U.S. trustee & SEC object to the bankruptcy plan

In January 2023, the U.S. trustee overseeing the bankruptcy objected to FTX’s retention of the same law firm post-collapse. FTX’s new CEO regarded any conflicts of interest as irrelevant because he attributed all wrongdoing to Sam rather than the lawyers and he was ultimately successful in retaining them. Now the U.S. trustee is objecting to their proposed reorganization plan for, among other reasons, giving themselves an excessive amount of legal immunity:

Vara also makes a number of more technical legal arguments, but most significant may be his case against the “impermissibly broad” exculpation, or forgiveness of any wrongdoing, afforded by the plan to the estate’s administrators and advisors. “Such immunity would far exceed the protections that estate professionals whose employment and compensation are subject to Court approval and oversight [under the relevant statutes] receive during the case,” Vara wrote.

FTX’s bankruptcy, meanwhile, is under investigation by prosecutor Robert Cleary, an independent examiner appointed to the case after an initial ruling denying the appointment was overturned.

Some creditors file their own complaint

Sunil Kavuri, a representative of the largest FTX creditor group who had previously urged his fellow creditors to vote against the plan, filed his own complaint alongside two others as representatives of FTX’s retail customers.

Kavuri’s filing also takes issue with the plan’s overly broad exculpatory provisions. “The definition of Exculpated Parties is overbroad, and as set forth below, inconsistent with controlling case law because it is not limited to estate fiduciaries,” the filing states.

I’ve just seen that the SEC also opposes the excessive legal protections the plan would afford the FTX debtors: “The SEC also joined the U.S. Trustee overseeing the bankruptcy in objecting to a discharge provision in the plan that would indemnify the FTX debtors from future legal actions by creditors…The administrative cost of FTX’s bankruptcy has ballooned in the time since the exchange melted down; fees requested by its staff recently surpassed $800 million, according to a tally from X user Mr. Purple.”

So the lawyers who strong-armed FTX into bankruptcy are now saying, “Alright now that we’ve paid ourselves $800 million and Sam has received a sentence informed largely by our fabricated $8 billion ‘loss’ amount, we’ll finally repay customers BUT only if they grant us legal immunity first” – did I get that right?