FTX Settles with CFTC for $12.7 Billion

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FTX and the CFTC have reached a $12.7 billion settlement agreement over fraud charges
The CFTC filed a complaint in 2022 against FTX, its former CEO, and Alameda Research, accusing them of fraud, causing $8 billion in losses
The agency  has initially sought a $52.2 billion claim, but the proposed settlement has significantly reduced this amount

Bankrupt cryptocurrency exchange FTX and the US Commodity Futures Trading Commission (CFTC) have reached a $12.7 billion settlement agreement, pending approval from a Delaware judge. The CFTC filed a complaint against FTX, its former CEO Sam Bankman-Fried, and the affiliated company, Alameda Research, in 2022, accusing them of fraud that resulted in $8 billion in customer losses. Initially, the agency sought a $52.2 billion claim, but the proposed settlement significantly reduces this figure.

“Fraud and Material Misrepresentations”

The CFTC brought is claim in December 2022, charging all three defendants with “fraud and material misrepresentations in connection with the sale of digital commodities in interstate commerce.” The agency demanded the huge sum, but was always going to be open to negotiations.

Indeed, a court document filed on July 12 in the US Bankruptcy Court for the District of Delaware reveals that months of negotiations have taken place, with the sum of $12.7 billion being agreed by both parties and submitted for judicial approval.

The court filing emphasizes the importance of this settlement for FTX’s chapter 11 reorganization plan:

The Proposed Settlement is an integral and valuable component of the Debtors’ proposed chapter 11 reorganization plan. It resolves ongoing litigation and disputes with one of the largest creditors of the Debtors, avoids the cost and delay of further litigation, and mitigates a significant risk of diminution of the assets available for distribution to creditors.

As part of the settlement, the CFTC has agreed to forgo its recovery, contingent on FTX’s compliance with its reorganization plan. Consequently, FTX will allocate up to $12.7 billion to its creditors, based on available funds. Andy Dietderich, a partner at Sullivan & Cromwell and lead counsel for the FTX Debtors, explained, “In this bespoke settlement, the CFTC foregoes its own recovery against FTX in order to supplement the recoveries of customers and cryptocurrency lenders beyond the levels typical in chapter 11 cases.”

Some Creditors Oppose Rehabilitation Plan

The settlement divides the $12.7 billion into $8.7 billion in restitution and $4 billion in disgorgement, with the disgorgement amount being subordinated to the claims of all other creditors. The court document also highlights that the CFTC is the “most significant single creditor” in FTX’s Chapter 11 bankruptcy cases.

FTX filed for bankruptcy in late 2022, unveiling its reorganization plan in May 2023. The plan aims to provide 98% of its creditors with at least 118% of their allowed claims. Creditors with claims under $50,000 would be eligible for 118% compensation upon court approval.

However, some creditors, particularly those representing FTX’s largest creditor group, have opposed the plan, arguing for compensation in the form of cryptocurrencies rather than their dollar value at the time of bankruptcy filing. Votes on the reorganization plan are due by August 16.

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