How Much Is Too Much to Spend on FTX’s Bankruptcy?

The legal fees for FTX’s bankruptcy process have already topped $200 million, a cost that is likely to grow.

One activist FTX victim is raising questions about those extraordinary costs, which pay for restructuring the allegedly fraudulent crypto exchange, and recovering victim’s funds from a dizzying array of recipients. Those costs are undeniably out of the ordinary, outpacing the cost of other notably complex bankruptcies by a variety of metrics.

That matters because the legal fees ultimately come out of the recovered funds that will be returned to FTX creditors, including retail depositors, at the end of the process.

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Defrauded FTX customers are owed $8.7 billion by the exchange, and the recovery of much of the missing money seems increasingly likely. But at the current pace, bankruptcy fees could eat up nearly 10% of what victims are owed.

The high cost of going broke

“The funds which are due to the creditors are being frivolously spent,” argues Sunil Kuvari, a former FTX customer.

Kuvari bases that claim on comparisons to other historical and recent bankruptcies. FTX, he found, is proving far more expensive than comparable proceedings, both in absolute terms and as a percentage of the underlying assets and liabilities.

“I thought, percentage wise, it should be similar to [the cost of unwinding] Celsius,” he says. “But by that metric, [creditors] are being overcharged by $30-$40 million per month.”

Celsius Network claimed $5.5 billion in liabilities at the outset of its bankruptcy, compared to the $8.7 billion FTX now owes its customers. But Celsius’ bankruptcy costs only ran to $87 million after six months. FTX’s costs have already topped $200 million in the same period.

Kuvari is a former finance professional who says he had about $2.1 million in assets on FTX when it collapsed. He is spearheading a class action lawsuit against influencers and celebrities who touted FTX, and has become prominent among creditors. He’s very motivated to scrutinize the bankruptcy spending: the outsized costs of the bankruptcy could mean he loses an extra $100,000 or more.

Kuvari has been ringing alarms about bankruptcy costs following a June 20 report by bankruptcy examiner Katherine Stadler, a lawyer tasked with overseeing the expense of the restructuring. In that report, Stadler recommended some cost reductions, but largely described the outsized costs as appropriate to the complexity of the situation.

If the FTX bankruptcy takes two years – the length of Enron’s bankruptcy – the restructuring team would be on track to bill roughly $800 million at its current pace. Enron’s bankruptcy cost $700 million, or just over $1.1 billion in 2023 dollars.

That would mean FTX’s bankruptcy cost about 3/4ths as much as Enron’s. But among Kuvari’s points is that Enron was nearly 100 times the size of FTX in terms of revenue and employees.

FTX’s remaining and recovered assets totaled around $7.3 billion as of this month, while Enron’s totaled $110 billion, or nearly $190 billion in 2023 dollars. So Chief Executive John Jay Ray III’s debtor team at FTX is on track to charge around 75% of the Enron fees to untangle 4% as much in the exchange’s assets.

And while management of FTX was notoriously chaotic, Enron’s fraud revolved around comparable complexity: the creation of hundreds of spinoffs, intentionally hard to track and meant to conceal corporate debt, even from Enron’s own auditors.

So why is FTX’s unwind costing so much relative to its size – and can those costs be reined in?

‘Frivolous’ – or just complex?

It’s probably imprecise to project the costs for the first six months of the FTX bankruptcy forward to its conclusion. Stadler’s fee examiner report, while acknowledging that proceedings “appear on track to be very expensive by any measure,” describes the initial phases of the recovery process as particularly chaotic and perhaps wasteful, but for defensible reasons.

“The Bankruptcy Code is explicit that reasonableness and necessity are to be measured at the time services are performed, not in hindsight,” Sadler wrote. “Some [fee] Applicants assembled teams that ended up being too big. Some firms deployed experts whose technical skill did not end up being needed. Others directed resources from other sectors of their organizations to fill gaps in their teams. The Fee Examiner cannot in good faith conclude that any of those approaches was wholly unreasonable in the moment.”

This rough start implies that future costs will decline as the process rationalizes. Stadler emphasizes that the bankruptcy teams “will continue to refine their processes to identify and eliminate inefficiency and excess as the cases progress.” Creditors will want to watch future reports very closely to make sure that actually happens.

Sadler’s report does also advocate for better controls in specific aspects of the bankruptcy. She found that the bankruptcy teams were using a higher proportion of senior staff than usual, with associated higher costs. Sadler also pushed teams to reduce the number of people in meetings and attending hearings.

Most specifically, Sadler imposed negotiated reductions of 5%-10% in fee requests filed by both the law firm Sullivan & Cromwell, and the management consulting firm Alvarez & Marsal, on grounds including “excessive meeting attendance.”

But even after a reduction in its fee requests, comparisons to similar proceedings highlight Alvarez & Marsal specifically as billing more than usual. In fact, A&M are also part of the bankruptcy of another crypto blunder, and it is charging much less in that case.

“Alvarez & Marsal have been charging Celsius $1.7 million per month,” Kuvari found, “And charging FTX $11 million a month.” Similarly to the comparison with Enron, this means A&M is charging about six times as much on a bankruptcy involving only about 50% more liabilities. On a percentage basis, A&M took around 11% of fees in the Celsius bankruptcy, but is getting about 30% of the FTX fees.

A&M is responsible for a variety of tasks, notably including the identification and recovery of assets. This may go a long way to explaining the discrepancy in the fee rates, since former FTX CEO Sam Bankman-Fried seemed determined to give away his customers’ money as fast as possible, whether to family members, his favorite “charities,” or complete strangers. Hunting that money down, and fighting to claw it back, seems naturally labor intensive.

A&M also helped develop accounting records in the case, and this again appears to be particularly complicated. Sadler described the state of FTX after its collapse as a “smoldering heap of wreckage” with many financial records simply missing. That echoed earlier statements by John Jay Ray III, who described the situation as even worse than Enron’s.

(We have reached out to A&M for comment on the numbers, and will update this story if we hear back from them.)

But Kuvari contests the idea that FTX’s bankruptcy is more complex than Enron’s.

“In fact, when I compared Enron to FTX, it’s like a dot. [FTX is] a company that has operated for three years. It had a maximum of 200 employees, and Enron had 20,000 employees.”

More important than scale, Kuvari argues that Enron’s fraud was just as opaque as FTX’s, and probably moreso.

“Enron had 3,000 off balance-sheet SPEs,” or special purpose entities, Kuvari points out. These entities were specifically created, by veterans of finance, to hide liabilities from auditors and the public. By contrast, Kuvari says, FTX involved “just embezzlement of an exchange. Probably as simple as can be.”

The counterpoint is that while Enron covered its tracks cannily, it did at least keep records of those activities. In fact, some of the documents tracking the creation of Enron SPEs played a role in the criminal prosecution of the ringleaders of that fraud.

Sam Bankman-Fried, it is increasingly clear, was not as smart as many believed, in any even slightly expansive sense of that term. His completely chaotic approach to disposing of his customers’ money seems to have been improvised rather than strategic. And it doesn’t seem to have helped him stay afloat longer than Enron’s puppet masters, who were engaged in fraudulent activity for the better part of a decade before being caught.

But SBF’s apparent ineptitude has certainly made life harder on those left to clean up his mess. While there’s plenty of reason to scrutinize the spending of the FTX bankruptcy team, what’s most clear is that Bankman-Fried himself is taking one last pound of flesh from FTX’s many victims before he faces the music this October.