The failure of FTX Trading and other cryptocurrency companies will give the legal system — like Dorothy Gale in “The Wizard of Oz” — a behind-the-curtain peek into a private, opaque, and largely unregulated world. Dorothy has found the man behind the wizard. What the courts will find out, according to court observers, nobody knows.
In their quest to understand what went on behind the scenes at FTX, judges and attorneys will address emerging technologies and unregulated issues, providing an opportunity to set new precedents or create new jurisprudence.
“There are going to be very, very difficult forensic accounting questions and some really big concept questions, like, how do we figure out what is cryptocurrency and is FTX more like a bank or more like a stockbroker?” said Jonathan Lipson, Harold E. Kohn chair and law professor at Temple University Beasley School of Law.
THE FRIED COLLAPSE OF FTX’S SAM BANKMAN VERSUS ENRON, MADOFF
Is the legal system up to the task?
“Bankruptcy courts are no strangers to crises with systemic effects or businesses using complicated technology. They have the tools and experience to stabilize the situation and bring some order to the chaos,” Melissa Jacoby told FOX Business. Jacoby is the Graham Kenan Professor of Law at the University of North Carolina at Chapel Hill.
It will not be easy.
“It will be a challenge for lawyers to explain to judges what these things are in sensible analogies,” Lipson told FOX Business.
Walking in cobwebs
WILL THE FTX FAILURE REPEAT IN THE GENERAL ECONOMY LIKE LEHMAN BROTHERS?
Lipson compared the situation to Lehman Brothers. The former Wall Street bank went bankrupt in 2008, shooting down exotic financial products such as covered debt obligations, synthetic credit transactions and variable-interest entities.
It took 14 years to complete the liquidation of the company.
FTX judges and attorneys will need to understand concepts like initial coin offerings, hard forks, staking rewards, and cold wallets.
Lehman’s bankruptcy spread around the world, affecting everyone with a financial instrument tied to the company, from investors on Wall Street, to state and local governments and homeowners with subprime mortgages.
For example, San Mateo County, California has filed claims totaling $155 million. Officials have invested in Lehman’s notes to expand its community college, improve roads and build a rail system, Reuters reported at the time.
HERE ARE THE DEM WHO BENEFITED FROM THE LEFT PAC IN WHICH FTX INVESTED 27 MILLION DOLLARS
FTX seems to have woven its own financial web. Crypto Fund Research listed more than half a dozen crypto funds with significant exposure to FTX on Monday.
Funds with FTX exposure
- Paradigm: $278 million
- Sequoia Capital: $213 million
- Galaxy Digital: $76.8 million
- Genesis: $175 million
- Galois Capital: $40 million
- CoinShares: $30.3 million
The list does not include requests from FTX customers, which can exceed one million.
Show me the money
US MAY EXTRADITE FRIED SAM BANKMAN DURING FTX COLLAPSE INVESTIGATION: REPORT
Temple’s Lipson says the length and breadth of FTX’s bankruptcy will depend on how much money is available to creditors and how hard people try to recover their assets.
“How much time, money and energy lawyers and the bankruptcy system spend recovering these things will depend on the money available and the money available to fund it.”
The matter is further complicated by allegations of financial fraud.
FTX FOUNDER SAM BANKMAN-FRIED HIT WITH CLASS-BASED LEGAL ACTION ALSO NAMES BRADY, BÜNDCHEN, SHAQ, CURRY
Law firm Entwistle & Cappucci said its initial investigation confirms that “Billions of dollars of client funds were wrongfully diverted from FTX to Alameda [Research] and elsewhere, leaving a huge deficit in client accounts.” The firm specializes in complex fraud and bankruptcy disputes.
UNC’s Jacoby says, “Bankruptcy can be a forum for investigating wrongdoing and potentially recovering assets in the hands of rightful parties, but there’s a big caveat: Based on how Congress has structured the system, investigations depend on someone willing to fund those investigations”.
Earlier this year, Purdue Pharma’s founding family agreed to a $6 billion settlement over its role in the opioid epidemic.
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How much can be recovered by FTX and perhaps former CEO Sam Bankman-Fried et al will depend on finding the cash, if any.
“A lot of real money has come in and untangling where that money has gone won’t be easy, but it won’t be impossible,” Lipson said.