The Scene
When Sam Bankman-Fried appeared in court today to be sentenced, one person who wasn’t there is the man who’s spent the past 16 months sorting through what the crypto boy-king left behind.
“I’m too busy,” John Ray III told me this week.
As SBF’s successor as chief executive of what remains of FTX, Ray has been investigating the exchange’s collapse while pursuing billions of dollars in cash, tokens, venture investments, political donations, and Bahamian real estate — all to be divided between customers and other creditors who submitted claims with a face value of $23.6 quintillion.
That’s made it a complicated endeavor, undertaken under a public glare. Ray has drawn a chorus of critics, who have questioned the pace of recoveries, his decision not to reboot the crypto exchange, and his handling of the grab bag of venture investments assembled by Bankman-Fried.
So Ray, who performed the same job for Enron two decades ago, really wants you to know that he hasn’t screwed it up.
“This wasn’t a normal company that went into bankruptcy. This was a crime scene,” he said in an hour-long interview in which he defended his work and detailed the challenges of wading through the chaos left behind by Bankman-Fried, who was sentenced to 25 years.
Ray has recovered more than $2 billion and identified another $5 billion or so, which he says should be enough to fully repay customers. He’s still fighting with the IRS over its claim on $8 billion in unpaid taxes, and trying to negotiate down billions of dollars in penalties from financial regulators. FTX’s Silicon Valley investors will likely get nothing.
“We’re never going to be able to put Humpty Dumpty back together again, because Humpty Dumpty was never complete to begin with,” he said. “We’re doing our job and we’ll continue to do so as long as we think that the dollars that we’re investing can be translated into recoveries for victims.”
Ray has been in a strange position where his success diminishes, by degrees, the scale of Bankman-Fried’s harm and could result in a lighter sentence. His lawyers have asked the judge to consider that many creditors will be made whole. And Ray’s success in selling some FTX holdings, like a big stake in Anthropic that went for $500 million this week, has lent credibility to the idea, as Bloomberg’s Zeke Faux writes today, that customers’ funds “weren’t so much stolen as they were redirected into at least a few surprisingly good investments.”
Ray acknowledged that perception in a letter last week to the court: “That things that he stole… were successfully recovered … does not mean that things were not stolen,” he wrote. “What it means is that we got some of them back.”
Bankman-Fried was an earlier investor in Semafor, which replaced his money after charges were filed.
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Bankman-Fried, who built and lost a crypto empire by 30, has maintained that FTX was solvent all along. He says he was strong-armed into bankruptcy by the company’s lawyers. In recent weeks some allies and academics have supported those claims.
A professor at Stanford Law School, where Bankman-Fried’s parents taught, criticized Ray’s decisions not to reboot FTX’s exchange and to treat as essentially worthless FTX’s holdings of digital tokens and venture investments. Some of those have turned out to be valuable.
Two law professors published a paper criticizing Ray for declining to pursue claims against FTX’s lawyers at Sullivan & Cromwell, who had failed to see the trouble the company was in and are now billing the estate more than $10 million a month. (Ray’s own $1,300-an-hour rate drew headlines in his hometown paper.)
The bankruptcy judge recently appointed a set of outside eyes, over Ray’s objections, to investigate those choices, though he won’t have carte blanche to second-guess commercial decisions.
Ray sees in those efforts a PR campaign orchestrated by Bankman-Fried designed to diminish his crimes and lessen his sentence, and batted back criticisms in the interview.
Why not reopen the exchange? “It had no adequate controls, no security, no financial reporting mechanism, no reconciliation between customers’ positions and the underlying assets,” he said. Fixing it would have diverted money away from customers, “and expecting them to put money back on the exchange where they got robbed seems crazy.”
Why not sell it to any one of a number of interested bidders? “We didn’t want to make it exclusive such that the only way to get your money out was to put it on [that particular] exchange.”
Why hasn’t he gotten more value out of FTX’s investments? Many of the tokens it owns are restricted or thinly traded. “You can’t just dump things out in the marketplace.” (Ray is being advised by Galaxy, a crypto-trading specialist, and FTX’s creditors get to approve any sale.)
Liz’s view
The bankruptcy code is designed for companies with traditional assets that are easy enough to value, like factories and inventory, and traditional debts, like bonds and bank loans. FTX had neither.
Its assets were mostly what Michael Lewis, in his book about Bankman-Fried, called a “dragon’s hoard” of venture investments. And much of its debt wasn’t owed to bondholders or vendors but rather to millions of individual customers.
People are always going to be upset. Ray plans to pay customers only the snapshot value of their accounts as of Nov. 11, 2022, rather than the current value of those coins, many of which Bankman-Fried secretly sold before FTX collapsed. Given the increase in bitcoin’s price since then, customers understandably think they should be 400% richer.
His decision not to chase value in a pile of investments is defensible — and even if you’re less forgiving, it’s reversible. Many were of dubious value, and Bankman-Fried seemed not to even know exactly what he owned. The estate’s big prize, Anthropic, has gone from a virtually unknown startup to a leading contender in the AI race. It’s now worth $18 billion.
Given that, I’ve been surprised at how normal the resolution of FTX has been. Ray has wrangled millions of individual claims, sifted through assets real and make-believe, and has a shot at recovering most of the $8 billion that was missing when FTX filed for bankruptcy.
Retail customers will be made whole, and institutional creditors will get some number of pennies on the dollar. FTX’s stockholders are wiped out, which is the right outcome in any bankruptcy and especially the right outcome in this one.
Room for Disagreement
Some of FTX’s creditors remain convinced that Ray’s decision not to reboot the exchange robbed them of value. Celsius, another crypto company, emerged from its own bankruptcy in January with a bitcoin-mining operation, under new management and owned by creditors.
“They had a thriving business that was the No. 2 exchange in the world, and all they had to do was turn it back on,” Arush Sehgal, an FTX creditor, told WSJ this week of Ray and his advisers.
Notable
- “His genius, if one can call it that, was recognizing that the mania around crypto would enable him to get away with totally disregarding the rules.” — Bloomberg