Thoughts on legal concerns surrounding the FTX situation

Molly13 Nov 2022 17:01 UTC
367 points
65 comments4 min readEA link

Edited to add: I’ve posted a clarifying remark in the comments section here.

As Open Phil’s managing counsel, and as a member of the EA community, I’ve received an onslaught of questions relating to the FTX fiasco in the last few days. Unfortunately, I’ve been unable to answer most of them either because I don’t have the relevant legal expertise, or because I can’t provide legal advice to non-clients (and Open Philanthropy is my only client in this situation), or because the facts I’d need to answer the questions just aren’t available yet.

The biggest topic of concern is something along the lines of: if I received FTX-related[1] grant money, what am I supposed to do? Will it be clawed back? This post aims to provide legal context on this topic; it doesn’t address ethical or other practical perspectives on the topic.

Before diving into that, I want to offer this context: this is the first few days of what is going to be a multi-year legal process. It will be drawn out and tedious. We cannot will the information we want into existence, so we can’t be as strategic as we’d like.

But there’s an upside to that. Emotions are high and many people are probably not in a great mental place to make big decisions. This externally-imposed waiting period can be put to good use as a time to process.

I understand that for some people who received FTX-related grant money, waiting doesn’t feel like an option; people need to know whether they can pay rent, or if their organization still exists. I hope some of the information below will provide a little more context for individual situations and decisions. [2]

I also committed to putting out an explainer on clawbacks. That is here, though I think the information in this post is more useful.

Bankruptcy and Clawbacks

Background

The information in this section is based on publicly available information and general conversations with bankruptcy lawyers. I do not have access to any nonpublic information about this case. None of this should be taken as legal advice to you.

FTX filed for bankruptcy on Friday (November 11th, 2022). More specifically, Alameda Research Ltd. filed a voluntary petition for bankruptcy under Chapter 11 of the Bankruptcy Code, by filing a standard form in the United States Bankruptcy Court for the District of Delaware. The filing includes 134 “debtor entities” (listed as Annex I); it looks like this covers the full FTX corporate group.

This means that the full FTX group is now under the protection of the bankruptcy court, and over the coming months, all of the assets in the debtor group will be administered for the benefit of FTX’s creditors. By filing under Chapter 11 (instead of Chapter 7), FTX has preserved the option of emerging out of the bankruptcy proceeding and continuing to operate in some capacity. You can read a useful explainer on the bankruptcy process here.

The rules in the Bankruptcy Code are ultimately trying to ensure a fair outcome for creditors. This includes capturing certain payment transactions that occurred in the past. Basically, the debtor can reach back in time to undo deals it made and recoup monies it paid; this money comes back into the estate through clawbacks and gets redistributed to creditors according to the bankruptcy rules.

Clawbacks

There are two main types of clawback processes. The first and most common (called a “preference claim”) target transactions that happened in the 90 days prior to the bankruptcy filing. Essentially, if you received money from an FTX entity in the debtor group anytime on or after approximately August 11, 2022, the bankruptcy process will probably ask you, at some point, to pay all or part of that money back. It’s almost impossible to say right now whether any specific grant or contract will be subject to clawback – there just isn’t enough information on the court docket – and if your transaction is captured, you will eventually receive formal notice from the bankruptcy court and will have an opportunity to raise a defense, negotiate a settlement, or litigate. You can read a legal explainer about preference claims here.

The second clawback process (called a “fraudulent conveyance claim”) targets transactions that happened up to two years prior to the bankruptcy filing. The root of these claims is an allegation that the debtor moved assets out of their organization for the purpose of frustrating future creditor claims. These types of claims are more complicated to prove, less commonly brought, and more individualized to the specific transaction.

It is way too early to tell whether and how fraudulent conveyance claims might be used in the FTX bankruptcy proceeding. But they would tend to target larger transactions or transfers that seem irregular, even if the recipient (e.g., grantees receiving funds) did nothing wrong and had no knowledge of any impropriety. Again, if your transaction is captured in a fraudulent conveyance claim (essentially if you last received money from an FTX entity more than 90 days ago), you will receive formal notice and have an opportunity to make your own case. I don’t currently have a good explainer for fraudulent conveyances, but the topic is somewhat covered in the explainer our external counsel helped put together, which is here.

Being a Creditor

Finally, to the extent you have a binding agreement entitling you to receive funds, you may qualify as an unsecured creditor in the bankruptcy action. This means that you could have a claim for payment against the debtor’s estate. If you are listed as a potential creditor, you’ll receive official notice from the court about the process for getting your claim on file; even if you don’t receive notice, if you think you have a claim, you will be able to file one proactively. It’s not at all clear whether there will be any assets left over for unsecured creditors, especially ones that are not depositors on the exchanges.

Timing

I want to emphasize that this process is likely to take months to unfold. I expect that FTX will file more documents with the court in the coming days; those documents should include at least a partial list of assets, debts, and potential creditors (including those captured in the lookback periods). Many court filings are publicly accessible, and you can look them all up yourself as they are disclosed on the court’s docket, but I will try to make the more substantive or useful filings available for you. I will update with a link when the folder is ready.

Looking Forward

I intend to share thoughts on another big area of concern—communications with FTX and FTXF-related people, and document preservation, in a future post.

For further resources surrounding bankruptcy proceedings and clawbacks:

I’ll do my best to provide updates as more relevant information is disclosed, and to maintain a current database of the most useful filings in the bankruptcy action here.

As major developments unfold in the bankruptcy case, I currently plan to provide general updates to the community via the EA Forum. As part of that effort, I also plan to share explainers prepared by bankruptcy lawyers and other experts. This is a large, complex case and there will be a lot of people watching, reporting and giving takes, which I will aim to share.

Finally, I am working to organize additional legal support options for the FTX grant recipient individuals and organizations that are most impacted as they navigate this process.

  1. ^

    I say FTX-related and not FTXF because my impression is that grant money came from many different entities, and not just FTX Foundation.

  2. ^

    In case this is helpful additional information: my husband is an FTXF grantee who received his money more than 90 days ago, and we’ve personally decided to halt committing any more of that money for now, though that has very little impact on our personal financial situation so is not a hard decision.

Molly13 Nov 2022 17:01 UTC
367 points
65 comments4 min readEA link