Too much is still unknown about the alleged fraud of Sam Bankman-Fried to fully comprehend John Ray’s suggestion this week that FTX U.S. might be worth restarting. Ray, who took over as C.E.O. of the cryptocurrency exchange in November to manage its bankruptcy, is progressing rapidly with the forensic work required to clean up the mess, but the extent of the interconnected web of deceit and duplicity is still a mystery. There’s little question, of course, that S.B.F. controlled everything: Alameda Research, FTX International and FTX U.S., as well as the myriad of other companies he created to confuse and to obfuscate. What is still not known is how all these companies fit together and how the money flowed between them. Is FTX U.S. actually solvent, as S.B.F. is fond of asserting? And even if it is, did it remain solvent at the expense of FTX International and Alameda? And if so, why?
I, for one, feel like we won’t know the answers unless, and until, an examiner is appointed in the case—just as it took Anton Valukus, the examiner in the Lehman bankruptcy, to complete his investigation before we knew what really happened there. A group of U.S. lawmakers has joined with the U.S. Trustee in the bankruptcy cases to insist that an examiner be appointed. It’s time for Judge John T. Dorsey to make that appointment.
In the U.S. bankruptcy system, a debtor—such as the Alameda/FTX entities—is also referred to as a “debtor-in-possession,” as in possession of an operating business. In a more typical bankruptcy—and I’ve been an advisor on many of them—the situation is often described as “good business, bad balance sheet,” whereby the underlying business might be fine, or somewhat troubled, but that the bankruptcy filing was necessitated by too much debt. That’s the kind of thing that happens when a leveraged buyout goes bad. In those cases, the business keeps operating under Chapter 11 protection while the creditors fight over the carcass, who will own what, and how much recovery they will get on their defaulted debt. (A version of this could possibly happen with Elon Musk’s Twitter.)