Will FTX traders get their money back? Bankruptcy experts weigh in

Creditors in a multibillion dollar bankruptcy could number more than a million.

December 23, 2022, 12:02 PM

Disgraced FTX founder Sam Bankman-Fried appeared in a Manhattan courtroom on Thursday to face federal charges, a major step as prosecutors seek answers for what they've described as "a fraud of epic proportions."

More than one million possible victims, however, remain in the early stages of a likely yearslong bankruptcy proceeding that will probably return only a portion of the money they lost, some bankruptcy experts told ABC News.

According to the indictment, Bankman-Fried -- who was ordered released on $250 million bond and did not enter a plea -- allegedly stole $8 billion from FTX investors and customers and used it to pay debts and expenses of Alameda Research, his privately held hedge fund. He also used the money to purchase lavish real estate and make political donations to mainly Democrats but also some Republicans as he sought influence in Washington, prosecutors said.

Many crypto traders, who deposited their savings on the platform, fear they may never get their money back.

The sudden collapse of the $32 billion crypto exchange is a challenge for officials overseeing the bankruptcy. They will seek to identify lost assets shrouded in the complexity of novel digital currency, a largely unregulated financial sector and an alleged absence of adequate record-keeping, the experts said.

"You've got a real holy mess here," G. Ray Warner, a bankruptcy law professor at St. John's University, told ABC News. "This really isn't a normal corporate bankruptcy."

FTX did not immediately respond to a request for comment.

In testimony before the House last week, FTX CEO John Ray said he and his colleagues are "now working on behalf of the FTX Group to achieve one fundamental goal: maximizing value for FTX’s customers and creditors so that we can mitigate, to the greatest extent possible, the harm suffered by so many."

Here's what experts say you need to know about the current status of bankruptcy proceedings, the process of returning money to crypto traders and whether they'll ultimately get any of their money back.

Where does the bankruptcy stand right now?

Once-heralded cryptocurrency exchange FTX declared chapter 11 bankruptcy on Nov. 11 after a wave of customer withdrawals. On the same day, Bankman-Fried stepped down as CEO and was replaced by Ray, a veteran of corporate bankruptcies who oversaw the dissolution of scandal-ridden accounting firm Enron.

The bankruptcy filing listed more than 130 business entities affiliated with FTX and its sister hedge fund Alameda Research. The number of creditors seeking reimbursement numbers at least 100,000 and may reach more than one million, the filing said.

The company, which as of last month held about $1.25 billion in assets, said it owes more than $3 billion to its 50 biggest creditors, plus additional money on top of that.

Ray told members of Congress last week that FTX lacked corporate controls to an extent he had never witnessed, complicating the effort to recover lost assets. "I've never seen an utter lack of record keeping," Ray said. "Absolutely no internal controls."

Edward Janger, a bankruptcy law professor at Brooklyn Law School, told ABC News that the sudden downfall of FTX left the company little time to prepare for an orderly liquidation.

"Sometimes companies belly flop into bankruptcy without any planning," Janger said.

How will crypto traders try to get their money back?

The first claim that some crypto traders will make is that lost money belongs to them rather than FTX, said Warner of St. John's University.

If the creditors can prove that their money was held independently from the company's pot of assets, then the money will be returned to them prior to the completion of the bankruptcy proceedings, granting them their best chance at full repayment, he added.

PHOTO: FILE - Representations of cryptocurrencies are seen in front of displayed FTX logo and decreasing stock graph in this illustration taken Nov. 10, 2022.
Representations of cryptocurrencies are seen in front of displayed FTX logo and decreasing stock graph in this illustration taken Nov. 10, 2022.
Dado Ruvic/Reuters, FILE

"The distinction is if you had loaned me your car for the week and I didn't give it back and I filed for bankruptcy, the car wouldn't be part of my bankruptcy estate," Warner said. "You would be able to get your car back from me."

Such attempts at speedy asset recovery usually fail since they must meet strict conditions and they otherwise undermine the fairness of dividing assets equally among creditors, Warner said. But some crypto traders may recover money in this way, perhaps in cases where they deposited funds in an FTX account but didn't invest them, he added.

For the most part, FTX creditors will await the full bankruptcy process in which officials claw back, identify, value and ultimately reorganize or liquidate company assets.

In a statement on Monday, FTX said that some recipients of donations from the company, Bankman-Fried or other officials have sought instructions for the return of such money. The company called on other donation recipients to come forward, noting that it will otherwise pursue legal action to secure the funds.

After assets are recovered, crypto traders will have to wait in line behind other parties who stand to receive lost money. Priorities include unpaid taxes, unfulfilled salary payments to employees and other company expenses. Shareholders and other company investors stand at the end of the line, behind the traders.

How long will it take for crypto traders to get their money back?

The exact duration of the bankruptcy process remains uncertain but it could very well take several years before crypto traders recover their money, some bankruptcy experts said.

Stuart Brown, a partner at DLA Piper who specializes in bankruptcy, told ABC News that comparable proceedings have transpired for several months without resolution.

"The other crypto bankruptcy cases have been pending for approximately six months with no clear path to an exit and those cases do not involve the level of complexity that FTX presents," he said.

The recovery of assets will likely take several years before the company even begins to return funds to creditors, Warner said.

"The distribution to claimants — that's probably not going to be for quite a while," he said.

There is also potential for added delay from a jurisdictional battle between Bahamian and U.S. authorities over who should adjudicate the bankruptcy, Warner said. Such disputes are usually resolved in settlements, but possible litigation over the issue could take several years, before the bankruptcy proceedings can move forward.

What's the likelihood that crypto traders will get their money back?

Crypto traders will likely recover at least some of their lost assets, the bankruptcy experts said.

"If history is any indication of the future, there is a good likelihood that creditors will realize substantial recoveries," said Brown of DLA Piper.

But the prospects are dim for a full recovery of lost assets, Warner said.

"It's almost certain that they'll get that back," he said. "But it's unlikely that they're going to get anything near 100%."