FTX bankruptcy expenses likely to exceed its recent extravagances
FTX was given the go-ahead to loosen its purse strings to pay for business expenses amid its own bankruptcy proceedings — the overall cost of which promises to sap the creditors' pot.
Driving the news: The court on Monday granted FTX's request to pay the folks that they employ in what they call "ordinary course of business" — for FTX that means an army of lawyers — as well as any outstanding sums owed to service providers.
Why it matters: Fees paid to lawyers, advisers and bankers over a bankruptcy proceeding can eat into what's left for creditors, the longer it takes. And the bankruptcy proceedings that tend to be more complicated, with a long list of creditors, take a long time.
- Small wonder why some claimants bail and sell their settlement rights away for pennies on the dollar.
Between the lines: If FTX is able to recover billions to divide amongst its creditors and, like Enron, 10% is paid out in legal expenses, those costs would easily exceed the $40 million FTX spent on lavish travel accommodations and postage over the better part of last year.
State of play: FTX's counsel for its bankruptcy proceedings is Sullivan & Cromwell. Their rates according to court documents:
- $1,575 to $2,165 per hour for partners and special counsel.
- $810 to $1,475 per hour for associates.
- $425 to $595 per hour for legal assistants.
Of note: "These rates for the more senior timekeepers in each class represent a discount from the rates currently used by S&C when preparing estimates of fees under its normal billing procedures for nonbankruptcy engagements," filings show.
- The intrigue: Lawmakers calling for the appointment of an independent examiner in the FTX case Tuesday questioned S&C's ability to be unbiased and impartial as debtor counsel, due to its having counseled FTX prior to its collapse.
Details: Separate to the bankruptcy lawyers, professionals that could be paid for FTX's "ordinary course of business " include local representation in Japan, Cyprus, Singapore, Hong Kong, Switzerland, the Bahamas, the British Virgin Islands, Australia, Turkey, Canada, and 11 other countries and territories.
- Average monthly expenses can't exceed $200,000 for the highest tier of lawyers.
Context: Bankruptcy courts are sensitive to the cost of liquidation proceedings and expenses are often analyzed and compared to others'.
- Lawyers in the Enron case, which took roughly three years to conclude, received nearly $690 million in legal fees on a recovery of $7.2 billion; the judge said the 9.5% compensation was lower than average for comparable class-action lawsuits.
Flashback: The Lehman Brothers liquidation took 14 years and is considered the costliest in history, according to a Federal Reserve Study.
Yes, but: In the Lehman bankruptcy, Debtors consistently underestimated the cost of proceedings, according to Liberty Street Economics, a blog by New York Fed economists.
- "Compensation and benefits to professionals and employees may contain an incentive component that is tied to estimated recovery using formulae approved by the courts," they said.
The bottom line: Lawyers are paid to vet every creditor claim, and to ensure every legitimate creditor is included in the process. And like company employees paid to work through a bankruptcy process, the court justifies their pay with the understanding that they'll increase the estimated recovery for all involved.
Our thought bubble: The time it takes to fill the pot, also takes from it.