The FTX bankruptcy, following Sam Bankman-Fried's fraud conviction, has concluded as one of the most expensive in U.S. history, incurring nearly $1 billion in legal and professional fees. Creditors are being repaid in cash, valued at the crypto market's November 2022 low, which significantly undervalues their claims relative to current prices and has drawn widespread criticism for disregarding customer property rights. The process was overseen by Sullivan & Cromwell, FTX's former counsel, whose appointment raised conflict of interest concerns, setting a contentious precedent for future crypto insolvency resolutions.
When the cryptocurrency exchange FTX imploded, customers around the world lost access to their money. Founder Sam Bankman-Fried was convicted of fraud and sent to prison. But the story didn’t stop there. For the past three years, FTX has been in bankruptcy, a legal process that determines who will be paid back and how much they’ll receive. From the start, some customers and FTX insiders have criticized the bankruptcy. Legal experts and a bipartisan group of senators objected to the law firm tapped to run it, raising concerns about potential conflicts of interest. But the bankruptcy court and an independent examiner signed off on the firm’s appointment as lead counsel. This year, customers are receiving compensation for their losses, but many say they’re being shortchanged. Instead of being paid in cryptocurrency, they’re receiving cash, with their claims pegged to the value of crypto when the market was at an all-time low. “Under this plan, my contractual rights and my ownership rights have been trampled; my property rights have been disregarded,” says Lidia Favario, an Italian artist who argued in court that customers should be repaid in crypto, not cash. This week on Reveal, in the second part of our series on FTX, we examine the decisions that shaped what’s become one of the most expensive bankruptcies in US history. Read the FTX bankruptcy estate’s on-the-record statement to Reveal. Dig Deeper Listen: Part 1 of the series Read: Sam Bankman-Fried and the Billion-Dollar Drama Over FTX’s Ruins (Mother Jones) Listen: So You Don’t Understand Crypto. Buckle Up. (More To The Story) Explore the Documents Credits Reporter: Jonathan Jones | Producer: Sophie Bridges | Editor: Taki Telonidis | Additional editing: Daniel Schulman | Additional reporting: Artis Curiskis and Sophie Bridges | Production assistance: David Ritsher | Archival research: Julia Haney | Fact checker: Sarah Szilagy | General counsel: Victoria Baranetsky | Production manager: Zulema Cobb | Digital producer: Artis Curiskis | Score and sound design: Jim Briggs, Fernando Arruda, and Claire Mullen | Deputy executive producer: Taki Telonidis | Executive producer: Brett Myers | Host: Al Letson Support for Reveal is provided by listeners like you, and the Reva and David Logan Foundation, the John D. and Catherine T. MacArthur Foundation, the Jonathan Logan Family Foundation, the Robert Wood Johnson Foundation, the Park Foundation, The Schmidt Family Foundation, and the Hellman Foundation. Transcript Reveal transcripts are produced by a third-party transcription service and may contain errors. Please be aware that the official record for Reveal’s radio stories is the audio. | Al Letson: | From the Center for Investigative Reporting and PRX, this is Reveal. I’m Al Letson. | | Jonathan Jones: | What does FTX stand for? | | Sam Bankman-Fri…: | Oh, God. Futures exchange. The F and the T both from the word futures. | | Al Letson: | That’s FTX founder, Sam Bankman-Fried. In an interview with Reveal’s Jonathan Jones. Sam started the crypto exchange in 2019 and watched it turn into a huge success. | | Speaker 4: | They call him the JP Morgan of crypto, right? | | Speaker 9: | Yeah, the Michael Jordan of crypto, if you will. | | Al Letson: | By 2022, millions of customers were trading billions of dollars in crypto through FTX. But behind the scenes, people who worked for Sam were seeing signs of trouble. | | Jonathan Jones: | Did you have moments where you felt he played a little too loose with the rules? | | Caroline Papado…: | Probably, yeah. I mean, I think it was, wow, we’re moving really fast. | | Al Letson: | In November of 2022, word got out that billions of dollars were missing. Investors panicked and started pulling out their money. | | Sam Bankman-Fri…: | On the 7th, we had $4 billion of net customer withdrawals, like 40 times as much as we’d ever seen in a day before. | | Al Letson: | Within days, the company imploded, triggering criminal investigations, global chaos, and customers around the world losing access to their money. As Sam’s empire crumbled, his inner circle turned on it and he decided to hand the company over to a new CEO, John Ray. | | Speaker 6: | Ray, who’d previously oversaw the bankruptcy of Enron said, “Never in my career have I seen such a complete failure of corporate controls.” | | Al Letson: | FTX’s new CEO declared bankruptcy, launching a legal process that would determine the future of the company, how much customers would get back, and whether some would be left out entirely. This part of the FTX story has largely gone untold. The spotlight has always focused mostly on Sam Bankman-Fried, and much less attention has been paid to what happened to FTX after Sam’s arrest and to the billions of dollars owed to FTX customers. Under bankruptcy, companies have a responsibility to their creditors to, in essence, act in their best interest. | | But in the case of FTX, some creditors say that didn’t happen, and they accused John Ray, FTX’s new CEO, and Sullivan & Cromwell, the law firm running the bankruptcy of making choices that did the opposite. Ultimately, these concerns would play out in a bankruptcy court. This week, in part two of our investigation into the FTX collapse, we unspool what’s become one of the most expensive bankruptcies in history. | | | Maxine Waters: | The committee will come to order. This hearing is entitled Investigating the Collapse of FTX, Part I. | | Al Letson: | Reveal’s Jonathan Jones picks up the story on December 13th, 2022, a month after FTX filed for bankruptcy when Congress held its first hearing into the collapse. | | Maxine Waters: | First, I’d like to welcome Mr. John Ray III, who has been appointed CEO of FTX to oversee its bankruptcy. | | Jonathan Jones: | That’s Representative Maxine Waters, the Democratic Chair of the House Financial Services Committee. As she begins, Sam Bankman-Fried is nowhere to be found. The night before, he’d been arrested in The Bahamas. | | Maxine Waters: | He was scheduled to testify under oath before this committee today. Unfortunately, the timing of his arrest denies the public the opportunity to get the answers they deserve. | | Jonathan Jones: | The congressional hearing goes on without Sam. With John Ray alone taking the mic. | | John Ray : | This is really old-fashioned embezzlement. This is just taking money from customers and using it for your own purpose. Not sophisticated at all. | | Jonathan Jones: | Ray portrays FTX as a catastrophic failure in leadership. | | John Ray : | Over, in many respects, starting from near zero in terms of the corporate infrastructure and record-keeping that one would expect in a multi-billion dollar corporation. | | Caroline Papado…: | For someone to come in and say, “You guys were completely disorganized. You didn’t have any records.” No, we had records. You disagree and you’re allowed your opinion, but the way you went about it in such a public frame and you didn’t talk with the people who used it and why we used it, the part was very insulting. | | Jonathan Jones: | Caroline Papadopoulos was controller of FTX U.S., running a team of accountants when the company went down. She was no Sam loyalist. She told me she only felt comfortable staying on post-collapse once she found out Sam would no longer be CEO. But watching the congressional testimony, what she’s hearing from the new CEO bothers her. | | John Ray : | I’ve just never seen an utter lack of record-keeping, absolutely no internal controls whatsoever. | | Jonathan Jones: | When you hear that, what goes through your mind? | | Caroline Papado…: | How dare you? I mean, only from the standpoint of I’m an ex-auditor. I do know a thing or two about controls, and he had no ability to understand what was going on because he had truly just taken over. | | Jonathan Jones: | Sam had prepared a statement he was going to read to Congress. It’s leaked and published in Forbes the day of the hearing. In it, he paints a different picture than John Ray. Sam begins with a flippant apology, “I effed up.” He then quickly turns to blaming others. At one point, he makes a sarcastic jab at fees the law firm Sullivan & Cromwell charged FTX saying they have “done a good job of making sure they were wired $4 million.” | | He argues that FTX’s new leadership, John Ray and Sullivan & Cromwell, had rushed the company into bankruptcy. Sam’s leaked testimony marks the beginning of a battle over the story of FTX that continues today. On the one side, Sam claiming bankruptcy wasn’t necessary, on the other, the FTX estate now helmed by John Ray and Sullivan and Cromwell arguing that a court-approved bankruptcy was the only way to preserve what was left of FTX. | | | Once the bankruptcy is underway, tens of thousands of customers begin filing claims, officially registering as creditors in hopes of getting their money back. People like Tareq Morad, a Canadian FTX customer who had hundreds of thousands on the exchange. | | | Tareq Morad: | FTX wasn’t supposed to be part of the risk. The risk was the investments you choose to invest in, not the platform you choose to invest in. | | Jonathan Jones: | As Tareq starts to piece together what happened to his money, he feels betrayed, mostly by Sam Bankman-Fried. | | Tareq Morad: | Customer funds are customer funds. So if I want it, he has to have the ability to return it. They’re not his funds. | | Jonathan Jones: | And for most FTX customers, it was unclear when or if they get that money back, and that’s where claims buyers come in. Claims buyers swoop in after a company goes under and offer cash to customers like Tareq who’ve lost money. Sometimes it’s as little as pennies on the dollar. For customers, it’s a way to guarantee they’ll get something back. For claims buyers, they’re betting that the bankruptcy will recover more than they paid, and they’ll make a profit. Sometimes a huge profit. | | Thomas Braziel: | They literally are vultures, and I guess I’m one, so I don’t want to act like I’m holier than thou. | | Jonathan Jones: | Thomas Braziel is a claims buyer who specializes in crypto bankruptcies. | | Thomas Braziel: | It became a bonanza. The entire docket in FTX with customer account claims, and so it’s up there with Lehman and Madoff and Enron. There were billions of dollars of claims. | | Jonathan Jones: | John Ray told Congress that his job was to recover as many of those billions as possible. | | John Ray : | Our overarching objective is to maximize value for FTX customers and creditors so that we can mitigate to the greatest extent possible the harm suffered by so many. | | Jonathan Jones: | But Ray also said at that hearing that he was pessimistic about that happening, and that most of FTX’s investments may be worth a fraction of what was paid for them. ThomasBraziel, the crypto claims buyer, told us he ran into John Ray at an industry event in New York. He says he floated the idea that parts of FTX’s, portfolio of startup investments could still be very valuable. | | Thomas Braziel: | I said, “John, I think of this whole venture portfolio that could work out to be a hundred.” He said, “Oh no. All this stuff’s dog shit, Thomas. Dog shit.” | | Jonathan Jones: | We were unable to independently verify that John Ray ever said those words. And when we asked him, the FTX estate responded describing Braziel’s characterization of the conversation as patently false. They acknowledged that John Ray has indeed expressed skepticism about some of the company’s investments, and that over time he’s been proven right. Many deals, they added, were made with virtually no due diligence, a point backed up by a independent examiner. Braziel says that after speaking with Ray, he began to suspect that the bankruptcy team would try to make it harder for some customers to get paid. | | Thomas Braziel: | It’s like an aggressive tactic, like try to exclude people from the bankruptcy because they don’t do the paperwork right. Set up artificial deadlines, stuff like that. | | Jonathan Jones: | Some customers would come to believe that, too, and they filed objections along those lines. The FTX estate rejects this claim, saying the process followed routine court-approved procedures. But it wasn’t necessarily routine for the vast majority of FTX customers who were outside the United States. | | Thomas Braziel: | Think about it, if you’re an international predator, you have tax forms you’ve never seen, you’ve got everything in English. What if you’re Finnish? What if you’re Dutch? What if you’re Chinese and it’s not your first language? If you’re not from America and you’re getting all these court documents that look very official and they have all the federal district of bankruptcy seals and stuff on it, it looks kind of scary. | | Lidia Lidia: | I’m Italian, and as you can hear, I have this very exotic English. So for me, all these legal language was really… I couldn’t understand anything. | | Jonathan Jones: | Lidia Favario was one of those international customers who now had to play by unfamiliar rules written in foreign legalese. | | Lidia Lidia: | We didn’t choose this legal system, but our assets were seized, and I find this, yeah, shocking. | | Jonathan Jones: | Under that system, Lidia was classified in one of the bottom tiers of customers. Her claim was worth under $50,000, but she told us it was everything she had. She spiraled until she stumbled across a community of fellow FTX creditors online, on Twitter threads, and then in Telegram chats. These creditors had lost millions and they were growing increasingly uneasy about how much money they might get back. In a bankruptcy court filing in mid-January 2023, John Ray referred to the company as a dumpster fire. But from the customer perspective, it wasn’t a mess at all. | | Arush Sehgal: | The dumpster fire thing is completely fictitious. You can ask any institutional trader on FTX, they had a world-class accounting system. Everyone knew exactly their holdings. We knew what we were owed. | | Jonathan Jones: | Arush Sehgal was one of those customers, and he was becoming one of the most outspoken critics of the bankruptcy. And more and more, some customers began to focus on the law firm in line to lead the bankruptcy, Sullivan & Cromwell. The firm had advised FTX for years before the collapse and played a central role in its final days. Now, a judge would decide if Sullivan & Cromwell could be the lawyers over overseeing the bankruptcy. To critics, including a bipartisan group of U.S. senators, this looked like a potential conflict of interest. | | As part of the approval process, in December 2022, Sullivan & Cromwell filed disclosure statements laying out its connections to FTX. The next step was an approval hearing in late January 2023. | | | Juliet Sarkessi…: | Thank you, your Honor. For the record, Juliet Sarkessian on behalf of the U.S. Trustee. | | Jonathan Jones: | The watchdog agency that oversees bankruptcies had filed an objection. It wrote that Sullivan & Cromwell’s original disclosure statements were wholly insufficient to determine whether the firm had conflicts of interest and that that alone should be enough to deny their application. Before the hearing, the U.S. Trustee dropped its objections after Sullivan and Cromwell agreed to provide additional disclosures, but those new disclosures only raised new questions, and Juliet Sarkessian appeared in the court to explain the Trustee’s concerns for the record, like why had the original filing by Sullivan and Cromwell failed to mention that Ryne Miller was a partner at the firm before becoming general counsel for FTX U.S. | | Juliet Sarkessi…: | The application and the initial declaration did not mention any connection with Mr. Miller, let alone that he was the individual who actually brought Sullivan & Cromwell to the attention of the debtors. | | Jonathan Jones: | In the U.S. Trustee’s view, if Sullivan & Cromwell were to run the bankruptcy, they’d potentially be investigating themselves. FTX customers objected too. | | Marshal Hoda: | My clients, have objected to the appointment of Sullivan & Cromwell as the debtors lead counsel because they have grave concerns about the firm’s lack of transparency in its mandatory disclosures. | | Jonathan Jones: | Marshal Hoda is an attorney specializing in crypto recovery who represented several FTX customers. | | Marshal Hoda: | The bankruptcy system depends on the self-policing conduct of lawyers in making robust, timely disclosures. The failure to get this right at the outset can result in a lot of pain down the road. | | Jonathan Jones: | Sullivan & Cromwell’s attorney, James Bromley, told the court that they had provided documents to address every issue raised by the objectors. | | James Bromley: | So with that, Your Honor, we have been able to resolve any issues that the office of the U.S. Trustee had with respect to Sullivan & Cromwell’s disclosures. | | Jonathan Jones: | Just hours before the hearing, there had been a surprise filing, a declaration by Dan Friedberg, FTX’s Chief Regulatory Officer. He accused the firm of misleading the court, downplaying its ties to FTX and pushing the company into bankruptcy, and claimed that other employees inside the company also had concerns, but were too afraid to speak out. Bromley quickly dismissed Friedberg’s declaration. | | James Bromley: | Objection. It was filed late. It was filed… Frankly, it’s a little bizarre if you sit down and read it, but Your Honor, our view is that it has no place in the court. It should be stricken from the record, and… | | Jonathan Jones: | He said the declaration was nothing more than a diversion tactic on behalf of Sam Bankman-Fried. | | James Bromley: | So what we have here, Your Honor, is a gentleman who ran this company into the ground, Mr. Bankman-Fried, sitting in his parents’ home in Palo Alto, California with an ankle bracelet on… | | Jonathan Jones: | And he dismissed the objections against Sullivan & Cromwell’s appointment as part of a smear campaign. | | James Bromley: | They can’t throw stones at the U.S Attorney’s Office, but they can throw stones at debtor’s counsel that’s providing information to the prosecutors and the regulators, and that’s exactly what’s happening. | | Jonathan Jones: | At one point, Friedberg appeared on the court’s Zoom meeting, waving his hand to be called on. One of the attorneys making arguments pointed him out, and then Judge John Dorsey said… | | John Dorsey: | So I did see him and I did not recognize him intentionally because, as I said, he has not filed a motion, he has not joined any motion. He is simply trying to be a witness, I suppose, but witnesses are not allowed unless they’re here live. | | Jonathan Jones: | I asked bankruptcy law professor, Jonathan Lipson, how common is it for a law firm to represent a company before it’s accused of fraud and then run its bankruptcy after it collapses? | | Jonathan Lipson: | Never heard of it. Never heard of it. I mean, that’s why it’s so remarkable that Sullivan & Cromwell has run the case. And Enron, for example, the two main law firms before bankruptcy, they obviously weren’t going to be counsel to the company in its bankruptcy, and instead you’d have independent lawyers and independent investigators coming in and figuring out, well, what went wrong. | | Jonathan Jones: | But to other close observers like claims buyer, Thomas Braziel, this was just how things tend to go in bankruptcy court. | | Thomas Braziel: | The joke in bankruptcy is that the conflict rules are really, really loose compared to other parts of the court system, so they routinely allow more and more like aggressive conflict. I don’t like it because the pre-petition guys who did a lot of the deal making were debtors counsel, hell, I mean, how are you going to look into pre-petition activity? You did all the work. I mean, I find the whole thing disgusting. How can you possibly question your own behavior? | | Jonathan Jones: | In the end, Judge Dorsey wasn’t swayed. | | John Dorsey: | With that, as I said, I’m going to overrule the objection and I will the order appointing, or excuse me, approving the retention of Sullivan & Cromwell. Are there any questions? | | Al Letson: | Despite objections, the judge declared, there was no evidence of any actual conflict and put Sullivan & Cromwell in charge of the bankruptcy. But it wouldn’t be long before the bankruptcy team made a decision that would raise new concerns about whether they were acting in the customer’s best interest. That’s next on Reveal. | | Al Letson: | From the Center for Investigative Reporting in PRX, this is Revealed. I’m Al Letson. In January 2023, Sullivan and Cromwell working alongside John Ray and his team began preparing to sell off parts of the old company. In late April, they decided to sell off the small U.S.-regulated exchange called Ledger X. For critics, this ended up raising concerns about whether Sullivan and Cromwell should be run into bankruptcy. Revealed’s Jonathan Jones explains. | | Jonathan Jones: | To understand why Ledger X matters, we have to go back in time. FTX acquired Ledger X roughly a year before the bankruptcy, and while Ledger X was small, it was licensed by the Commodity Futures Trading Commission, the agency that regulates U.S. financial markets. For Sam, this was a breakthrough, a way to gain a foothold in the United States through Ledger X, FTX could now offer Crypto Futures, its core business, to U.S. customers. And to get it done, he hired some of Wall Street’s most powerful lawyers. | | Jonathan Lipson: | When you think of old-line, powerful law firms, the platonic form is Sullivan and Cromwell. And in fact, Sullivan Cromwell is the law firm that helped FTX make the acquisition. | | Jonathan Jones: | That’s Jonathan Lipson, the bankruptcy law professor who studied the collapse, and Sullivan and Cromwell’s role in the company. | | Jonathan Lipson: | After FTX acquires Ledger X, they were acting as regulatory counsel to FTX. They were preparing and presenting to the government, the Commodity Futures Trading Commission, in particular, what appears to have been a very important application to allow FTX to do certain things. | | Jonathan Jones: | That meant answering questions about FTX’s ties to Alameda research. Sam’s trading firm Alameda wasn’t just trading crypto and making investments. It had also acted as a kind of internal bank for FTX, handling customer deposits and withdrawals, and even paying some of the company’s bills to make that possible. FTX programmers wrote lines of code allowing Alameda to access FTX funds. | | Dan Chapsky: | Technically speaking, the lower bound on that was like $65 billion, but that’s just an arbitrarily large number. Basically just means that they can withdraw infinite amounts. | | Jonathan Jones: | That’s Dan Chapsky, who was Head of Data Science at FTX. He says Alameda could take that money without putting up the collateral to guarantee they could pay it back taken together. | | Dan Chapsky: | I think most people refer to it as the “back door”. | | Jonathan Jones: | Dan says he first heard about the issue in early 2022 from a team of employees at Ledger X who were in charge of identifying risk. | | Would you say they had a more robust risk management team than even FTX did at that time? | | | Dan Chapsky: | I would say they had a more robust risk management team than any exchange at the time. | | Jonathan Jones: | One of the members from that team brought up the lines of code to Dan. He says he told them it sounded bad, and suggested they raise it with someone higher. According to the Wall Street Journal Ledger, ex-employees had raised concerns and flagged the backdoor code in a written message, writing, quote, “Just want to point out that there are currently a few places in the code base where Alameda gets special treatment in one way or another.” Ledger X’s chief risk officer replied, “Yeah, we should clean up this sort of stuff.” The risk officer then tried to take the issue to her boss, and here’s where things get murky, according to Jonathan Lipson. | | Jonathan Lipson: | We have no idea if in fact what she reported was accurate. We have no idea what the response was. We do know she was fired. | | Jonathan Jones: | While all of this was going down Sullivan and Cromwell was helping FTX with its U.S. expansion, and that involved a lot of back and forth with regulators. | | Jonathan Lipson: | And in that process, it appears that somebody from the CFTC asks FTX, “Well, can you tell us a little bit about the relationship between Bankman-Fried and all of the other companies in the FTX complex?” And the statement that goes back, and I’m paraphrasing, but the statement that goes back to the CFTC is “There is no connection. There are no special privileges.” | | Jonathan Jones: | But there were special privileges, the ones that gave Alameda access to customer funds and form the basis of the fraud charges. Court filings later revealed emails have been sent to regulators with inaccurate information. | | Jonathan Lipson: | That was the underlying falsehood that, I think, drove all of this. Whether Sullivan and Cromwell themselves affirmatively made that statement, it’s just not clear, but it’s pretty clear that that statement was wrong. | | Jonathan Jones: | Court documents don’t show who sent those emails, and it’s unclear if Sullivan and Cromwell wrote them or even knew about them. The FTX estate hired an outside firm to review these questions, which found no evidence Sullivan and Cromwell knew the statements to regulators were false. Nevertheless, this type of regulatory work was exactly what Sullivan and Cromwell was brought on by FTX to do. To Lipson, the uncertainty over what Sullivan and Cromwell knew – or didn’t – raises a big question. Could the same attorneys who worked for FTX before the collapse be trusted to investigate it afterwards? Or, to paraphrase an FTX customer in their official objection to Sullivan and Cromwell’s appointment: | | Jonathan Lipson: | If you’re worried about the foxes running that henhouse, this case is a problem. | | Jonathan Jones: | Fast-forward to April 2023. 5 months after the collapse, Sullivan and Cromwell is lead counsel in the bankruptcy, and the restructuring team decides to sell off LedgerX. For Lipson and other critics, this was a big deal because selling off Ledger X meant that the court would no longer have access to the company’s documents, documents that could potentially provide answers about who knew about the back door, and what they did about it. Neither Sullivan and Cromwell nor the FTX estate responded to our questions about the preservation of records, but the estate noted that LedgerX was sold at a public auction approved by the creditors committee and the court. | | As the bankruptcy unfolded, Sullivan and Cromwell’s prior work for FTX continued to draw scrutiny, and the U.S. Trustee, the watchdog meant to protect the public interest, continued to push for more oversight. That’s when Jonathan Lipson went from being an observer of the FTX bankruptcy to a participant. | | | Jonathan Lipson: | I got involved in the case because I agreed to write an amicus brief to support the United States Trustee’s effort to get an examiner in the appeal. | | Jonathan Jones: | An examiner is an independent investigator appointed by the court to make sure a bankruptcy is handled fairly. To Lipson, who studied the use of examiners in other major cases, FTX was exactly the kind of case that called for one. The bankruptcy court had rejected a request for an examiner and the issue was taken up in appeals court. | | Jonathan Lipson: | In all of my studies, I have never seen a free fall bankruptcy this spectacular, precipitated by allegations of such serious misconduct, that did not also have an independent investigation to invite a truly independent examiner or trustee. Enron, Worldcom, Lehman Brothers, New Century, Refco all had them, which means that if the bankruptcy court’s decision is affirmed today, it would be a first. | | Jonathan Jones: | And then one of the judges pressed James Bromley, a Sullivan and Cromwell attorney, to explain why the case didn’t need an independent examiner. | | Judge: | To Professor Lipson’s point that in every other major bankruptcy there’s been an examiner, this would be the first one that hasn’t had one. | | James Bromley: | Your Honor, this- | | Judge: | Is he wrong? | | James Bromley: | Yes, he is wrong. | | Judge: | Cite me one. | | James Bromley: | Because here’s the situation. He’s wrong with the context and how he frames it. | | Judge: | Which one? Give me the name of a bankruptcy. | | James Bromley: | This one. | | Jonathan Jones: | In a twist, Bromley didn’t dispute that FTX would be the first bankruptcy involving widespread fraud without an independent examiner. He just argued that it was fine; the company already had oversight from the creditors and the courts. The appeals court didn’t buy it. They ruled that the law required an independent examiner. | | When the examiner’s report was eventually released, it concluded the court did not make a mistake in approving Sullivan and Cromwell as bankruptcy counsel. The examiner said he’d seen no evidence Sullivan and Cromwell knew of or ignored the fraud. But Jonathan Lipson was critical of the report. He says the examiner was appointed late, had limited time, and on key issues, relied too much on the work of the estate’s outside counsel. | | | Jonathan Lipson: | It’s very, very limited in scope, essentially, I think to whether Sullivan Cromwell was involved in a few other things. | | Jonathan Jones: | Meanwhile, Lipson says at the same time, Sullivan and Cromwell was steering the bankruptcy. It was also cooperating with the prosecutors, building the case against Sam Bankman-Fried. | | Jonathan Lipson: | It takes a long time to put together a criminal prosecution normally, right? It takes years to do that. In the FTX case, I think we certainly, we being me and some other academic friends, worry a great deal that Sullivan Cromwell, in effect, was acting as the government’s backup lawyers in the prosecution of Bankman-Fried. | | Jonathan Jones: | The FTX estate flatly rejected that characterization as false and without merit. The independent examiner also looked at this issue and found that Sullivan and Cromwell’s ongoing cooperation with prosecutors was at John Ray’s direction. At an early bankruptcy hearing, Andrew Diederich, a partner at Sullivan and Cromwell made clear that cooperating with prosecutors was a top priority, despite the financial cost to creditors. | | Andrew Diederic…: | In the first months, the board determined that spending estate resources to cooperate with governmental investigations was in the best interest of our debtors. This was expensive given the extent of those government investigations and the sheer number of them, but it has proven to be the right call. | | Jonathan Lipson: | One of the partners at Sullivan and Cromwell, Jim Bromley says, tens of millions of dollars of support to prosecutors. | | Jonathan Jones: | That is crazy. Who’s paying for that? Creditors are paying for that. | | Jonathan Lipson: | Sullivan Cromwell isn’t doing it for free. They’re billing $2,100 an hour to do that work, but it’s dollars that would otherwise go to creditors. | | Jonathan Jones: | In other words, every dollar going to Sullivan and Cromwell’s legal fees was coming out of the same pot of money that would be used to pay back FTX customers. Almost a year after the collapse, the man at the center of it all finally faced prosecutors in court. In October 2023, Sam Bankman-Fried went to trial. | | Damian Williams: | Kevin Smith. You got it, Sam. | | Speaker 11: | Sam, how are you going to plead this morning? | | Speaker 8: | Come on guys. | | Jonathan Jones: | The media was all over it. | | Speaker 12: | We’re covering this story. Disgraced FTX founder Sam Bankman-Fried, took the stand today in his criminal fraud. | | Speaker 13: | He looks like a mess. Okay? And I’m not saying this in a mean way, but it almost is like Pig Pen from Peanuts with this just haze around him. And in these… | | Jonathan Jones: | The once-media darling had become Public Enemy Number One. | | Carly P. Reilly: | I mean, look, the defense was wildly outgunned. I mean, the defense’s case felt so bad, like kind of surprisingly bad. | | Jonathan Jones: | Carly P. Reilly is an independent podcaster and journalist. She attended the trial and posted daily updates. | | Carly P. Reilly: | The prosecutor who spoke for the prosecution in opening statements, his story was very simple. Basically, “Sam took money from FTX and spent it like his own personal piggy bank on whatever he wanted. He spent billions of dollars of customer money,” and that was the story. | | Paul Peltier: | White collar crime boils down to three things, lying, cheating, and deceit. It is really how did they lie? How did they cheat? How did they deceive people and cheat them out of their money? That’s it. | | Jonathan Jones: | Paul Peltier spent almost three decades in the Department of Justice, and for years led its criminal fraud section prosecuting major financial crimes. He wasn’t the prosecutor who tried Sam Bankman-Fried, but from the outside, here’s how we saw what happened. | | Paul Peltier: | We were doing stuff with the money, and we weren’t telling people we were doing what we were doing with the money, and it was creating risk, and we told them the opposite. That’s a crime, that’s fraud. | | Jonathan Jones: | Peltier says white collar trials almost never move this fast. But he noted prosecutors’ close cooperation with Sullivan and Cromwell. | | Paul Peltier: | This was a little bit easy, and I say that with all due deference to how difficult these cases are, but it seems like Sullivan and Cromwell, and I’m going to call it, silver-plattered it a little bit with the prosecutor’s office, and then they effectively were able to get a witness fairly quickly that gave them the keys to the kingdom. | | Jonathan Jones: | Nearly all of Sam’s inner circle turned to government witnesses. The most devastating testimony came from Caroline Ellison, his on-and-off girlfriend and head of Alameda Research. | | Andrew Diederic…: | They had his girlfriend, and she was a co-conspirator, and the prosecutors beautifully lined it up. Literally, this was their questioning. “What did you do?” “I worked for Alameda.” “Who did you work there with?” “Sam Bankman-Fried.” “Did you commit a crime with him? “Yes, I did.” “Who did you commit a crime with?” “Sam Bankman-Fried.” | | Jonathan Jones: | Here’s how Carly described it. | | Carly P. Reilly: | At every turn, Caroline made it very clear that everything she did was at the behest of Sam. It almost became a joke. I mean, if I had a flask in there, it would be a drinking game, right? And everything was like, “Well, at Sam’s direction.” “Well, Sam told me…” | | Jonathan Jones: | Caroline wasn’t the prosecutor’s only star witness. As the trial turned against him, Sam testified in his own defense, against the advice of his lawyers. It did not go well. | | Carly P. Reilly: | He did all this while seeming incredibly semantic and pedantic for sure, but also like an asshole. I think one person said to me, “What the jury had prior to Sam taking the stand was a stick figure version of him, this criminal CEO. And now Sam has basically gotten on the stand and breathed a life into that stick figure and made that person real.” | | Jonathan Jones: | After just four hours of deliberation, the jury found Sam guilty on all counts. | | Damian Williams: | Sam Bankman-Fried perpetrated one of the biggest financial frauds in American history, a multi-billion dollar scheme designed to make him the king of crypto. | | Jonathan Jones: | That’s Damian Williams, the U.S. Attorney in the Southern District of New York, addressing the cameras immediately after the verdict. | | Damian Williams: | The cryptocurrency industry might be new. The players like Sam Bankman-Fried might be new, but this kind of fraud, this kind of corruption is as old as time, and we have no patience for it. | | Jonathan Jones: | Paul Peltier says that lack of patience was a far cry from how the DOJ handled the last major financial scandal, the 2008 banking and mortgage collapse. Back then, he felt his hands were tied. | | Paul Peltier: | The people above us weren’t empowering the Department of Justice to bring these cases. The fraud section lost 70% of its prosecutors during this time period, mostly out of frustration. | | Jonathan Jones: | Peltier and Lipson believe that in that historical context, Sam Bankman-Fried was an appealing, high profile target. | | Jonathan Lipson: | The prosecutors come out of the financial crisis of 2008, really not going after anybody individually. They don’t know perp walks, right? So Bankman-Fried is just this incredibly attractive candidate to prosecute and the fact that Sullivan Cromwell has basically delivered him on a platter, and all the resources to do it really fast and really hard? I mean, what prosecutor wouldn’t take that? | | Al Letson: | Five months after his conviction, Sam Bankman-Fried would return to the court for sentencing. But first, FTX customers were invited to speak and many were upset, not just at Sam, but at the bankruptcy itself. | | Speaker 16: | And it’s a lie that the new administration is planning to pay us back 100% of our money. | | Al Letson: | A customer movement challenges the story told in court. Next, on Revealed. | | Al Letson: | From the Center for Investigative Reporting and PRX, this is Reveal. I’m Al Letson. | | As Sam Bankman-Fried sentencing approached the Department of Justice invited victims to write impact statements about the harm he’d caused. More than a hundred people wrote in, they described savings wiped out, livelihoods destroyed, and families uprooted, all because of FTX’s collapse and fraud. And in an uncommon move, John Ray FTX’s new CEO, filed his own victim impact statement. Ray told the judge he was writing on behalf of FTX victims to correct false claims by Sam Bankman-Fried that the harm was zero, the money was there all along, and FTX was solvent at the time of bankruptcy. Ray argued customers were still suffering as a result of Sam Bankman-Fried and that whatever people get back was only possible because of his team’s efforts to dig through the wreckage. Ray spoke about FTX victims on Freakonomics Radio. | | | John Ray: | I mean, there’s people, they’ve got children, they’ve got to put them through school, they’ve got a house that may have a mortgage. If you were a customer and you have money hung up, you want to get it back as quickly as possible. | | Al Letson: | Lidia, the Italian artist living in London, had already written a victim impact statement, but then she read Ray’s letter. Reveals Jonathan Jones picks up the story from there. | | Jonathan Jones: | Lidia had lost her life savings in the collapse. For more than a year she’d been obsessively reading court filings, media coverage, telegram threads, and Twitter arguments. In her first impact letter, Lidia focused squarely on Sam Bankman-Fried. | | Lidia: | I lost my money because Sam Bankman-Fried and his clique of friends were trying to play Gods and became the new gatekeepers of a new world and a new economy. To do so, they stole the money, the hopes and the dreams of hundreds of thousand human beings from over the world. | | Jonathan Jones: | But by the time she read John Ray’s letter, she was growing increasingly outraged at the team now running the bankruptcy. | | Lidia: | When I read the statement of Joe Ray and I was whoa, whoa, whoa, whoa, whoa, here there is something wrong. | | Jonathan Jones: | Now she was having second thoughts about what she’d written. | | Lidia: | When I read his I was furious, so furious. I felt so bad about what I wrote about Sam and I just thought, well, it’s true, the trial is not about Sullivan & Cromwell and John Ray, but I feel it’s not okay in that impact statement, I’m just not saying anything about John Ray. I don’t know, I felt that was not okay. So I sent a second impact statement. | | Dear Honorable Judge Kaplan, I’m a conceptual- | | | Jonathan Jones: | Lidia’s second letter, still expressed anguish at what she called the greed of Sam in his inner circle but then- | | Lidia: | Unfortunately, the new administration doesn’t appear to be so different. Rather it appears to use and abuse FTX clients and their assets for their own personal benefits. | | Jonathan Jones: | Lidia says she was upset about the fees Sullivan & Cromwell were charging and that the new FTX leadership was making decisions about her money that she didn’t agree with and she wasn’t alone. Lidia had become part of a cohort of customers who were determined to call attention, not just to Sam Bankman-Fried, but to the bankruptcy left in his wake. | | Creditor activist, Sunil Kavuri wrote a victim impact statement too, saying that bankruptcy had compounded the harm rather than making things right. One customer questioned whether Sullivan & Cromwell could be trusted given their work for FTX before the collapse. Another said they’ve been trapped in a constant state of anxiety and depression since the bankruptcy proceedings began. But the hearing wasn’t about the bankruptcy, it was about Sam Bankman-Fried. Prosecutors told the judge that whatever victims might get back later, Sam had already stolen billions from customers all over the world, Judge Kaplan agreed and sentenced Sam to 25 years. | | | After his sentencing, Sam Bankman-Fried faded from public view. The media moved on, but the bankruptcy continued and soon a new battle was heating up over whether reviving FTX could help make customers whole. Almost from the beginning of the bankruptcy, some creditors have been pushing for John Ray and his team to restart the exchange without Sam as a kind of FTX 2.0. And John Ray in his interview on Freakonomics Radio, said that his team was seriously looking into it. | | | John Ray: | We’re looking very strongly at restarting the exchange, there was some capabilities to the exchange that people liked there was certainly a need for competition within the sector. But look, if there’s a life for it, the market will determine that. | | Jonathan Jones: | When Ray put the exchange up for sale, the market responded. According to court records, there were more than 75 potential bidders, prominent creditors like Arush Sehgal even got involved. | | Arush Sehgal: | It would’ve been the only exchange where the customers owned the exchange and therefore have a preference to trade there. | | Jonathan Jones: | But then Andrew Dietderich from Sullivan & Cromwell told the court they couldn’t find a single viable offer. | | Andrew Dietderi…: | The costs and risks of creating a viable exchange from what Mr. Bankman-Fried left in the dumpster were simply too high. | | Arush Sehgal: | They put out this statement in the hearing, oh, there were no buyers that were willing to take on FTX or something like that. So I screen-shotted it and sent it to the head of our bid and I was like, “What is this?” He goes, “News to me.” | | Jonathan Jones: | Some creditors saw FTX 2.0 as a missed opportunity to give them a stake in the company and to get back the crypto they’d lost access to. | | Arush Sehgal: | It was complete nonsense, we could have driven billions in recovery. | | Jonathan Jones: | With the idea of restarting FTX dead, the estate pivoted to a wind down plan. After nearly two years of twists, turns, courtroom battles and customers waiting for their money the end was finally in sight. In October 2024, it was time for the bankruptcy team to present their repayment plan for final court approval. At that hearing, Sullivan & Cromwell attorneys shared that more than 95% of creditors voted to back it. Only certain groups of creditors were allowed to vote though, and a lot of the voting power came from big firms that have bought people’s claims. The bankruptcy team announced that FTX creditors would be paid back in full, they’d also get interest. But the reality was far more complicated and controversial. Creditors would be paid back in cash, not crypto, with claims pegged to the value of crypto on November 11th, 2022, the date of the bankruptcy. But that’s exactly when the crypto market had tanked, in part because of the collapse of FTX. | | Back then, a single Bitcoin was where something like $17,000. But by the time of the approval hearing for the plan, Bitcoin had bounced back to roughly $60,000. Today, it’s almost double that. But under the deal, the owner of a Bitcoin would be paid back in full with $17,000. Not surprisingly, many FTX customers were not happy, including Lidia who made her case at the approval hearing. | | | Lidia: | Thank you so much, Your Honor, for giving me the chance to speak. | | There was John Ray, there were lawyers of Sullivan & Cromwell that I knew they were them because I researched and I was fuming, I was furious because these people, they were playing around with our lives with our money. | | | Jonathan Jones: | She wanted her money back as crypto, not cash. She had calculated that if her claims were paid back in dollars pegged to November, 2022, she’d lose two thirds of what she’d originally put in and completely miss out on crypto’s rebound. | | Lidia: | Under this plan, my contractual rights and my ownership rights have been trampled. My property rights have been disregarded. | | Jonathan Jones: | Despite hearing objections from Lidia and other creditors, Judge Dorsey went ahead and approved the repayment plan. He called it a model case for how to deal with a very complex Chapter 11 bankruptcy, setting off worries that it could set a precedent for paying back victims of future crypto bankruptcies. | | Three months later in January 2025, the first repayments to FTX customers were scheduled to go out. The day before I happened to be on a call with Sam Bankman-Fried. | | | I’m wondering how you’re feeling knowing that this marks this beginning of this attempt to repay the people who lost money. | | | Sam Bankman-Fri…: | It’s really frustrating basically. I am very glad that it is starting, but it’s hard to think about it without thinking about the deficiencies in the process. It’s been over two years now, there’s no reason for this to have taken two years. | | Jonathan Jones: | In May of this year, Tareq Mourad from Canada finally received his first cash payment and he says he can live with what he got. | | Tareq Mourad: | Just getting your money back is wonderful, and it’s a good feeling and I’m very happy about it. | | Jonathan Jones: | But he knows it didn’t come cheap. | | Tareq Mourad: | I know they were talking about fees going towards the billion dollar mark, which is absurd. But if that’s really what it took and we got our money back, I guess that’s what it took. | | Jonathan Jones: | The process of repaying customers did come with a staggering price tag. By early 2025, professional and legal fees in the FTX bankruptcy were nearing a billion dollars, making it one of the most expensive in US history. Sullivan & Cromwell alone billed about $232 million with partners charging up to $2,375 an hour. And John Ray, he requested a $38 million bonus on top of his $3 million salary, it was later reduced to $30 million. All of it court approved and paid for with FTX funds. John Ray was asked about the exorbitant costs on Freakonomics Radio. | | John Ray: | Crime is very expensive, a lot of people get hurt and it’s very expensive to fix it, right? But on the other hand, we’re sort of investing in a recovery if you look at it from that perspective. | | Jonathan Jones: | In a statement to Reveal the FTX estate said it has, “Managed its Chapter 11 case in a transparent public process that was supervised by the US Bankruptcy Court, reviewed by an independent examiner and had the full support of the official creditors’ committee. They said they are proud of the integrity and impact of their work.” But even with billions recovered, some customers could still be left out of the repayment plan altogether. Roughly $500 million in claims from people in countries like China, Ukraine, and Morocco are being withheld. After the FTX recovery team cited local regulations that could bar payouts. | | To law Professor Jonathan Lipson, FTX is a cautionary tale about the power that lawyers have to frame control and profit from a crypto crisis and bankruptcy. | | | Jonathan Lipson: | So why should Joe Public care? I think Joe Public should care because there are about a million Joe Publics who had accounts at FTX, and the end of the day, they’re not getting back nearly what they could have gotten back if the case had been handled differently. So I think there’s going to be a cloud over the case probably forever. | | Jonathan Jones: | As for Sam Bankman-Fried, even now from prison he’s still lobbying through his parents for a presidential pardon. And he’s appealed to overturn his conviction with a hearing set for November. | | If your appeal is successful and you’re released, would you anticipate going back into the crypto world? | | | Sam Bankman-Fri…: | I’d look into it. I haven’t been able to follow it as closely as I’ve wanted obviously over the last few years, but I still think it’s an incredibly high upside area. One that could be [inaudible 00:13:15] forth or one that could be really profitable to be in. It’s an area where there’s a lot of growth potential, so I think I’d give a tentative like, yeah, I’d look into it. | | Al Letson: | To read a companion story about the collapse of FTX and the aftermath, and to see original documents related to the case visit Revealnews.org. Our story was reported by Jonathan Jones with additional reporting by Artist Teriscus. The lead producer was Sophie Bridges, she had help from David Ritcher. Taki Telonidis edited the show with additional editing from Daniel Schulman. Archival research by Julia Haney. Sarah Szilagyi is our fact-checker. Victoria Baranetsky is our general counsel. Our production manager is the great Zulema Cobb. Score and sound designed by the dynamic duo, Jay Breezy, Mr. Jim Briggs and Fernando my man, Arruda. They had help from Claire C Note, Mullen. Our executive producer is Brett Myers. Our theme music is by Camerado-Lightning. | | Support for Reveal is provided by the Reva and David Logan Foundation, the John D. and Catherine T. MacArthur Foundation, the Jonathan Logan Family Foundation, the Robert Wood Johnson Foundation, the Park Foundation, the Schmidt Family Foundation, and the Hellman Foundation. Support for Reveal is also provided by you, our listeners. We are a co-production of the Center for Investigative Reporting and PRX. I’m Al Letson, and remember, there is always more to the story. | The FTX bankruptcy resolution has culminated in one of the most expensive proceedings in U.S. history, with professional and legal fees approaching $1 billion, directly diminishing creditor recoveries. A central point of contention is the repayment plan, which compensates creditors in cash pegged to cryptocurrency values at the market's nadir in November 2022. This methodology locks in substantial opportunity costs for creditors, as assets like Bitcoin, valued at approximately $17,000 at the time of bankruptcy, have since surged to multiples of that price. The bankruptcy was managed by law firm Sullivan & Cromwell (S&C), which also served as FTX's counsel prior to its collapse, a fact that drew objections regarding potential conflicts of interest from a bipartisan group of senators, the U.S. Trustee, and numerous customers. Despite an independent examiner ultimately finding no evidence S&C knew of the fraud, critics argue the examiner's scope was limited and the appointment came too late. The estate, led by CEO John Ray and S&C, pursued an aggressive legal strategy, including spending tens of millions in creditor funds to assist federal prosecutors in the case against Sam Bankman-Fried. Strategic decisions, such as opting not to restart the exchange as 'FTX 2.0' despite interest from over 75 bidders and selling the regulated U.S. entity LedgerX, have been criticized by creditors as missed opportunities to maximize recovery value. The case sets a significant, and controversial, precedent for future crypto insolvencies, particularly regarding the valuation of digital assets and the management of conflicts of interest.
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