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Will FTX traders get their money back? Bankruptcy experts assess

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Disgraced FTX founder Sam Bankman-Fried appeared in a Manhattan courthouse on Thursday to face federal charges, an important step as prosecutors seek answers for what they described as “a fraud of epic proportions.”

More than a million would-be victims, however, remain in the early stages of a likely years-long bankruptcy process that is likely to return only a portion of the money they lost, some bankruptcy experts told ABC News.

According to the indictment, Bankman-Fried — who was released on $250 million bail and did not file a confession — allegedly stole $8 billion from FTX investors and customers and used it to pay off debts and expenses of Alameda Research. , your private hedge fund company. He also used the money to buy luxury real estate and make political donations primarily to Democrats but also to some Republicans as he sought influence in Washington, prosecutors said.

Many cryptocurrency traders, who have deposited their savings on the platform, fear that they will never get their money back.

The sudden collapse of the $32 billion cryptocurrency exchange is a challenge for authorities overseeing the bankruptcy. They will try to identify lost assets shrouded in the complexity of the new digital currency, a largely unregulated financial sector and an alleged lack of proper record keeping, experts said.

“You’ve got a real mess here,” said G. Ray Warner, professor of bankruptcy law at St. Louis. John’s University, to ABC News. “This really isn’t a normal corporate bankruptcy.”

FTX did not immediately respond to a request for comment.

In testimony before the Board last week, FTX CEO John Ray said that he and his colleagues are “now working on behalf of the FTX Group to achieve a fundamental objective: to maximize value for FTX customers and lenders so that we can mitigate, as much as possible, the evil suffered by so many.”

Here’s what experts say you need to know about the current status of the bankruptcy process, the process for returning money to cryptocurrency traders, and whether they’ll ever get any money back.

Where is bankruptcy now?

The once-heralded cryptocurrency exchange FTX declared Chapter 11 bankruptcy on Nov. 11 following a wave of customer withdrawals. On the same day, Bankman-Fried stepped down as CEO and was replaced by Ray, a veteran of corporate failures who oversaw the dissolution of scandal-ridden accounting firm Enron.

The bankruptcy filing listed more than 130 commercial entities affiliated with FTX and its sister hedge fund Alameda Research. The number of creditors seeking repayment is at least 100,000 and could reach more than a million, it said.

The company, which as of last month held about $1.25 billion in assets, said it owes more than $3 billion to its top 50 creditors, plus additional cash.

Ray told members of Congress last week that FTX lacked corporate controls in a way he had never witnessed, complicating the effort to recover lost assets. “I’ve never seen a total lack of record keeping,” said Ray. “Absolutely no internal controls.”

Edward Janger, professor of bankruptcy law at Brooklyn Law School, told ABC News that FTX’s sudden downfall left the company with little time to prepare for an orderly liquidation.

“Sometimes companies go bankrupt without any planning,” said Janger.

How will cryptocurrency traders try to get their money back?

The first claim some crypto traders will make is that the lost money belongs to them, not FTX, said Warner of St. John’sUniversity.

If creditors can prove that their money was held independently of the company’s assets, the money will be returned to them before the bankruptcy process is completed, giving them the best chance of a full repayment, he added.

PHOTO: ARCHIVE - Depictions of cryptocurrencies are seen in front of the displayed FTX logo and falling stock chart in this illustration taken on Nov 10, 2022.

Depictions of cryptocurrencies are seen in front of the displayed FTX logo and the falling stock chart in this illustration taken on November 10, 2022.

Ruvic/Reuters data, ARCHIVE

“The difference is that if you had lent me your car during the week and I didn’t give it back and file for bankruptcy, the car wouldn’t be part of my bankruptcy estate,” Warner said. “Would you be able to get your car back from me.”

These quick asset recovery attempts often fail as they must meet strict conditions and otherwise undermine the fairness of dividing assets equally among creditors, Warner said. But some crypto traders can recover money this way, perhaps in cases where they deposited funds into an FTX account but did not invest them, he added.

Most of the time, FTX creditors will wait for the full bankruptcy process in which employees recover, identify, appraise, and finally reorganize or liquidate the company’s assets.

In a statement on Monday, FTX said some recipients of donations from the company, Bankman-Fried or other employees have sought instructions for the return of that money. The company asked other donation recipients to come forward, noting that if they don’t, it will take legal action to secure the funds.

Once the assets are recovered, cryptocurrency traders will have to wait in line behind other parties who want to collect their lost money. Priorities include unpaid taxes, unpaid employee wages, and other business expenses. The company’s shareholders and other investors are at the back of the line, behind the operators.

How long will it take for cryptocurrency traders to get their money back?

The exact length of the bankruptcy process remains unclear, but it could be several years before cryptocurrency traders get their money back, some bankruptcy experts say.

Stuart Brown, a partner at DLA Piper who specializes in bankruptcy, told ABC News that similar lawsuits have gone on for several months without resolution.

“The other crypto bankruptcy cases have been pending for approximately six months with no clear path to an exit and these cases do not involve the level of complexity that FTX presents,” he said.

Asset recovery will likely take several years before the company starts returning funds to creditors, Warner said.

“Distribution to claimants – it probably won’t take long,” he said.

There is also potential for further delay from a jurisdictional battle between Bahamian and US authorities over who should adjudicate bankruptcy, Warner said. These disputes are usually resolved in settlements, but potential litigation over the matter could take several years before bankruptcy proceedings can move forward.

How likely are cryptocurrency traders to get their money back?

Crypto traders are likely to recover at least some of their lost assets, bankruptcy experts say.

“If history is any indication of the future, there is a good likelihood that creditors will make substantial recoveries,” said Brown of DLA Piper.

But prospects are bleak for a full recovery of lost assets, Warner said.

“It’s almost certain they’ll get that back,” he said. “But they are unlikely to get anything close to 100%.”