Illustration: Aida Amer/Axios
FTX and its network of 134 bankrupt subsidiaries, as private companies, were a black box for outsiders. Everything is about to change.
Driving the news: FTX’s Friday Chapter 11 filing appears to have been pretty rushed — the company didn’t even file standard day one documents.
Why is this important: Those SEC and DOJ investigations? They will probably take a while to play out. But the bankruptcy court will make revelations sooner.
State of play: Everyone is waiting for what is known in the bankruptcy world as a “day one statement,” a document that tells the story of all the events leading up to the filing.
- It is intended to justify the bankruptcy itself and the protection it affords to debtors: it is usually a comprehensive review of all the steps the company has attempted to avoid bankruptcy.
- With Sam Bankman-Fried (SBF) out, and now of dubious credibility, the statement will likely be a sworn statement by new CEO John Ray III.
What they say : “This will be the first time, in formal court pleading under penalty of perjury, that they will have to explain why they are seeking bankruptcy protection,” says Daniel Gwen, corporate restructuring and cryptocurrency attorney at Ropes & Grey.
- The disclosure could explain why FTX.us was included in the bankruptcy filing – a day after SBF tweeted that users of the US exchange were doing “well” even as the rest of the international empire sank was collapsing.
Another big reveal will be the list of the biggest creditors. This could show external debt and intercompany loans – as well as, potentially, some of the largest institutional clients whose assets are tied up on the platform. (Typically, this is filed with the application for bankruptcy protection.)
- FTX checked a box in the petition saying it has at least 100,000 creditors. This box is the largest option available – so the number could actually be much higher.
- 💭 Our thought bubble, via Brady Dale of Axios: We will be watching if the FTX team can protect the financial information of individual retail investors on its platform and avoid massive privacy blunders like those of deposed lender Celsius.
Looking further, a full table of assets and liabilities is due within 14 days of filing – although judges have been known to grant extensions in complex cases, says Dan Besikof, partner in Loeb & Loeb’s restructuring practice.
- Bankrupt businesses must also file monthly operating reports throughout the case, tallying up all the money coming in and going out.
“Bankruptcy is intended be extremely transparent. That should clear things up pretty quickly,” Besikof says.
The bottom line: what we can not learn for now how FTX intends to obtain out of bankruptcy.
- Ultimately, the purpose of Chapter 11 protection is to provide businesses with legal protection from creditors and litigation while they develop a plan for reorganization, sale, or liquidation.
- All the new revelations hitting the docket in the coming weeks will make for compelling reading, but the bigger effort could take months or even years – and only then will creditors see any real recovery of their claims.