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This is business breakdowns.
Business breakdowns is a series of conversations with investors and operators
diving deep into a single business.
For each business, we explore its history, its business model, its competitive advantages,
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This is Matt Russell and we are releasing a bonus episode of breakdowns today.
While we typically love to cover businesses, we thought this was an interesting opportunity
to cover a special situation around a business, and in this case, the FTX bankruptcy.
I was joined by Aaron Brodrick, head of US Cross-Border Restructuring and Insolvency at Evershed,
Sutherland, and Aaron represents the ad hoc committee of non-US customers for FTX.
That's given her a front row seat and a hands-on seat to everything that's unfolded at FTX since they entered
Chapter 11 in November of 2022.
We tried to cover some of the basics around bankruptcy proceedings using FTX as a lens to
compare to other restructurings, and Aaron helped explain what the key negotiating points have been
in this particular case. We'd love your feedback on this episode, so if you're listening on Spotify,
drop us a response there, or you can respond to any of our social media accounts linked in the
show notes of this episode. Now on to the conversation with Aaron on FTX.
All right, Aaron. Thank you very much for joining us here and what is a different
flavor of episode for business breakdowns. We're typically diving into a specific business
that's an ongoing entity, and basically picking it apart here, we have a business at the center
of everything, but we're going to talk about what happened with FTX and specifically with the
reorganization restructuring of FTX. To kick us off, it would just be helpful to hear your own
background and how you are tied into the situation at FTX. Maybe we can start there.
I'm a partner at Everstead, Sutherland. I head up the US cross-border and international
restructuring department by an overstructuring attorney for almost 20 years now, and I became involved
in FTX in representing the ad hoc committee of non-US customers, which is currently comprising about
75 members, holding over 2.5 billion in claims against FTX. A insufficient number or small number
there. Maybe we just start at the beginning. In November 2022, slightly prior to that, things got
very intense with FTX. Alligations came out, and what ultimately ended up happening was a chapter
11 bankruptcy. My understanding with chapter 11 is that there's a reorganization. You're not
intending to liquidate the assets. There's some business behind it, and there's some restructuring
effort to keep this business going. That's different than chapter 7. Tell me where I am wrong
in that assessment of chapter 7 versus chapter 11, and what the ultimate process was here in terms
of going into bankruptcy. Well, chapter 11 is known as a reorganization proceeding, whereas
chapter 7 is a liquidation. In practice, that's a bit misleading. Really, the key distinction is that
in the chapter 11, you have a debtor in possession process, which means the company's management
in board can stay in power and in control. In the chapter 7 proceeding, it's turned over to a court
appointed trustee. I think what's confusing in the FTX case is obviously the company's
insiders could not be trusted, to remain in control. There was a shift over to John Ray
as the company's new CEO and new appointments made for the board, but it is a debtor in possession
proceeding with the new management and new board in control. There's reorganization, selling of
assets is often part of the chapter 11 process. Indeed, FTX, there's been a monetization of the
token portfolio as well as part of the venture's portfolio, really from the outset of the case.
With the chapter 7 being the court appointed trustee, just curious why it didn't go that route.
My initial assumption is there's not the expectation that the court would realize the highest value
in terms of that liquidation. So there was some effort to say, whoever the debtor is in possession
of this process is going to be able to extract more value for the overall pie of lenders or
creditors in this particular case. Is there anything more to it on that?
Yeah, I just think there's a practical expectation of the limitations of the chapter 7 trustee,
both in terms of expertise and of resources. So while the first day filing is painted a pretty grim
picture of the lack of financial records and what could be ultimately some pretty dismal recoveries,
I think from the out of heart perspective and many that are in the crypto community realize that
there is a lot of value here and there needs to be experienced professionals to make sure that
that value is not squandered and that it's realized that maximum recover is to creditors. If you turn
it over to a coin-apported chapter 7 trustee, those efforts would not have been undertaken.
Understood. Typically what I was used to in distress situations was you had creditors involved
with a lot of experience going through this process. There were often several classes of loans
or bonds and you had committees or groups formed where certain groups in the top tier of security
joined together versus those lenders that were maybe a notch below and everyone was fighting in
terms of their efforts to get the maximum recovery to their specific group. How did it come together
here? I don't imagine that you had the same setup in terms of the traditional lenders or funds that
were involved, not even the amount of time to get those funds involved at least in the beginning
of this process. Can you just talk about what this process looked like relative to others that
you've gone through? Sure. I think big picture at the outside was pretty clear that the ftx.com
silo with the foreign customers was really the piggy bank for the entire enterprise and yet you
had these distinct silos from the dot com exchange, the us exchange, and then almeida and ventures
as separate silos. There was a recognition that if you were to keep those silos separate,
you have this group of customers whose funds were stolen, yet there's not a token portfolio or
cash sitting on the dot com debtors balance sheet. That's in various other silos, particularly
almeida was invested into some of the ventures portfolio or rather third party. There was a recognition
right up front that there was going to need to be a substantive consolidation of these states
to make sure that the value elsewhere that came from customer funds was allocated and a fair
and really maximum amount that could be given to customers. So that's the first point. And then
the second point about the capital structure is it wasn't unique here. There are purported secured
lenders at the almeida silo, but their loan arrangements were often secured by ftt or other
tokens. And again, we have that overlay of some of the collateral that may have been posted was
actually customer funds. So at the end of the day, what we're really talking about is you've got
the customers and you can throw in the US side here because I think their claims are so small
that they're really not at odds with the foreign customers, but you have these customer claims.
And many of the customers believe that they have ownership of these assets that they should be
superior to everyone as owners instead of mere creditors. But the question becomes, well, do we
need to prove out the ownership arguments with tracing and identification of assets if we can just
get the customers a maximum value of the estates because the general unsecured creditors here
besides the subordinated government claims. It's maybe around two billion at the end of the day.
Many of those claims, there's counter claims and settlements being worked out. So it's really not
customers against general unsecured creditors as much as I think that's in the news. I think it's
more making sure that the government agencies recognize that their claims are really for the benefit
of customers and seeing any recoveries on those claims go to customers. I'm going to just restate
this. So I think I understand it properly. There's one road that you can take where it's the
customer's proving that they have the most senior form, maybe not of actual lending, but they're
actually owners of assets that were then taken from them. But if there's a way to just make sure
that they're paid back and full, you don't actually have to prove that that was the case. Is that
a fair way to represent it? Yeah. It comes down to the property of the estate arguments that have
been brought up in other crypto cases, in cases where it was a clear cut ruling one way or the other,
you actually had assets that were properly held in custody that were segregated. And here,
there's no dispute that Almeida and other of the debtors and insiders misappropriated
billions, probably north of 10 billion in customer funds. The DOJ, other governmental agencies,
and the debtors had been able to trace certain of those transfers into co-mingle customer accounts.
So okay, billions that were transferred out that were customer funds and they can identify where
they were invested into certain venture assets or went to buy about the Bahamas, but not on a kind
of individual customers. And there were also non-customer funds that were co-mingle there. So
we could get into a very complicated exercise of tracing identification to say on a pro-rata
basis for the collective benefit of all customers. X went into the estate. We think that this
appreciation and this particular venture asset is due to customer funds. We could go through all
that allocation. It would take months if not years. We don't exactly know how it would end up.
So what the ad hoc's position has been is let's try to get the maximum amount of customers
pro-rata for everyone's benefit of the estate value. And if I just take that example and compare it
to maybe a bank is the most simple comparison if you were to see a bank go through a bankruptcy
process. How would that differ just in terms of proof? And I think what you were keying in on there
specifically the custodial nature of funds. But how would it be treated if a bank were to go bankrupt?
And I have a second example, but maybe we could just start there.
Banks can't go bankrupt because they have regulatory regimes that allow for their liquidation.
And there's protection on customer deposits. And actually depository relationship is one in which
you actually do have a claim to the bank's assets. It's very different here where there's an argument.
I wasn't putting my assets on loan to the exchange. I own the assets. I was free withdrawal them.
And I thought there'd be a one-to-one ratio of assets held by the exchange and what was reported
on my customer ledger. But in a bank liquidation situation you would essentially take all the
pulled assets and distribute those out to the depositors. Okay.
It happens in pulled investments when you look at MF Global or other cases where there were pulled
investments and similarly situated investors. They have allowed to have a distribution of the
pulled assets paraded at everyone according to the debtors books and records. Again,
the competition years we don't have the nice little pot of customer funds. It's all mixed together
with some non-customer funds and customer funds like. That makes a lot of sense. And that's where I was
going next was something more in the exchange-like business category. And I think you answered it
well there with MF Global. In this particular case, I think there were 130 related entities that
along with FDX filed in this process. If you compare that to other cases, would you say that is a
traditional amount of entities that you typically have with one of these? Is that uncommon?
It feels like there's a lot going on there. But how different is that versus what you would see
in your other cases that you're dealing with? It's a substantial amount of debtors, but I think
the general practice, particularly in chapter 11 is you want to get the whole global business
into chapter 11. It's something that's unique about insolvency proceedings in the United States
versus other jurisdictions as there's very broad jurisdiction to file in chapter 11.
And if one debtor can satisfy the jurisdictional and venue requirements, you can bring in any other
affiliate that really helps to just streamline administration of the cases to prevent infighting
with the corporate entities. Again, particularly here where corporate distinctions were not respected,
it made a lot of sense to file all the entities together and really prevent all the assets from
being dissipated across the world. In this process, how many groups ended up forming? You mentioned
representing the ad hoc committee, were there a lot of groups that ended up coming together?
What did that look like? No, not really. I think that speaks to the nature of the common customer
experience that they had terms of service that said you own these assets and whether it was Fiat
or digital assets when the bank for filing hit, everyone lost their right to which all those funds.
We have not seen formal groups come up on a splintering of the customer class. That could certainly occur,
but I think the best result would be to have the customer class united and just trying to get
the highest recovery for what is currently one customer class under the debtors plan.
And did that form fairly quickly? It just in terms of gathering. Again, I feel like usually
you have these lenders who have sizable chunks of the debt. So they represent a large percentage.
In this case, I would imagine it was very fragmented in nature. So just corralling all of that together
would be a challenge. But what did that look like in terms of getting a united committee together?
Ad hoc officially formed on December 5th and we had three members in the first week.
And it was very difficult to collectively organize because the customer was also confidential in this case.
So it wasn't like your typical case where you could look at the schedules and you could identify large holders.
And everyone was very concerned about privacy and having to be disclosed as a member of an ad hoc committee.
But it was really grassroots and contacts that I had around the world that my colleagues had
reaching out and wanting a voice in the proceedings and not really knowing where else to turn
because they weren't getting a lot of information from the estates and didn't feel like the official
committee that has fiduciary duties to all unsecured creditors in the case really represented
and then particularly on these ownership arguments. So it continued to build and build and build.
And as the underlying customer class has changed and had more secondary hedge funds in the customer
class, the same as true with the ad hoc committee, in number, it's about 80% original holders,
but in claim amount, it's more the secondary hedge funds at this point.
On the confidential point, did that have to do with this being a crypto asset or is that just the nature
of this type of business where you're dealing with something like an exchange?
There were two lines of arguments to keep the customer information confidential.
The first was the damage that it could do to individuals by revealing their identities,
particularly those uncertain jurisdictions that would be identified as being wealthy.
We've seen some personal stories there. The second line of argument was that the customer list
is an asset of the estates or a reboot of the exchange or any other type of failed transaction
involving the customer list. You would lose that value by revealing the customer identities.
With many chapter 11s, you keep the business running, keep the, in this case, it would have been
the exchange running. Didn't seem to happen here. Was there any portion of the business that was kept
in operation? The exchange was shut down. So it has not been operating throughout the bankruptcy
proceedings. The debtors recently announced that they are not in the process of continuing with
the 2.0 or exchange asset sale process. That said, they haven't taken off the table. There was a robust
marketing process and I think there is still value in the customer list through a separate exchange.
I think where there is just a misunderstanding in the customer basis, the value that was attributed
to the actual exchange where I can say this publicly. I've gotten to go ahead to say it is that
no bitter in the marketing process ascribed material value to IP or infrastructure,
underlying technology. So I just think, is it set as some customers are that there hasn't been
a concentration on a reboot? You can't control the market. It's interesting because I think the
headlines have suggested that the exchange business was a profitable business and much of the
misdoing had to do with misallocation of funds into other endeavors, some of which you referenced
before. That would lead me to believe that that was not the case or maybe it wasn't as strong of a
business as maybe some were led to believe. Do you think that's misrepresenting the situation in
how I framed that? Look, there was value in some of the trading products for sure that there
is also heightened scrutiny from a regulatory standpoint on some of the trading products.
So to say that the exchange had no value, I don't think that's the case, but in terms of a
restarted exchange using the existing infrastructure and security and all the like,
there was just not that ability to do so. Yeah, I guess it's impossible to compare it to what
was the exchange before this because obviously what happened here had major implications for
the entire industry and much of what happened in the year leading up to this. So impossible to ever
go back and make a like for like comparison there. Getting back into the process itself,
how things came together, you referenced some of the secondary hedge funds coming into
these claims just into this market. Can you talk a little bit about that, how that was in terms
of evolving and developing? These claims get traded on the market again in traditional bankruptcies.
I would imagine it looked a little bit different here. Did that have a major impact on the overall
proceedings? And was there anything unique about the process evolving with maybe some more mature
players and those that operate in this world? I don't think that the participation of
the secondary hedge funds is unique in this case where they think that they can drive returns,
they will get involved. I think in terms of the actual claim x positions, there are some unique
features in FTX. For example, not dollarizing claims at the outset, but scheduling all the
liabilities in terms of the token and then having the estimation motion that would actually set the
value for those tokens, not heard until the end of January. That was unique in terms of pricing.
I think the market built in the right assumptions there. There's a KYC process that original
holders have to undertake in order to receive distributions in the case, the portal that was set
up and all the processes around that were geared towards original holders and not a secondary buyer.
So that's added some logistical complications. I think there is a misunderstanding from the original
customer perspective that is not familiar with chapter 11 proceedings or the typical players
therein that there's something nefarious about secondary buying claims from original holders and
that there's a big distinction between their claims. There's not really at the outset of the
cases when preferences were being focused on, you could argue there was distinction because
secondary is were able to diligence possible preference exposure, but as we can get into with
announced recoveries, it's likely that preferences will not be pursued. So there's really not a
distinction between the original and the secondary claim holdings at this point and that's reflected
in the treatment under the plan as well. With the claims just from the logistics out of things,
I'm curious with some larger bankruptcys, you typically have corporate customers that might have
claims and you'll have some traditional hedge funds that will purchase those claims. Here,
a very different customer base in terms of those claims actually exchanging hands,
they're not just listed on the New York Stock Exchange in terms of buying and selling. What does
that process look like if I wanted to go out and purchase some FTX claims? Do you have a sense of
what that actually entails in terms of getting my hands on those? Yeah, I mean, look, there's a number
of different ways that buyers and sellers and some intermediaries have connected. The larger claims,
it tends to be your more traditional outreach through a broker to the larger distress funds and
some of those have minimums that they're buying. There's also been a number of exchanges set up
so that parties can connect to buyers very quickly and because there is this unique customer
code identification in the FTX schedules and now that the dollarized amounts are known associated
with the schedule tokens, it's been a lot easier from a pricing and diligence perspective. So I do
think that there's still a bit of a shutout of your smaller claims in the market on both sides
from diligence and cost, but you are seeing smaller claims being traded through some of these
online platforms that make it very easy to diligence acclaims. You've been mentioning dollarization
a few times here. It's worth jumping into. I'll take my impression of what the issue is and we
can answer that and then you can tell me whether I just have the wrong impression to start with,
but if I am purchasing Bitcoin or Ethereum on FTX, I am typically sending in dollars to make that
purchase and there comes a question of should my claim be calculated in terms of the dollar amount
that I use to purchase that Bitcoin or Ethereum or the actual Bitcoin or Ethereum that I purchased
and how much it was and where it's trended over time. So is that a fair representation of what's
going on with dollarization of claims and the challenges in terms of determining that because
obviously the price has swung quite dramatically in terms of where Bitcoin and the lesser extent
of Ethereum have gone over that time frame. Because I think that there's some principles because I
think what you're seeing both in FTX and hearing through Genesis confirmation trial that began
today is there's the bankruptcy code requirements that you can't get around and then there are all
parties acknowledgement of equities and how do we get the equities within the confines of the
bankruptcy code. Title 2, the bankruptcy code, it requires that claims be valued as a petition
date in US dollars that's done purposefully for equality of creditors so that you don't have
different denominations or different time periods in which to value claims. So you really can't
get around the dollarization of claims in terms of in-kind distributions. If you have an
unsecured claim you get paid back in dollars unless you agree to some sort of equity interest
with the ownership arguments here. There is a equitable basis to try to make in-kind distributions
if you could. In Genesis very different from FTX so we're going to hold on to our crypto assets
to try to do a in-kind distribution. The case as of the petition date of the bankruptcy filing
there was such a shortfall in the token portfolio at the exchange that I think it was decided
that's not going to be the best route and it's going to be extremely costly. We're going to go
for a value maximizing prudent monetization of the liquid assets for the benefit of customers
and so that's where we are and certainly I don't think anybody wants the estates to go out and
buy crypto at today's market prices to make in-kind distributions. So I think what we're really
talking about is the appreciation of the assets that the debtors are holding. Who should get that?
Should it be that customers just get a hundred percent of their petition date, dollarized claim
pay or should they have the benefit of appreciation that they would have otherwise had but for the
bankruptcy filing giving ownership arguments. And then there's further arguments of is there a
distinction between someone that held BTC as of the petition date versus someone that held FIA
because again these weren't contracts denominated in one asset type. You were freely trading in
about so I may have liquidated my token portfolio a couple hours before the bankruptcy filing because
I wanted to get my funds out. Should I not get the value of the cost of capital time value of money
if I would have put that FIA right back into the market and seeing the same returns as a crypto
denominated claim. So what we're really talking about is you can't get around the dollarization
of claims and value as a business date. We just need to figure out what's the best way within the
confines of the bankruptcy code to make sure that that appreciation ends up in the hands of customers.
In terms of the assets that actually stayed within the business, have they been held there
where there's some large balance of Bitcoin that has thus appreciated over this period of time.
How does that get managed through this process just in terms of when you have something like that
which isn't dollar denominated and is going to have a lot of volatility?
Yeah well the debtors have not been sitting on their crypto assets. There's been a monetization
of those assets done through an independent manager galaxy. There are guardrails with respect to
volumes at pricing to inform the sales but it's been an ongoing process to monetize the token
portfolio and the grayscale interest which were monetized for a near billion last month. So there's
been an ongoing effort to convert the crypto assets into cash. Is that voted on during the
reorg process? How does that come to be where those guardrails are put in place? Who's the decision
maker in terms of that? Ultimately the court. So the debtors proposed a motion with consultation
parties, the official committee, our group, the AHA committee, weighing in with the debtors'
professionals as to what those appropriate guardrails are. Everyone has an opportunity to object.
Some parties did object and then the court approved the motion over those objections.
Okay I'm curious when did that actually get approved timeline wise?
Let's say it was in October.
Fall okay interesting and I think we're getting into this a little bit but as much as the headlines
revolved around fraud within this business there were some very valuable assets sitting within
the business. So can you talk a bit about what the process was like to uncover this because again
it was not a traditional balance sheet in the way that I think things were managed or reported
but just the process of uncovering all of the assets and all of the value that sits underneath
this umbrella and the timeline for that and whether there's still key decisions to be made in
terms of liquidating, monetizing, managing those assets from here. Yeah so really from the
outset of the cases the debtors' professionals were working on putting together accurate
and complete records. Primarily the customer accounts but also identifying what assets could
be tied to those customer accounts and as I mentioned not all of the debtors' efforts have been
put on the bankruptcy docket but if you look at the criminal proceeding and the government exhibits
that were put forth against SPF and the other co-conspirators again nobody is denying that
billions of dollars of customer funds were misappropriate and there has been an ability to trace
where coal mingle customer funds whether it was through bank records whether it was through
slack messages that got discovered or emails that just got discovered there's been a number of
there was a $500 million investment into this asset there was a $100 million investment into
this asset that's as bad as far in the public domain at least than anyone's been able to go
and the issue is again when you're looking at those investments this came up in the recent hearing
on the anthropic stake sale where there was an objecting group that said there was there was 500
million of customer funds that were invested in the anthropic and they were relying on this
government except that well it was 469 million customer funds and there was over a hundred
million of other funds and then there were funds along the way that went to the ultimate
investment I asked this not facetiously should we really require a source of funds for every sale
some people have proposed that should we have the debtors go back and do a forensic accounting
exercise and just halt the cases and don't sell anything until that's done we could but I think
we're probably good enough to say wow a whole lot of this enterprise is attributed to customer
funds what's the way that we can get out of bankruptcy as soon as possible get as much to customers
as we can confirm a plan under the bankruptcy code requirements and save value because
there's a number of different competing interests on the customer class among creditors as a whole
where you could take a position that you're going to litigate these issues for maybe a marginally
bigger slice of a undoubtedly greatly diminished pie years down the road that's what we hope to prevent
in the event that you have these instances of investments made that were not necessarily
found via records what ends up happening to those the event that comes out later that there was
a large investment into something that became very valuable but where does that ultimately fall
in the future yes so under the current plan construct the way that it's designed is that where the
debtors were able to find assets that were traceable to the dot com exchange or to the US exchange
that only those respective customers recover from those assets and everything else is dumped into
the general pool which would be shared by really the waterfall but it would be the customers get
a priority payment so they get a 66% priority payment from that general pool before it goes next
to general unsecured creditors it's almost like a lean for 66% of the customer claim amount
and so that's an acknowledgement of the difficulties of sorting out where all the value is but
also giving credence to the arguments on ownership that the customer has raised and maybe we can
talk a little bit about the plan and it proposed recoveries what that looks like can you outline
I don't know exactly where it stands today in terms of what's been approved versus not but where
we stand today in terms of that proposal and where that piece naturally fits into something
within that proposal so at the January 31st hearing which was on the debtors estimation motion
debtors council did make an announcement that they have a goal to have a plan filed by the end of
this month what I can tell you is not going to happen because it's just got a couple days
yes but I think it will be filed in March that will pay not only customers but general unsecured
creditors in fall which means the power value of their dollarized petition claim the wrinkle
there is that that would require the subordination voluntarily or otherwise of the CFTC the IRS
and other governmental agencies that have over 20 billion in asserted claims at this point
because they are general unsecured creditors and there's arguments to subordinate them without
their consent but the CFTC has already agreed to subordination of at least the power amount for
creditors and we would hope that the IRS and the other government agencies would follow suit
that typically happen in these cases where the government is actually subordinate
actually it does because when you're thinking about what are these government agencies
asserting claims for it's on behalf of the customers that were victimized may have different
definitions of victims according to their statutory dictates but I think everyone can
agree that the customers were victims here with respect to the IRS there is a directive from the
tax division tax directive number 137 and it asserts that in cases where there's a Ponzi scheme
or embezzlement or misappropriation of funds that could give rise to constructive trust arguments
that the IRS should divert their recovery to those victims so there's definitely on an equitable
basis it makes sense I think here there hasn't been all those arguments proven out to the finale
but certainly we would hope that the IRS would recognize that there was customers funds who
are stolen and they certainly didn't get the benefit of any revenue generations from the exchange.
In the IRS itself their claims specifically I would assume are tied to tax payments though
there's nothing else that they're representing beyond their traditional line of businesses there
yeah I mean the IRS has a real purse so they're actually looking for a real recovery and the
tax claims yeah I think it's complicated here when you take a look at where those tax liabilities
would actually sit it's not with the foreign.com debtors it's really with Elmita and the US side
and at the holding company level which is what we call bankruptcy structurally subordinate
to claims at the operating level so there's a lot of nuances to the IRS's claims but again
if there could be a consensual agreement on their claims that'll be the best route for everyone.
In terms of the other creditors claims I assume par is what they are looking for aiming to get back
is that a win if that's the outcome? Well everybody wants more money so no I think
you've argued that it's a win but I think for most of the customers they're looking at this that
they've had their capital held up for a year and a half they've seen appreciation in the marketplace
where they could have been making those returns and haven't and so getting their petition date
claim paid in full does not feel like a win to them. We don't know what appreciation there is
going to be two years from now when distributions are made in the case but I think there's a very
clear and united cry for whatever value there is customers should get it really shouldn't go to
equity holders and there's compromises that will need to be made to make that work to fit into
the bankruptcy code of course. I would imagine that legally they only would have the right to
the par amount unless they were to make the argument against the dollarization that amount was
maybe I misunderstand the code where they can actually get paid a recovery above par
is that the case or is there anything else they can do to actually come out with more than that
dollarized amount. There's post petition interest which isn't equitable grant to unsecure creditors
it's typically implied where you have a contractual rate of interest and you have a solvent
debtor and the point there is you get the benefit of your bargain before equity holders do in a
solvent debtor case. That said this is all part of what we call a 19 19 global settlement of issues
so there's no reason why as part of the overall settlement for customer ownership rights you
couldn't say that we will give post petition interest and the highest amount permitted under law
to customers in this case and as long as the government agencies are okay with that and their
recovery is being supported and needed to it then that should be fine. That's one avenue to get
appreciation into the hands of customers we're also looking at creative structures with GIFTIN
and redistribution maybe through some of the government agencies so let's to think about I think
we all want to get to the same end place and we got to follow the law but it's a lot of compromise
and getting a lot of people to agree to feel a little bit of pain maybe to get to the best result
for everyone at the end. Yep understood and if there were an agreement that was made and the
various creditors were paid out the remaining equity holders that hold on to what I would
assume are mostly investment stakes and other entities they just have control over those investments
and monetize them as time goes on is there anything else beyond that. So there have been discussions
about having the ventures portfolio specifically which would also tie into the unsold tokens
as part of the post-effective date there'd be a trust that's set up and then trust interest
would go out to customers or other parties. I think there are some issues there from regulatory
standpoint and otherwise where if we can get upside interest to customers just through the
estates which would be a plan administrator would essentially be appointed and would continue to
monetize assets after the bankruptcy case as close but then that would go into the recovery pool
without a direct equity interest but you're still getting the upside from the recovery pool
of the estates. And I'm curious with that recovery pool be something that could be traded on a
secondary exchange as well where you have a claim and then you have access to that pool and I could
potentially or an institution could purchase those claims in the recovery pool. In cases where there's
a trust interest that can happen here if it's currently contemplated under the plan it's just one
claim and your recovery on that claim so I think as there's disclosures made about what potential
upside there is you're going to see that impact the the claims market but there's not a separate
instrument being contemplated as of now that would separately trade. And I know it's not your
direct line of work but do you have any sense of where those claims are trading right now relative
to par? I do because I haven't checked it in the last few days but as of last week I believe it was
high 70s low 80s depending on the claim amount. Much higher prices than at the outside of the case
for sure. Yes I can imagine. I think we've covered all of the questions that I have the last one
is going to be just about milestones but is there anything that you don't think that we
hit on throughout the conversation that's an important piece to this story? I think it's just
important to remember that this case is different than other crypto cases where there's often
comparisons. A lot can get lost with respect to those distinctions and here again we don't have
customer groups that had separate contractual arrangements to nominate it by different asset
types. It was all just your FTX account and you could trade in and out and we had a lot of folks
that were converting to FIA before the bankruptcy filing just to get their funds out. So I think the
distinction between the crypto and FIA claims that's been asserted in other cases is really not
as relevant here. That's the one thing that I would say to be careful of. That makes a lot of sense.
To close it out, I guess, monitoring from here sounds like a plan that was expected by the end of
the month might not happen by the end of the month and we are recording this on Monday, February 26th.
But what are the other key dates coming up or just general time frames which makes sense to be
monitoring the situation? Sure. So once the plan and the disclosure statement are filed about 30 days
from that time, you have your actual disclosure statement hearing and which the court will determine
if there's adequate information in the disclosure statement for individuals to vote on the plan.
Then you have your solicitation period which can run as short as 30 days. It can go up to 60 days.
I think we're going to try to keep the solicitation period as short as possible to give all the
creditors time to vote on the plan. After the voting is received and tabulated, you go to your
confirmation hearing and that's really when the court decides all of these sticky legal issues
that we've been talking about. Then after confirmation, you go to your effective date and you're out of
bankruptcy. So as I mentioned, the debtors announcing that they were planning to file the plan and
disclosure statement this month and there's only a couple days left. That's likely to be pushed back.
But if we can shorten the solicitation period and get the plan still filed in March,
we should be still looking to exit bankruptcy before fall this year.
Excellent. Well, Aaron, this has been a phenomenal conversation. I certainly learned a lot
having some familiarity but learned quite quickly. Not that much needed to brush up on a lot of this.
Thank you so much for sharing all this and joining us.
Yeah, thank you for having me. To find more episodes of breakdowns ranging from Costco to Visa to
Moderna or to sign up for our weekly summary, check out Join Colossus.com. That's J-O-I-N-C-O-L-O-S-S-U-S.com.
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