Crypto exchange FTX is the rare financial blowup that will repay victims in full (2024)

FTX said in court papers Tuesday that it will have $14.5 billion to $16.3 billion in cash after liquidating its cryptocurrency holdings and other investments, more than enough to cover the roughly $11 billion that customers and nongovernment creditors are owed.

That customer money has been trapped since November 2022, when Sam Bankman-Fried ceded control of FTX to a new management team that filed it for bankruptcy, beginning one of the largest-ever efforts to recover misappropriated funds.

The management team found enoughfunds for FTX’s creditorsthanks to a rally in cryptocurrency prices andthe sale of stakes the company acquired—with users’ money—in speculative crypto projects and other technology ventures. The bankruptcy process gave FTX the time it needed to find buyers and fill in the nearly $9 billion balance-sheet hole it entered chapter 11 with.

If approved in court, the repayment plan would make FTX the rare case of financial fraud that compensates its victims in full, and relatively quickly. By way of comparison, account holders at Bernard Madoff’s firm have waited more than a decade and a half for their stolen money to trickle back after his 2008 arrest for operating a Ponzi scheme.

Aside from FTX’s millions of individual customers, some of Wall Street’s biggest investment firms are among the winners. They bet that, when FTX filed for bankruptcy, many of its customers would want to—or need to—cash out their claims against the exchange rather than wait years to see how much they might recover.

Asset managers including Oaktree Capital Management, Attestor, Canyon Capital, Farallon Capital Management and Silver Point Capital hold more than $3 billion in customer claims they bought, court filings show. The firms didn’t return requests for comment.

Soon after FTX filed for bankruptcy, customer claims could be purchased for as little as 3 cents on the dollar, said Thomas Braziel, an investor in distressed debt and crypto assets whose firm has bought claims from FTX customers. Customers who sold their claims for pennies on the dollar may have seller’s remorse. FTX said Tuesday that 98% of its users are now expected to recover 118% of their account balances.

“This is historic," Braziel said. “That’s got to be the highest return of all time" for creditors in a bankruptcy.

FTX previously said it would be able to pay its millions of users more or less in full for the amounts they had in their crypto trading accounts when the company filed for chapter 11. On Tuesday, it said it wouldn’t only cover those account balances in full but also would pay 9% interest to most users, dating back to the bankruptcy filing.

U.S. prosecutors called FTX a massive fraud and charged Bankman-Fried and other former executives with fraud. Bankman-Fried was sentenced in March to 25 years in prison for stealing billions of dollars from customers. The bankruptcy plan filed Tuesday marks the first time FTX confirmed it expects users to recover their funds in full.

Driving the turnaround in users’ fortunes was a rebound in cryptocurrency prices. A large portion of FTX’s assets are tied to the volatile market for digital assets, many of which have risen in value since the bankruptcy filing—especially solana, a token closely tied to Bankman-Fried that has multiplied sevenfold since the bankruptcy filing.

Some customers have complained, however, that they’re being repaid in cash—not the crypto they deposited—based on the values in their frozen FTX accounts. That means they have missed out on the asset appreciation in cryptocurrencies as prices roared back after 2022’s meltdown.

Saul Ewing bankruptcy lawyer Candice Kline said being paid in full in bankruptcy differs from being made whole in an economic sense.

“Actual market value, time value of money beyond some interest, and opportunity cost will still hound creditors digesting this good news," she said.

In addition to the recent bull run in prices of bitcoin, ether and solana, customers and investors can thank the rising value of FTX’s venture-capital investments and its success in finding and clawing back assets that were transferred out of the company shortly before its bankruptcy filing, said Erin Broderick, a lawyer for a group of FTX claim holders. For instance, FTX sold most of its stake in Anthropic, an artificial intelligence startup backed by Google and Amazon.com, for $884 million this year—267% above the original purchase price.

Brigham Young University law professor Brook Gotberg said valuing claims in bankruptcy isn’t always straightforward, and that it depends on what type of relationship a company has with its customers.

“If the claim is just for the dollar value of the cryptocurrency at the time of the bankruptcy filing, then the FTX creditors will be paid in full," she said. “If the claim is for the cryptocurrency itself, then the FTX creditors aren’t getting their full value."

Holders of FTX’s proprietary FTT token—another Bankman-Fried creation—won’t receive anything under FTX’s plan. Nor will the exchange’s equity owners—which include Sequoia Capital, the Ontario Teachers’ Pension Plan and SoftBank Group—and FTX’s various celebrity backers who include NFL quarterback Tom Brady and model Gisele Bündchen.

Under Bankman-Fried’s leadership, the company spent customer money on “bad or illiquid investments, vanity projects, celebrity endorsem*nts, political donations, and lavish personal expenditures," FTX’s court papers said on Tuesday. Hard assets recovered for customers since the bankruptcy include luxury real estate in FTX’s former home of the Bahamas as well as two private jets. The company explored, then abandoned, plans to reboot its crypto exchange.

Prosecutors said Bankman-Fried’s theft of customer funds caused $10 billion in losses, drawing comparisons to Madoff. After FTX’s bankruptcy, Bankman-Fried argued that customers could be made whole. Ahead of his sentencing, Bankman-Fried claimed that FTX was “solvent at the time of the bankruptcy petition" and that “the harm to customers, lenders and investors is zero" because of the likely outcome of FTX’s chapter 11 case.

John J. Ray III, the turnaround specialist who assumed control of FTX from Bankman-Fried, said in response that the company’s asset-recovery effort since 2022 “does not mean that things were not stolen."

“What it means is that we got some of them back," Ray said in a March filing in Bankman-Fried’s criminal case. “And there are plenty of things we did not get back."

U.S. District Judge Lewis Kaplan said that whether customers recovered their money didn’t weigh into his sentencing decision for Bankman-Fried, who has appealed his conviction and sentence.

Write to Becky Yerak at becky.yerak@wsj.com, Soma Biswas at soma.biswas@wsj.com and Andrew Scurria at Andrew.Scurria@wsj.com