Original article by Niamh Rowe, Fortune Magazine
Original compilation: Luffy, ForesightNews
When rumors began to circulate on the Internet that FTX was in trouble, one of FTXs clients, Louis dOringy, ignored them and turned his attention back to the friends he was entertaining at his Miami Beach apartment.
Fake news, he recalled. He put down his laptop and left the increasingly anxious cryptocurrency community for a day of relaxation at the beach.
But within a few hours, the mood changed. He came home and saw a tweet about an FTX client’s withdrawal request being rejected.
Things were getting hectic, he recalled. As the sun set through the floor-to-ceiling windows, the then 31-year-old wondered how things would play out next.
“Then,” he recalled, “suddenly we couldn’t withdraw the money we had in FTX.”
DOringy is one of more than a million victims trying to recover lost funds from FTX. FTX collapsed after co-founder Sam Bankman-Frieds financial fraud came to light.
“At the time, it felt like the end of the crypto world,” he said. The outlook is very pessimistic, no one thinks Bitcoin will hit another all-time high.
But during cryptos darkest moments, dOringys thoughts began to change.
Louis dOrigny has purchased over 1,000 FTX bankruptcy claims since December 2022
My view is that Sam didnt have enough time to commit this fraud and lose money. Im pretty sure they were able to recover a significant amount of money, he said.
DOringy saw an opportunity: Many creditors like him wanted to get at least some of their money back, but there was no clarity and no guarantees on how the exchange would raise a total $8.7 billion shortfall when it declared bankruptcy. In other words, creditors may sell their claims at a discount.
So what if they could hedge their claims?
Debt trading is both a risk and an opportunity
DOringy had used his own former boutique fund, Arceau, to buy some of the Celsius bankruptcy claims, but he was new to the field. Most investors he knew didn’t want to get into FTX’s troubled waters—no one was willing to put up money to buy the bonds.
But within weeks of the Miami incident, dOringy began using his own money to purchase FTX positions from hedge funds and requested liquidation.
We didnt know any more about the bankruptcy. We took a big risk and I just said it and did it, dOringy told Fortune.
Trading bankruptcy claims is a high-risk, high-reward strategy. As Lehman Brothers, Enron and General Motors went bankrupt, debt traders are believed to have made hundreds of millions, if not billions, of dollars from these once-giant companies. But more often than not, the debt may end up being worthless.
The end result was much better than I imagined, he said.
When a company goes bankrupt, creditors face lengthy bankruptcy proceedings in court with no guarantee of a percentage of their claims. Instead, many choose to immediately sell their claims for cash to a buyer willing to take the risk of a collapse in the value of the claims, with the buyers losses depending on how much of the debt the bankruptcy administrator is able to recover.
Calculating the exact timing and value of the debt transactions has been complicated since FTX filed for Chapter 11 bankruptcy in the District Court of Delaware on November 11, 2022. Industry traders told Fortune that some debt transactions were conducted on online platforms, while others were private transactions where buyers were not required to submit transfer applications immediately, creating delays, while some debt transactions were simply reported as their own claims.
As of March 28, on the Claims Market, the industrys main online trading platform, 49 transactions have exchanged claims worth more than US$439 million. Meanwhile, hedge funds have purchased more than $2.3 billion worth of deeply discounted claims, according to court records as of March 20.
While the bankruptcy court has not yet set a date for creditors to be paid, it now appears likely that they will be paid in full. It appears that the client is expected to be reimbursed in full, Bankman-Fried told a Manhattan court at Thursdays sentencing.
When claims are first approved, creditors sell claims at low prices. More than 60 claims with a total value of more than $1 million have transacted on the market - selling for around 10% in November 2022 and now at 93%, indicating growing confidence in repayment.
Meanwhile, two people with knowledge of the debt transactions told Fortune that they are estimated to have been driven by rising cryptocurrency values and the sale of FTX’s stake in artificial intelligence startup Anthropic for more than $880 million. The value of the claim may exceed its original value by 120% to 140%.
A gamble with a return rate of over 700%
Debt buyers told Fortune that the appointment of John J. Ray III as the new CEO at the time FTX filed for bankruptcy also fueled interest in the debt. “He immediately started selling all the assets that were uncertain (price fluctuations), and institutional debt buyers liked that because they didn’t want Bitcoin,” d’Oringy explained.
According to data submitted in the FTX case report, FTX has recovered approximately $7 billion in assets to date, including liquidated cryptocurrencies, 38 properties in the Bahamas, and $2.6 billion in cash.
The legacy includes approximately 59 million SOL and 21,482 Bitcoins, which have gained approximately 1,000% and 343%, respectively, since the company filed for bankruptcy. FTX will sell 41 million SOL to institutional investors at a price 68% lower than the current market price, worth approximately $7.65 billion at the time of publication. This angered some of the victims, including Sunil Kavuri, who criticized Bankman-Fried for constantly lying and saying we would all be adequately punished during the sentencing.
As of March 20, Chapter 11 filings show dOringy has purchased about $29 million worth of claims. He said the bonds were purchased for $3.5 million with personal funds: This is a family office investment of mine and some friends. The return on the investment was more than 700%.
dOringy purchased his first bond at Christmas when he was reunited with his family. He recalls the worried looks on his parents faces, who teased him that the family might be bankrupt by next Christmas because of his gamble. The debt, worth nearly $3 million, settled on Dec. 28, 2022, at 6% of the original value, according to a contract seen by Fortune.
So far, the buyers expected to reap the biggest returns from FTXs remains are hedge funds specializing in distressed debt. As of March 20, Attestor, Baupost and Farallon have purchased claims worth more than $520 million, $518 million and $346 million respectively, leading the race. The funds use other entity names, people familiar with the matter confirmed.
Another big name in the bet, and a friend of dOringys, is Thomas Braziel, a bankruptcy debt broker at 117 Partners who buys debt on behalf of some of the largest hedge funds in the market. Braziel said his first transaction was on Nov. 12, 2022, before the bankruptcy was officially filed. He spent about $240,000 to buy $8 million of debt (about 3% of its stated value), while another transaction cost about $210,000 to buy $3.5 million of debt.
Debt trading is not easy
Current valuations are a far cry from where they were on April 27 last year when debt buyers narrowly escaped disaster.
In a Zoom call with debtors in Singapore, dOringy was close to finalizing a $3 million debt purchase agreement. During the call, news broke that the IRS had filed a $44 billion claim against FTX, accusing it of evading taxes.
You know, during the call, we were freaking out, he said. But he ultimately decided to buy the debt. This is really, really scary.
Although the IRS reduced the claim to $20.4 billion, creditors would still face bankruptcy in this case if no objections were filed. Well get nothing, dOringy said.
However, FTX has launched a legal battle over the claim, asking the court to dismiss it: it may indefinitely halt the debtors progress and any distributions to customers and other creditors. In other words, since the IRSs claim will Fraud victims pay out of pocket, so thats unlikely to happen, sources tell Fortune.
In July, FTX launched its own public portal for customers to file claims. But in the early days of the deal, there was limited information about which assets could be liquidated or how claims could be verified. Many appear to be crowdsourced via Twitter, and KYC is conducted in a time-consuming and ad hoc manner, dOringy said.
“It’s really, really hard to buy debt,” said Braziel, who said he purchased at least two or three debt securities that turned out to be fraudulent.
Due to the speed of verifying claims, dOringy purchased 40 claims in the first year of trading. That gave him another idea: speeding up the due diligence process through automation. In December, he co-founded his own portal, FTX Creditor, which he describes as a custom CRM, KYC and due diligence solution, which he says has reduced the verification process from days to 30 minutes . The company currently has 14 employees spread across all continents who answer calls from creditors 24 hours a day.
The company, which specializes in claims under $100,000, aims to provide retail investors with a convenient way to complete sales over a 30-minute phone call, avoiding being stuck in lengthy transaction confirmations.
Public records show that FTX Creditor has purchased nearly 1,000 claims worth about $100 million since December. Assuming a purchase price of 70% of the debt, that would mean the company would make a profit of about $30 million, according to market estimates -- some of which may have been proceeds from dOringys earliest debt purchases.
But dOringy explained that rising debt values have slowed transactions somewhat. However, more than $6 million worth of debt has been purchased on the market this week alone, and Braziel is still buying debt at a 70% discount, according to a contract seen by Fortune.
DOringy decided to continue running FTX Creditor after FTX, but once those claims were paid off, he would take a vacation first.
Is it calculated wisdom to put money into these claims? K. But in DOringys opinion, these situations occur by chance. He used a word that was completely different from intelligence: luck.
