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Profiting From Bankruptcy: Former SEC Official Slams FTX’s Restructuring Plan

John Reed Stark voices concerns over FTX's restructuring efforts

The financial unraveling of FTX has sparked a wave of scrutiny, especially from former Securities Exchange Commission (SEC) official John Reed Stark. Stark, known for his candid insights, took to X social media to voice a scathing critique of the FTX reorganization plan, labeling it as a boon for the legal team at the expense of FTX customers. 

His stark commentary described the scenario as a "highway robbery of highway robbers," highlighting a profound skepticism towards the restructuring efforts spearheaded by FTX's legal counsel. This critique underscores growing concerns around the bankruptcy process and the substantial profits reaped by legal teams from such high-profile cases.

Legal fees under scrutiny amid FTX bankruptcy

The financial aftermath of FTX's collapse has not only revealed the exchange's internal disarray but also cast a spotlight on the burgeoning legal fees associated with its bankruptcy. John Reed Stark’s pointed criticisms on X highlight a lucrative period for the legal team managing FTX's downfall, suggesting an almost satirical level of profit at the expense of FTX's clientele. 

John Reed Stark (@JohnReedStark) quipped: 

“FTX Goes Chapter 7 — and FTX Bankruptcy Lawyers Are Probably Heading to the Beach in 2024

The FTX bankruptcy team’s lawyers should send thank you notes to all FTX customers. Why? Because thanks to the FTX customers, each member of the FTX legal bankruptcy team can now probably…” pic.twitter.com/P89w5tS54y

During a detailed scrutiny, the court-appointed fee examiner, Katherine Stadler, deemed the legal and advisory fees—which soared over $200 million from November 2022 to June 2023—as "not wholly unreasonable at the moment." This period of billing culminated in an astonishing $53,000 per hour on legal and advisory fees in the quarter ending October 31, spotlighting the hefty financial toll on FTX's estate.

FTX’s attempted relaunch and its financial implications

In the labyrinth of FTX’s bankruptcy saga, a notable chapter was the shelved plan for a potential relaunch, dubbed FTX 2.0. This ambition was clarified during a hearing by FTX lawyer Andy Dietderich of Sullivan and Cromwell, who stated that despite exhaustive efforts, reviving FTX within the Chapter 11 bankruptcy framework proved unfeasible. 

Stark’s foresight into the improbability of such a restructuring effort likened the scenario to

 "trying to reorganize a combination of Murder Incorporated, The Cali Drug Cartel, and Madoff Investment Advisory Services," 

illustrating the perceived futility and moral quandary of investing in FTX's legal team for a relaunch.

This aborted mission to resurrect FTX not only underscored the complexities of navigating bankruptcy for crypto exchanges but also highlighted the significant financial outflows dedicated to legal maneuverings, with over $118.1 million billed in just three months. The saga takes a further twist with FTX's move to sell its $175 million claim against Genesis Global Capital, a strategic attempt to recuperate some losses amidst ongoing legal expenditures.