadline set for 16 August.
A hearing on the settlement is scheduled for 6 August in the Bankruptcy Court for the District of Delaware.
US Bankruptcy Court Judge John Dorsey will make a final decision on 7 October. The outcome of this hearing will significantly impact the final structure of the reorganisation plan and the method of creditor payouts.
FTX’s reorganisation plan is designed to address the vast financial shortfall created by the mismanagement and alleged fraudulent activities of its former executives.
The plan also aims to restore some level of financial stability and trust among its creditors.
However, the approval of this plan depends heavily on the creditors’ vote and the subsequent court approval.
