Nov 22, 2022 - Economy

Judge in FTX case grants privacy to customers, for now

Illustration of a hand in a suit pulling a shade down on a computer screen

Illustration: Sarah Grillo/Axios

FTX bankruptcy judge on Tuesday gave a win for customer privacy — but it wasn't really just about privacy. It was about money.

Driving the news: The post-Sam Bankman-Fried FTX appeared before the Delaware Bankruptcy Court on Tuesday asking — among other things — that the names of everyone (everyone!) it owes money to be redacted from the official record, for the time being.

Why it matters: On the one hand, a core value of the U.S. bankruptcy system is transparency. On the other, by listing everyone's names, it could put a target on the backs of FTX customers, who have it bad enough right now.

Zoom out: The attorneys for the FTX family of companies made a case that they are dealing with a gigantic mess that could take longer to untangle than typical bankruptcies.

  • "Your honor, what we have is a worldwide organization, but an organization that was run effectively as a personal fiefdom of Sam Bankman-Fried," James Bromley, a partner at Sullivan & Cromwell who is representing FTX, said in his opening remarks.

Yes, but: The motion for redaction was definitely not just about privacy. FTX new executives believe that the customer list that FTX has is a valuable asset, one they could potentially even sell in order to recoup more funds to repay creditors.

What they're saying: "We are talking about information, and information here is an asset," Bromley said.

  • Further, in a filing in advance of the hearing from restructuring firm Alvarez & Marsal, managing director Edgar W. Mosley II wrote: "Public dissemination of the Debtors’ customer list could give the Debtors’ competitors an unfair advantage to contact and poach these customers."
  • Two attorneys rose in support of the motion to redact, on behalf of two different groups of customers.
  • Judge John T. Dorsey granted an interim motion to redact the names of all creditors, but that will be revisited on Dec. 16.
  • Eye-popping stat: The estate currently estimates that there could be a million or more customers owed money.

In the weeds: Cryptocurrency customers are unique, Sullivan and Cromwell argued. "Many customers invest in cryptocurrency in part not to be publicly identified," Brian D. Glueckstein argued on behalf of the debtors. "Identifying the personal contact of the customers, particularly at this time, could put them in the crosshairs of bad actors."

  • He also hinted that knowing all the bigger names on the list could do more harm than good, saying such revelations might lead to "further destabilizing the broader crypto markets."
  • We are watching one industry pillar wobble right now.

The other side: Representing the U.S. Trustee, Ben Hackman argued that case precedent shows that in a bankruptcy proceeding, companies should expect to be in a "fishbowl."

  • The U.S. Trustee, part of the Department of Justice that advocates for the public in bankruptcy cases, objected to redaction, particularly when it comes to institutional clients.
  • "We submit that overbroad redactions do not serve transparency," Hackman said.

The upshot: "I need to make sure I'm protecting the interest of these individuals. This is a space where everything is done over the internet," the judge said. "Hacking happens all the time."

  • There will be another hearing on Dec. 16 before he issues a final order.

Flashback: This focus on privacy comes after an outcry in the bankruptcy case of crypto lender Celsius Network, which earlier this year filed with court the names and crypto transactions of thousands of users.

  • Doubtless, few users of either service ever suspected their identities or holdings might be exposed in this way.

Of note: Several other matters were also resolved with little objections over the course of the hearing.

  • The securities regulator in the Bahamas agreed to the proceeding in Delaware, though with some matters left unresolved.
  • Various attorneys and contractors were approved.
  • The judge approved motions to pay critical vendors and employees. The attorneys estimated that 260 employees remain.

The bottom line: "Those who are involved today in running FTX understand the concern and the outrage to what has happened. We are working day and night to bring order to disorder," Bromley said in his opening remarks.

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