A growing group of non-U.S. customers of FTX.com, which currently counts up to around $1.6 billion in lost funds, has lawyered up and is looking to create an official customer committee in order to protect their rights of ownership over their assets on the exchange.
The non-U.S. FTX customers, led by Eversheds Sutherland attorneys Sarah Paul and Erin Broderick, had already formed the first FTX ad hoc group. As an official committee it would be granted additional consultation and approval rights within the Chapter 11 case, including being entitled to payment of professional fees by the bankruptcy estates.
After FTX filed for Chapter 11 bankruptcy protection with a widely reported shortfall of as much as $8 billion, a primary task for non-U.S. customers of the exchange is to establish that funds removed from customer accounts and transferred to other FTX-affiliated entities, such as Alameda Research, are not the property of FTX’s bankruptcy estate.
Establishing this would mean the money from these customer accounts should not be distributed to all creditors, as per the U.S. Bankruptcy Code, but rather belong to the account-holding customers, explained Broderick, a cross-border restructuring attorney with experience in crypto bankruptcy cases, including failed exchange Mt. Gox.
“The rights of the non-U.S. customers and why they’re differently situated is really important,” said Paul, a former federal prosecutor in the U.S. Attorney’s Office for the Southern District of New York. “First, there is an irreconcilable conflict between the interests of the non-U.S. customers and the creditors of the other silos. The starkest example of that is the transfer of the $10 billion to Alameda from FTX.com. The terms of service situate the assets differently, as customer funds, as opposed to property of the estate.”
Despite the confusion over the collapse of FTX and the actions of its former CEO, Sam Bankman-Fried, who was arrested on Monday in the Bahamas, there are certain aspects of the bankruptcy that are more straightforward than, say, Celsius Network, the bankrupt lending platform that has spawned a number of ad hoc customer groups.
“In comparison with Celsius, which had an Earn program where customers transferred the rights and title of their crypto assets to Celsius, here for the non-U.S. customers, there were just the terms and service that are governed by English law,” Paul added.
Certain FTX customers did enter into margin trading or other arrangements that gave the FTX debtors a “legal or equitable” interest in such property, noted Broderick. However, it has been reported that the customer assets subject to these arrangements made up a small portion of the total $16 billion in volume trading at the time, she said.
Those specific customer assets may be the property of the estate, although there are arguments to the contrary, but this misses the point and confuses two separate issues, Broderick added.
“It is undisputed that $10 billion of the $16 billion in customer funds on the FTX.com exchange was transferred to Alameda,” Broderick said via email. “Whether the customer assets were fraudulently transferred to satisfy Alameda’s liabilities or whether the transfers are just one piece of a Ponzi scheme remains to be seen, but it doesn’t change the fact the FTX.com customers have a greater legal and equitable right to the return of their own property or the value thereof before it is distributed out to other creditors or used or sold by the debtors without the protection of their interests.”
Read more: The FTX Downfall: Full Coverage
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