The UCC’s Litmus Test: The Genesis Settlement

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There has been a lot of chatter among FTX creditors with regard to whether they can depend on the Unsecured Creditors Committee (UCC) to act on their behalf since its formation.

With a deal in the offing involving an untrustworthy FTX Debtor relative to the massive liability of Genesis Global Capital, how the UCC reacts to that as it unfolds will go most of the way in dispelling or confirming creditor doubts.

Let’s jump straight into it!

A lot done, but... more to do!

This coming Friday, creditors will find themselves precisely nine months into this bankruptcy process.

To say that it’s been far from a pleasurable experience is quite the understatement.

It’s been incredibly painful but if creditors zoom out, they will recognize that we’ve come a long way.

In November, we were told by the “experts” to forget about it, move on, you won’t see a dime.

It took some time but we organized ourselves and pushed back against that narrative. We were also told that we were fools to consider FTX 2.0, that it would never happen and it would never work.

Again, we organized ourselves specifically to advocate for the business to be restructured.

While many within the broader crypto sector continue to express doubt, that resistance is also fading and it will continue to fade before we ultimately get to the point of an FTX business restart in 2024.

It may not feel like it to many creditors but we have gotten somewhere.

While I think creditors should hang on to their claims for dear life, if we do look at claims market rates, that metric is only going up and to the right, so take that as validation.

That said, this is only the beginning and we’ve a long road ahead of us.

FTX Debtor failures: Their Colossal Incompetence

From the outset, most agreed that the bankruptcy lawyers would have a field day in picking over the FTX carcass.

However, I think that more still never imagined just how far they’d sink their teeth into it.

As a point of reference, many of us would have looked at previous bankruptcies, decided that sure, they proved to be wildly expensive but still, given the opportunities that exist within the FTX estate, there was a way to navigate our way out of this.

A run rate of around $1.4 million/day with hourly rates of up to $2,100. We were told last week (wrongly) that this was the most complex bankruptcy in history.

That said, there’s certainly a degree of complexity involved.

Given that’s the case, why are Sullivan & Cromwell putting a team of unqualified lawyers on the case, learning how to do their jobs at our expense, to the tune of $775/hr.?

Meanwhile, non-legal admin work gets charged out at $550/hr.

FTX creditors paying through the nose
FTX creditors paying through the nose

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And of course they’re failing the test of basic competency.

Not only are we getting hit with costs that make this process wildly more expensive than other similar crypto bankruptcies, the FTX Debtor is failing miserably to demonstrate capability relative to the most basic of things.

They failed to maximize value when it came to the sale of SUI warrants to Mysten Labs.

Advisors to the Debtor, Alvarez & Marsal, billed $350,000 in June for Cash Management, yet nine months into this bankruptcy we don’t have a Cash Management Plan.

At the 11th hour, the Debtor produced a Draft Plan as it had promised, but immediate criticism from restructuring professionals, creditors generally and the UCC followed.

And to cap it all off, matters have descended into a total farce with the epic failure of the Debtor to execute when it comes to the Claims Portal.

Alignment of Incentives: A Test for the UCC

What all of that means is that we can have zero faith in John J. Ray III and his ravenous band of lawyers in terms of fulfilling their fiduciary duty to creditors given the outrageous level of billing, general incompetence and an evident lack of interest to pursue the best options to bring about optimized recovery for creditors.

As Charlie Munger once said, “show me the incentive and I’ll show you the outcome.”

If we’re not aligned with the FTX Debtor what of the UCC?

Upon their appointment in December, I was highly skeptical of the UCC. Many other creditors were, and many continue to be.

  • Would these guys act in the interests of the top 50 creditors at the expense of the broader creditor base?
  • How would we even know given that communication has been entirely lacking?

More recently, with the creditor-driven advocacy for FTX 2.0 I’ve been inclined to row in behind it, given that we know that it has done a body of work relative to that initiative in the background.

I’ve been further assured by other key creditors that the Committee is acting in our interests, that it’s working hard on our behalf and we simply can’t see it.

Crunch Time for the UCC: The Genesis Deal as Credibility Test

That backdrop brings us right up to a pivotal moment — the Genesis settlement.

$2.1 billion in loan repayments via Alameda and $1.8 billion in FTX exchange withdrawals fall within the preference period.

A total of close to $4b.

On the flip side, Genesis is FTXs largest unsecured creditor, sitting on the UCC, with $226 million in claims.

A successful clawback here would improve our position considerably.

Clawbacks against avoidance actions and fraudulent transfers have a lot of potential but they don’t come much bigger than this one.

A recent court filing has indicated that the FTX Debtor has reached an agreed settlement with Genesis although the specifics of the deal have been withheld.

Given the track record that the Debtor has established, many creditors are fearful of a bad outcome.

Subsequent to the announcement of that deal, it’s been revealed in recent days that Barry Silbert’s Digital Currency Group (DCG), the parent company of Genesis, is now the subject of an investigation by Federal Prosecutors.

In January, DCG was investigated concerning internal transfers between it and Genesis.

This time, the New York Attorney General (NYAG) is seeking information from former Genesis executives.

We can only speculate as to what these investigations will unearth but it’s reasonable to assume that the outcome could be relevant for FTX.

If creditors were fearful of a badly negotiated deal prior to this development, what should we think now that we know that it’s been thrashed out without any consideration of the bearing of that NYAG investigation?

The stakes are high.

This single line item represents a major opportunity for creditors to bring about optimized recovery.

It will also set the tone for how other such settlements could roll in the future.

Sooner or later, the FTX Debtor will need to present the details of the deal they’ve negotiated with Genesis to the bankruptcy court in Delaware.

If that deal is a bad one, it could represent a pivotal moment in this process in which the UCC should look to push back and oppose the confirmation of that deal.

Recent feedback via social media suggests that the broader creditor base is certainly looking to empower the UCC to do so and to give it a mandate to do so.

Such a move would likely be perceived as the UCC fulfilling its fiduciary duty to ordinary creditors.

It would likely lead to a strengthening of alignment and trust between the UCC and the average creditor.

That’s a necessary outcome alongside a fair and reasonable settlement with Genesis, because with a wayward FTX Debtor in play, we’re going to have to up our game to get to the desired outcome of optimized recovery.

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