Sam Bankman-Fried, the founder of FTX, is presented by the American press as the biggest swindler since Bernard Madoff. The clients of the latter have recovered 88% of their money, but they had to wait 14 years after the arrest of the financier, according to the latest release of the Madoff Recovery Fund.

In 2020, the U.S. courts ruled those bona fide investors who invested in Madoff without knowing the fraudulent nature of his Ponzi scheme should still return the profits they received.

This money would contribute to the resources used to compensate the many victims of the swindler.

Is such a decision feasible for FTX, SBF’s fallen empire, and its one million victims? Some clients were able to withdraw their money before the bankruptcy. This is particularly true for residents of the Bahamas, where FTX was registered. This was revealed by Sam Bankman-Fried.

Some lawyers may challenge this preferential treatment.

The court will have to determine whether other investors and employees got their money back by benefiting from confidential information about FTX’s catastrophic financial situation. More generally, the court could decide that customers who withdrew their money during a given period before the bankruptcy must return it to increase the overall compensation package.

The international nature of FTX’s customer base will not make this task any easier. Almost half of them were registered in tax havens (Bahamas, US Virgin Islands, Bermuda, Jersey…). Money laundering or tax evasion, all or part of this money was perhaps not declared to the authorities of their countries.

Vulture funds

Sniffing out good deals, specialized firms and funds offer customers whose money and cryptos are blocked on FTX to recover a small fraction. According to Bloomberg, they can then expect to receive just 5% to 8% of their value. But they have to draw a final line on the rest of their money: they irrevocably give up their claims and rights to future repayments.

To get more back, they must engage in a lengthy legal battle.

According to data from Cherokee Acquisition, a platform that connects buyers and sellers of receivables on FTX, the repurchase price has fallen to a low of 6% and is now stabilizing at 12%. Those who want their money back must therefore accept a discount of 88% in addition to the platform’s fees. Such a haircut illustrates the very high uncertainty about FTX’s assets that can be used to repay the one million companies and investors affected by the scandal.

Creditors of other bankrupt crypto companies, Celsius and Voyager Digital Holdings, have a higher recovery rate and can recover 17.5% and 38% of their money, respectively.

FTX’s former customers will have to get lawyers. The process will be even more expensive because it involves an unregulated platform. A month before FTX’s bankruptcy, the Bahamas had been added to the European Union’s blacklist of tax havens. European retail investors who took the risk of opening an account there may be in for a surprise.

Advice from Madoff’s lawyer

Unlike desperate individuals, trading firms and hedge funds whose money is tied up at FTX will not give up their money so easily and so quickly. Funds (hedge funds, crypto companies, firms specialized in bankruptcy…) will take over from the injured clients who have been rebuffed by a long battle involving several bankruptcy regimes (Bahamas, Delaware…).

The lawyers of these firms will try to recover as much money as possible.

John Ray, the liquidator of FTX, has been immersed for almost two months in the financial meanderings of the group to draw up the most exhaustive inventory possible. The real estate assets of SBF and FTX employees should be seized and then resold to recover the cash.

At the beginning of December 2022, Ira Sorkin, Bernard Madoff’s former lawyer, gave Sam Bankman-Fried, then on a promotional tour in the media, some advice. “Shut up! You’re not going to have any influence on the general public. The only people who are going to peel back everything you said are the regulators and the prosecutors.”

Advice SBF would have been better off listening to …