‘The Emperor Had No Clothes,’ FTX’s Lawyer Says

The more we learn about FTX, the worse it looks.

A lawyer for the failed cryptocurrency exchange FTX told a federal bankruptcy court on Tuesday that the company had been run as a “person fiefdom” of FTX founder Sam Bankman-Fried.

James Bromley, who is the co-head of the restructuring practice at the Wall Street powerhouse law firm Sullivan & Cromwell, said in a hearing in the United States Bankruptcy Court for the District of Delaware that the company was “not particularly well run.—and that is an understatement.” Later, Bromley went on to say that the new management of FTX—who took over after Bankman-Fried resigned—had discovered “a lack of corporate controls at a level none of us who are in the profession have ever seen.”

FTX founder Sam Bankman-Fried speaks during the Institute of International Finance (IIF) annual membership meeting in Washington, DC, on Oct. 13, 2022. (Ting Shen/Bloomberg via Getty Images)

This echoed the statement of the company’s new chief, longtime restructuring expert John J. Ray III, who said in a sworn statement to the court: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information.”

Bromley was not done. He went on to say that after control of the company was turned over to Ray and his team, they discovered that “the emperor had no clothes.”

“These businesses were not operated in a way that is consistent with any best practices,” Bromley said.

He described the failure of FTX as “one of the most abrupt and difficult collapses in the history of corporate America, in the history of the world.”

Crypto-Bankruptcy?

While everyone in the Delaware Court appeared to agree that FTX and its related entities were extremely badly run under Bankman-Fried, there was a genuine issue of contention at the hearing. The lawyers for the debtors, led by Bromley, have asked the court to redact the names and addresses of the creditors of FTX. They argue that disclosing the customer list of FTX is a valuable asset in itself that should be kept confidential and that exposing customers involuntarily would be an invasion of privacy. They also noted that disclosure of exposure to FTX could further destabilize the crypto market.

Benjamin Hackman, a lawyer for the U.S. Trustee—the Justice Department office that oversees bankruptcy cases—said his office opposes the redaction of creditors and customers. In particular, Hackman urged the court to allow for public disclosure of corporate customers and the names of individual customers who are not subject to foreign privacy laws. Disclosure would improve transparency, Hackman argued, and precedent points to a “strong presumption in favor of public access.”

FTX attorney James Bromley, right, arrives at bankruptcy court in Wilmington, Delaware, on Nov. 22, 2022. (Sarah Silbiger/Bloomberg via Getty Images)

A worker transports documents out of bankruptcy court in Wilmington, Delaware, 0n Nov. 22, 2022, for the FTX bankruptcy hearing. (Eric Lee/Bloomberg via Getty Images)

For now, the FTX lawyers won this argument. Judge John T. Dorsey said he would—on an interim basis—keep the creditor names and addresses redacted, including the list of top 50 creditors to whom FTX apparently owes around $3 billion. Dorsey noted, however, that any creditor who applies to be part of the official creditor committee will eventually come forward. He also said he could be open to disclosing particular names, especially of corporate entities, that the U.S. Trustee thinks should be disclosed for specific reasons.

This means that the guessing game of trying to determine which other cryptocurrency companies might have large FTX exposures will likely continue. According to the FTX lawyers, there are potentially millions of creditors.

The debate over customer and creditor privacy—largely the same thing in the case of FTX—highlights the trouble with trying to handle the failure of complex financial companies through traditional bankruptcy courts. Bankruptcy proceedings are very public things. Generally, a bankrupt company loses its right to keep its books and records confidential. Financial companies, however, are by nature secret keepers. They conceal the identities of their clients, the positions of their clients, and often their own assets. They have not declared bankruptcy, so involuntarily outing them as creditors seems unfair. Most likely, this will continue to be an issue as this case proceeds and creditors are forced to decide whether to come forward if they want a say on the creditor committee or to sit on the sidelines in privacy.

Risk Management Failure

One of the consistent features of large corporate failures is how much their employees tend to lose when the company collapses. Typically, this is because a lot of the employees hold a disproportionate part of their savings in the equity of their employer. This makes the failure doubly painful because not only do you lose your job, you lose a big part of the savings you thought would get you through harder times.

The FTX employees were doing something even riskier: Many kept their paychecks inside the company. “Outside the U.S., many staff were paid via direct deposit to their accounts on the cryptocurrency exchange, so when FTX froze customer withdrawals last week, these employees couldn’t access their funds, people familiar with the matter said,” the Wall Street Journal reported. Now they are unsecured creditors of their former employer.

– Alex Marlow & John Carney
Breitbart News Network

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