this video is sponsored by Incog. Use the link in the description below or code Bagel to get 60% off an annual subscription. Hey everyone, welcome to the Plane Bagel. I'm your host, Richard Coffin. It's been just shy of two years since we saw the Titanic-style collapse of FTX, one of the world's largest crypto exchanges of its time, after it misappropriated client funds. It's been 7 months since its founder, Sam Bankman-Fried, or SPF for short, was sentenced to 25 years in prison for his part in it, a saga that has overall come to be known as a cautionary tale for crypto investors regarding startups in the space. Well, while the whole saga has likely made its way well into the finance history books by now as one of the greatest rises and falls of a finance firm, we recently got the update that perhaps not all had been lost with the collapse of FTX. You see, just this month on October 7th, we got the news that a bankruptcy judge had

approved FTX's plan to pay back all of its customers' missing deposits, and not just the full balance of money owed, but 18% of account balances, with 98% of its customers expected to be made whole over the next 2 months. In other words, by year-end, the vast majority of FTX customers who likely thought their deposits lost will be made whole, which is obviously a huge development and one, mind you, that was first announced back in May of this year, which is when FTX first filed its reorganization plan. The current update is that a judge finally approved it, meaning that the company has the all-clear to go ahead. But it all does naturally raise a couple of questions: where did this money come from? Was SPF correct in saying that the company wasn't, in fact, insolvent? And if FTX does have enough money to pay back its customers here, then what the heck was the problem in the first place? Well, that's what we'll be answering in today's video, and I know I'm late covering this, uh, like I

mentioned most of these details were released in May of this year, which is like 90 years in Internet time. But initially, I didn't want to cover the story until we had the bankruptcy court approval on the off chance that someone did come forward and raise issues with the plans to avoid getting anyone's hopes up. And with this recent update and the US fast approaching the effective date for the plan, which is currently set for October 31st, or this coming Halloween, I figured it was as good a time as ever to follow up on this story, give the update, and hopefully finally close this chapter of finance on a more positive note. Because it's nice to cover a good story from time to time rather than just always the doom and gloom. But since it's been nearly 2 years since the collapse of FTX, you'd be forgiven for maybe forgetting some of the details. So, let's start things off with a quick Sparks note recount of what happened. And if you'd like to skip this section, you can

do so using the chapters in the description down below as mentioned. FX was one of the largest crypto exchanges back in 2022, with the company being run and majority owned by Sam Bankman-Fried, again SPF for short, a crypto advocate who seemingly liked to multitask and was viewed by many as an eccentric genius and key leader in the crypto space. But in November of 2022, things quickly started to collapse as we saw allegations surface that the company had been co-mingling client funds with Alam Research, a hedge fund that was also owned by SPF, with a later coming note that FTX had lent $10 billion of client money to the fund for the purpose of trading and even paying off its debts, with those funds ending up locked up in various crypto projects, many of which had ties to SPF or seemingly just being lost by Alam. And while FTX maintained that customer deposits were fully backed, as clients rushed to withdraw their funds in a panic, we saw that lie quickly fall apart with the company unable to meet demand and

ultimately freezing withdrawals with just days later on November 11th. FTX filed for chapter 11 bankruptcy. Now since then, SPF, as mentioned, has been sentenced to 25 years in prison, with Caroline Ellison, the CEO of Alam Research, receiving a lighter sentence of two years just this past September, in part due to her cooperation in SPF's own case and her testimony that SPF largely instructed her regarding the illegal activities. And to try and sort through the dumpster fire at FTX, we saw John J. Ray III come on as CEO, someone who had previously steered Enron through its own big bankruptcy blowup and who even worked as a principal officer for Nell back in 2010. But initially, things looked pretty grim, with Ray writing in the firm's bankruptcy filings, Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information, with records for the company being in complete disarray and assets for the firm being seemingly a fraction

of what people were expecting for a company that was once valued at $32 billion with the cryptocurrencies on hand for FTX docomo September 2022. So, it really did seem like all customer funds had been lost here, either from Alam to losing it on bad crypto trades, uh, the company misappropriating customer funds to pay celebrities and influencers for marketing, or just to buy properties for employees, or literally just lost in the nether of the cryptoverse due to the company's just god-awful accounting practices and the fact that s bankman freed had requested and used a backdoor program to move money around while avoiding detection. So, needless to say, it came as quite the shock when in May FTX announced that it had recovered enough assets to not just pay back the claims of all non-governmental creditors, but in fact 118% of claims for 98% of its creditors within 60 days of the effective date of the plan, which at the time was said for October 31st or next Thursday in other

words the vast majority of FTX customers, many of whom likely assumed their money lost, would be getting their money back plus a bit extra by the end of 2024. Now, as for y 118%, that 18% figure represents 2 years of interest paid on the owed deposits, uh, with the bankruptcy filing setting the consensus rate to 9%. So, 9 * 2 = 18%, which is not an awful return for money that you otherwise assume to be lost. Now, importantly, as husband been widely reported at this point, uh, the claim amounts being used here are based on account values as of November 2022, which is when FTX filed for bankruptcy, but also represents a near-perfect bottom for cryptocurrency markets, with Bitcoin, for example, having since returned to its previous peak and rising roughly 300% since that point. So, while 9% is certainly nothing to scoff at, you do have some customers dissatisfied that they were effectively forced to sell at a low and aren't just getting back the cryptocurrencies that they held in their

accounts, which, depending on what they held, could be worth meaningfully more. It's also worth highlighting that this group, dubbed the convenience class, that's immediately being reimbursed here, this 98% of customers, are only those with account balances of $50,000 or less, and at aggregate, their claims represent only $1.2 billion. The other 2% of creditors, deemed the entitlement class, reflect the lion's share of money owed here, with roughly $9 billion in claims. And while this group is expected to be paid back with a recovery rate of somewhere between 129% and 43%, seemingly depending on the timing and the final amount recovered through the company's liquidation, they're only expected to begin receiving their distributions in 2025, but there being no deadline as for when they'll be made hold by. But all things considered, with how bad things looked going into this, it's a pretty meaningful victory for customers. Now, the frustrations around the rebound of cryptocurrency prices is certainly understandable, and people were still put

through financial strain because of all this, with their money being locked up for a period of time. Uh, but the fact of the matter is that those cryptocurrencies that some customers are demanding they be paid back are simply long gone. At the time of bankruptcy, the company only held 1% of the Bitcoin and only 1.2% of the Ethereum that customers believed it had. So, it's still quite impressive that we're seeing this amount of money returned to customers here. In fact, well, there's still some contention around $1 billion that was seized by the government during SPF's criminal prosecution. It looks like even shareholders of FTX may receive up to $230 million of these funds, meaning that even owners of the company, the lowest in the pecking order here, could walk away with a bit of money. But it does all bring us back to the questions: where did this money come from, and if FTX was actually able to pay back its creditors plus interest, why the hell did they go bankrupt in the first place? Well, part of

the issue here was liquidity. The company has some assets to meet withdrawal needs but couldn't cash them out immediately. For example, some of the client funds and cryptocurrencies that the company did have were locked up in various projects, some of which the company has since been able to get their money out of. With FTX certainly getting lucky here and benefiting from pegging customer claims at a low in November and taking advantage of the crypto rebound to now sell off the assets they do have. FTX was seemingly able to track down some of the client funds that had been lost in the chaos, but importantly, a good chunk of the refund money here is coming from other buckets, some of which wouldn't have been accessible without a criminal trial or conviction. For example, SPF, as part of his image as the cryptocurrency version of JP Morgan, had a bunch of investments in other projects and ventures that are now being sold at times for profit. For example, the company had a $500 million investment in Anthropic, an AI startup that has since been

able to sell during bankruptcy for nearly $900 million. The company also got approval to sell a bunch of real estate purchased by SPF, with them recovering hundreds of millions of dollars. They're getting some assets back from Caroline Ellison, pursuing litigation claims, so settling or otherwise trying to get money out of outstanding legal claims they have against others, clawing back some of the copious amount of money that was donated by SPF to various causes, with mixed results, and even seemingly trying to get back some of the grand sums the company had paid to celebrities like Shaquille O'Neal for marketing, with the company having nearly $18 million in prepayments to various teams and celebrities. Albeit there, it's unclear who they have been able to recover any money from, as some of their cases are still outstanding. And when it comes to the influencers who promoted FTX, while we have seen some settle in a class action lawsuit that was brought against them, it's likewise hard to confirm if any of the personalities who promoted FTX ended up returning any of the money.

towards customer refunds. Still, it seems the company has raised enough cash here to now pursue its customer repayment plan. And while John J. Ray has seemingly done a great job of raising cash here for customers, another big driver of the success for this bankruptcy is the fact that many government institutions and agencies likewise reduced the fines that they had slapped on the company or otherwise prioritized customer deposits and claims over their own to ensure that customers could get back as much money as possible. You see, with the typical institution where a customer might hold their investments, the client assets are typically managed separately or isolated from company assets. So, if there's ever any government fine or creditor claim, you typically have this degree of separation where customer assets can't be touched. But because of the comingling and the fact that FTX was only registered as a money transmitter, which is well below the bar set for brokerages and the like, those same protections wouldn't have been afforded here. And we could have seen customer funds eaten up by fines on the company.

uh, but instead, we saw institutions like the IRS, which had a $24 billion tax claim against FTX, settling instead for a $200 million cash payment and a $685 million subordinated claim that would only be paid after all other creditors. Meanwhile, the Commodity Futures Trading Commission subordinated their own claims on the company and agreed to contribute any recoveries they do come across to a special fund that will offer supplemental restitution to certain customers and creditors. So, you can see that this was really an effort on all fronts to try and make customers whole here. In fact, we even saw the liquidator appointed in the Bahamas, who had previously challenged the company's authority to file for bankruptcy in the US based on where certain parts of the business were actually registered, agreeing to work with FTX management here. And the whole situation has been applauded by many as a very successful bankruptcy, with even the bankruptcy judge John Dorsey calling it a model case for how to deal with a very complex chapter 11 bankruptcy proceeding.

so what comes next? Well, as mentioned, the effective date for the plan is next week on October 31st, which we could see that post postponed. It has been quite some time since the date was first announced, and things might have changed. But if all goes according to plan, it means that we could see some customers getting their money back within a matter of weeks. As for what will happen with FTX, well, Chapter 11s do typically leave the door open for a return to operations. The reorganization plan is for a full liquidation, with the company having already explored the possibility of making a comeback. Now, interestingly, FTT, which was FTX's own cryptocurrency, is still fluctuating in value around $2, with the value rising and falling around these announcements. But it's important to highlight that that's entirely speculative. There's no plan to bring FTT back, and FTT holders aren't receiving any compensation in connection to the company's liquidation. And to the question of whether SPF is less guilty here, given that clients are being

made whole. Uh, we have actually seen SPF recently appeal his sentence, with his lawyers arguing that this update demonstrates that FTX was indeed never insolvent and that SPF was treated unfairly and as presumed guilty by the judge who presided over his trial. However, it is worth highlighting that during SPF's trial, there was still a lot of evidence of Sam Bankman-Fried lying, using that backdoor program to move money to Alameda without detection, something that, mind you, went squarely against FTX's own terms of service. And barring any evidence that would justify a retrial or a different judge, it doesn't seem likely that we'll see his sentence lessened at all, even with customers being made whole here. Uh, with the judge for the case saying, A thief who takes his loot to Las Vegas and successfully bets the stolen money is not entitled to a discount on the sentence by using his Las Vegas winnings to pay back all or part of which he stole when he finally

gets caught. So, while SBF did initially talk about a return of FTX and even the FTT token, it doesn't seem like he's going to be a free man anytime soon, with the courts still viewing him as a nefarious actor, even if the crime ended up having a more neutral impact on customers. Now, on the note of nefarious actors, I probably don't need to tell you that Sam Bankman-Fried is not the only one out there known for mishandling customers and their funds. In today's modern internet era, people face constant threats online around identity theft, phishing attempts, viruses, or just annoying spam emails, all issues made worse and more prevalent by data brokers who collect, aggregate, and sell personal information, which can then be used or abused by others, some of whom have actually been charged in the past for knowingly supplying this information to scammers who can use the details to better target their victims. However, thanks to today's sponsor, Incog, you can tell these brokers to stop it, leave me alone. Incog is a

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subscription so thank you in cogy and thank you guys for joining me today. Like I mentioned, a bit of an older story, but wanted to cover and give this positive ending/update regarding FTX so we can close this chapter with a bit of a silver lining. Hopefully, it serves as a reminder to be very cautious when dealing with finance startups, especially in the unregulated crypto space, to only invest money that you don't need immediately, and to always check what protections come with the investment services you use. A lot of traditional institutions have insurance in Canada and the US for the purpose of bankruptcy of the institution so that your deposits are protected, but those protections don't typically exist for cryptocurrency offerings, even services that are otherwise offered by traditional financial institutions. So, it's important to review what safety nets do exist when you decide to use a given platform. If you like this video, please make sure to like, subscribe, all that good stuff. It does help the channel tremendously, and let me know your thoughts on how things played out with the FTX situation.

especially if you are someone who was a customer of the platform and had funds locked up here. My name is Richard Coffin, and as always, be safe out there.

FTX’s 118% Refund Plan to Start Next Week

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I'm a CFA and CFP professional working as an analyst for an investment management company in Ottawa. I'm a huge finance nerd and am passionate about the field - I think people lack the resources they need to make educated financial decisions, and hopefully this channel helps with that!

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