The hot new cryptocurrency market? Trading FTX casing.

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After FTX cryptocurrency exchange declared bankrupt Last year, Thomas Braziel, an investor who specializes in collapsed companies, began negotiating an unusual type of transaction: a market to profit from the fall of FTX.

Brazil put one of his clients in touch with a large financial company that had lost almost $100 million when FTX went bankrupt. Last December, the company agreed to sell its claim in the FTX bankruptcy (essentially a promissory note from the collapsed exchange) for 6 cents on the dollar, betting that it was better to raise some cash quickly than wait years for the FTX shell to begin. pay creditors.

Then the FTX claims market exploded. Braziel recently negotiated the sale of an FTX claim for $19 million at 68 cents on the dollar, collecting a commission of nearly $100,000, he said. Some claims are selling for more than 70 cents, as investors become optimistic that FTX's new leadership will recoup a sizable chunk of the roughly $8 billion that founder Sam Bankman-Fried received. convicted of stealing from customers.

“The market is crazy,” said Brazilel, a partner at investment firm 117 Partners. “It's so hot.”

The initial despair over FTX's failure has given way to a strange afterlife for the failed exchange: a trading frenzy that has intensified in recent weeks as major financial firms search for opportunities in the rubble of one of the worst business collapses in decades. The FTX story has come full circle, as investors who once used the platform to place risky crypto bets are now betting on the company's prospects in bankruptcy court and funneling any profits back into the market. resurgent crypto market.

For speculators, the math is simple: They're betting that if they buy a $10 million claim for, say, 50 cents on the dollar, they'll pocket substantial profits if the bankruptcy estate ultimately returns more than $5 million. In total, between $1 billion and $1.5 billion in FTX claims have changed hands since the bankruptcy began, according to Xclaim, a company that connects buyers and sellers.

Most of the claims represent holdings of cryptocurrency and cash that FTX clients stored on the exchange when it filed for bankruptcy in November 2022. Some of the claims have a face value of just a few million dollars, while others They are worth tens of millions. In recent weeks, some claims worth $100 million have been negotiated, according to market participants.

The market has attracted several big-name hedge funds and investment firms, including Farallon Capital, Silver Point Capital, Hudson Bay, Contrarian Capital Management and Canyon Partners, court records show.

But it has also attracted investors with more checkered backgrounds in the financial industry. In June, a court-appointed investigator in Delaware accused Braziel of falsifying bank records and embezzling funds from a bankruptcy estate he managed. Mr. Brazil's lawyers responded by objecting to those conclusions about his “actual or potential criminal liability.”

Another figure involved in the claims market is a former top FTX executive who worked closely with Bankman-Fried. Ramnik Arora, one of FTX's top fundraisers, recently started a online claims negotiation platform for FTX clients and began purchasing some smaller claims for himself, according to corporation records and two people familiar with the matter. Mr. Arora was scheduled to testify before the prosecution in The criminal fraud trial of Mr. Bankman-Fried in October but was ultimately not called as a witness; He has not been charged with any crime.

An FTX spokesperson declined to comment.

Claims trading is not new, especially in complex bankruptcies that take years to develop. But recent bankruptcy filings by high-profile crypto companies, including lending companies Genesis Global, Celsius Network and BlockFi, have created a cottage industry of brokers who specialize in connecting buyers and sellers.

The market offers creditors with money blocked in court proceedings the opportunity to withdraw their money immediately instead of waiting years for a payment. The trade-off is that they must accept much less than the face value of a claim, and potentially less than the bankruptcy estate can ultimately distribute.

Still, hundreds of cryptocurrency investors are embracing that deal. Over the past 18 months, Xclaim has processed $70 million in Genesis deals and $4 million in Celsius deals, according to Andrew Glantz, the company's chief strategy officer.

FTX's bankruptcy has sparked by far the most interest. After the company went bankrupt, John Ray, a veteran of corporate turnarounds who handled the liquidation of Enron, replaced Bankman-Fried. In court filings and congressional testimony, Mr. Ray called FTX the The worst corporate disaster I had ever seen.raising fears that it will be impossible to recover the money.

But the recovery process has moved faster than expected. Ray estimated in August that FTX had recovered $7 billion, although it was unclear how much of that money would return to creditors, given the number of outstanding claims.

Still, claims that once traded for just a few cents on the dollar have increased in value. “Our first trade was in the low teens,” said Jay Conklin, managing partner at hedge fund Park Walk, which began working with institutional investors to buy and sell assets shortly after the FTX collapse. “Now there are deals in the '70s,” Conklin said.

One of the claims market's most vocal evangelists is Braziel, who lives in Forte dei Marmi, a coastal town in Italy, and has become a familiar face on the cryptocurrency conference circuit. Not long ago, he said, he convinced Scott Galloway, the popular podcaster, will buy $2.5 million in FTX claims. Galloway talked about investing in one of his programs.

“He was lucky: we bought him a basket in about 20 years,” Brazilel said. “He's going to make at least three or four times his money.”

In bankruptcies, claim transfers are typically recorded in the court docket a few weeks after closing. The presentation almost always identifies the buyer, but the identity of the seller is often hidden for privacy reasons.

There are risks everywhere. Brokers operate with limited oversight and no one regulates who can buy claims or arrange deals. Some matchmakers require sellers to give them an exclusive period of time to find a buyer, which can limit a creditor's ability to compare a claim.

Bradley Max, principal at claims brokerage Cherokee Acquisition, said some sellers were having trouble negotiating deals on their own because they had to comply with “know your customer” rules that buyers institute to avoid transacting with bad actors.

“No one wants to buy the FTX claim from Vladimir Putin or someone like that,” said Max, whose company runs a online platform for commercial claims.

It is also unclear how much FTX will ultimately pay. By this fall, lawyers and other professionals working on the bankruptcy case had collected more than $300 million in fees – money taken from the pool and returned to creditors.

And in recent months, the Internal Revenue Service has filed claims for $24 billion, arguing that FTX owed the government “income taxes, employment taxes and penalties” from 2018 to 2022 (the IRS did not respond to a request for comment).

Typically in a bankruptcy, the IRS is paid before all other creditors, so a large tax claim could dramatically reduce funds available to clients. But the amount FTX actually owes remains in dispute, with a hearing scheduled for early next year.

For now, speculators are not worried.

“It's a very, very foolish thing,” Braziel said of the IRS' efforts to reclaim billions of dollars in unpaid taxes. “No basis in fact.”

Kirsten Noyes and Sheelagh McNeill contributed to the research.



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