When rumors began to circulate online that FTX was in trouble, one of the cryptocurrency exchange’s clients, Louis D’Oringhi, took no notice, turning his attention back to the friends he was hosting at his Miami Beach apartment.
“Fake news,” he recalls saying. He turned away from his laptop, leaving the increasingly worried crypto community for a day at the beach.
But after a few hours the mood changed. He returned home and saw tweets about his withdrawal being denied.
“Things became increasingly hectic,” he recalls. As the sun set through his floor-to-ceiling windows, the then 31-year-old wondered how it would all play out.
“And then,” he recalls, “we couldn’t withdraw our money.”
D’Oringhi is one of more than a million or so victims trying to recoup lost funds from FTX, which collapsed after co-founder Sam Bankman-Fried’s financial fraud was revealed.
“At the time, it seemed like the end of cryptocurrency,” he said. “It was very dark and grim. Nobody thought Bitcoin would ever reach an all-time high again.”
But in cryptocurrency’s darkest hour, the wheels of D’Oringa’s mind began to turn.
“I believed that Sam did not have enough time to commit this fraud and lose every dollar. I was quite convinced that they would be able to recover a lot of money,” he said.
D’Oringhi saw an opportunity: Creditors like himself wanted at least some of their funds back, but there was no clarity or guarantee as to how the exchange would be able to raise the combined $8.7 billion deficit at the time of the announcement about bankruptcy. In other words, creditors are likely to sell their claims cheaply.
What if he hedged his bets?
Claim jumpers
D’Oringhi had bought several Celsius bankruptcy filings along with his previous boutique fund Arceau, but was relatively new to the field. And most of the investors he knew didn’t want to go near FTX—no one wanted to commit capital to start buying up those shares.
But in the weeks after that day in Miami, D’Oringhi began using his own money to buy FTX positions for pennies on the dollar from hedge funds under a liquidation mandate.
“There was no information about bankruptcy. We took a big risk. I just put my money where my mouth is,” he said. Luck.
Trading bankruptcy claims is a high-risk, high-reward tactic. In the wake of the Lehman Brothers, Enron and General Motors bankruptcies, claims traders are believed to have made hundreds of millions, if not billions of dollars, scraping the bones of these once giant firms. But in other cases, claims turn out to be useless.
“It ended up being much better than I ever imagined,” he says.
When a company goes bankrupt, creditors face a lengthy bankruptcy process in court, with no guarantee as to what percentage of the claim will be repaid. Instead, many choose to immediately sell their assets for cash to a buyer willing to risk the value of the claim falling depending on how much the bankruptcy trustee is able to recover.
Calculating the exact timing and value of claims sold since FTX filed for Chapter 11 bankruptcy in the District Court of Delaware on November 11, 2022 is difficult. Some are traded on online platforms, while others are traded privately and buyers are not required to apply for transfer immediately, creating a delay, while others simply report it as their own application, traders said in this domain. Luck.
As of March 28, the industry-dominant online trading platform Claims Market had traded more than $439 million in claims across 49 transactions. 20.
While the exact payment date for bankruptcy court creditors remains uncertain, it now seems likely that they may be fully rewarded. “It appears that the clients will hopefully receive full payment,” Bankman-Fried said in a Manhattan court during Thursday’s sentencing.
When claims were first settled, creditors would give them up on the cheap. More than 60 claims worth over $1 million have been sold on the Claims Market, selling for around 10% of their value in November 2022 and now reaching 93%, indicating growing confidence in repayment.
Meanwhile, others estimate claims could exceed their original cost by 120% to 140%, two people close to the sale said. Luckdue to the rise in the value of cryptocurrency and the sale of shares of the AI startup Anthropic. worth more than $880 million.
Process
The appointment of John J. Ray III as FTX’s new CEO following the bankruptcy filing has also increased interest in the lawsuits, buyers said. Luck. “He immediately began the process of selling everything that wasn’t nailed to the floor, which institutional buyers say they like because they don’t need Bitcoin,” D’Oringhi explained.
So far, FTX has recovered approximately $7 billion in assets, including liquidated cryptocurrencies, 38 properties in the Bahamas and $2.6 billion in cash. according to the submission filed in the case.
The estate held approximately 59 million Solana tokens and 21,482 Bitcoin, and they have since risen approximately 1,000% and 343%, respectively, after the company filed for bankruptcy. FTX will sell 41 million Solana tokens, valued at approximately $7.65 billion at press time, to institutional investors at a 68% discount to their current market price. This angered some victims, including Sunil Kavuri, who criticized Bankman-Fried’s “constant lies that we will all get enough” after his sentencing.
Chapter 11 filings as of March 20 show that D’Oringy has bought out about $29 million in claims. They were bought for $3.5 million with personal funds, he says: “An investment in a family office for me and a few friends.” This is a profitability of more than 700%.
D’Oringhi was with his family for Christmas when he bought his first plot. He remembers the worried faces of his watching parents, who teased him that his plan could leave the family bankrupt by next Christmas. The nearly $3 million claim was exchanged on Dec. 28, 2022, for 6% of its value, according to a contract reviewed Luck.
The buyers who stand to gain the most from FTX’s waste at the moment are hedge funds that specialize in distressed debt. As of March 20, Attestor, Baupost and Farallon are in the lead, each having bought claims worth more than $520 million, $518 million and $346 million, respectively. The foundations used alternative organizational names confirmed by people close to the matter.
Another big name in the space and a friend of D’Oringa’s is Thomas Braziel, a bankruptcy claims broker at 117 Partners who buys claims on behalf of some of the largest hedge funds in the market. Brazile says its first transactions took place on November 12, 2022, before bankruptcy was officially declared. He paid about $240,000 for an $8 million claim (about 3% of the reported value) and about $210,000 for a separate $3.5 million claim (6%).
“Very, very scary”
Current estimates are a far cry from April 27 last year, when disaster nearly struck for claims buyers.
During a Zoom call with debtors in Singapore, D’Oringhi was looking to close a $3 million claim at 25%. During the call, it was revealed that the Internal Revenue Service had filed a $44 billion lawsuit against FTX, accusing it of not paying taxes.
“You know, we got scared during that call,” he says. But he decided to buy the claim anyway. “It was very, very scary.”
Although the IRS reduced the claim to $20.4 billion, if it is not contested, it would still be game over for creditors in this scenario. “We get zero,” says D’Oringhi.
However, FTX has entered into a legal battle over the claim, seeking to have it dismissed in court, which “threatens to halt the debtors’ progress and any payments to customers and other creditors indefinitely.” In other words, since the lawsuit would leave fraud victims without funds, it is unlikely to proceed, the sources said. Luck.
In July, FTX opened its own – somewhat clunky – public portal where customers can file claims. But in the early days of trading, there was limited information about what assets could be liquidated or how claims would be substantiated. Many of them were crowdsourced from Twitter, with KYC According to D’Oringa, these studies were conducted in a time-consuming and somewhat ad hoc manner.
“It was very, very difficult to buy claims,” said Braziel, who said he bought at least two or three claims that turned out to be fraudulent.
Because of the speed it took d’Oringhi to substantiate the claims, he bought 40 pieces in his first year of trading. This gave him another idea: speed up the due diligence process through automation. In December, he co-founded his own portal, FTX Creditor, which he describes as a “customized CRM, KYC and diligence verification solution” that has cut the authentication process from days to 30 minutes, he says. The company now has 14 employees from all continents who answer calls to creditors 24 hours a day.
Specializing in claims under $100,000, the company strives to provide retail investors with an affordable way to close sales in a 30-minute call, rather than tying them into lengthy deal confirmations.
Since December, FTX Creditor has bought about 1,000 claims worth about $100 million, according to public records. Assuming the purchase price exceeds 70% of market estimates, that could mean a profit for the firm of about $30 million—a portion of which D’Oringhi appears to be adding to what he earned by purchasing his first claims.
However, rising claims values have slowed their trade somewhat, D’Oringhi explained. However, more than $6 million was purchased on the Claims Market this week alone, and Braziel is still buying claims at 70%, according to a contract seen Luck.
D’Oringhi is determined to continue pursuing bankruptcy after FTX, but once those claims are settled, he will first go on vacation.
Was spending money on these claims really just a matter of calculated ingenuity? Maybe. But, according to d’Oringa, the prevailing conditions were simply an accident. He used a word very different from genius: “luck.”