The Hot New Market in Crypto? Trading the carcass of FTX.

After cryptocurrency exchange FTX filed for bankruptcy last year, Thomas Braziel, an investor who specializes in bankrupt companies, began brokering an unusual kind of transaction: a market to profit from FTX’s demise.

Mr. Braziel put one of his clients in touch with a major financial firm that had lost nearly $100 million when FTX went under. Last December, the company agreed to sell its claim in the FTX bankruptcy – essentially an amount from the collapsed stock market – for 6 cents on the dollar, betting that it was better to raise some money quickly than take years waiting for the shell of FTX to begin. repay creditors.

Then the market for FTX claims exploded. Mr. Braziel recently brokered the sale of a $19 million FTX claim for 68 cents on the dollar, taking a commission of nearly $100,000, he said. Some claims are selling for more than 70 cents as investors grow more optimistic that FTX’s new leadership will recover a significant portion of the roughly $8 billion for which its founder, Sam Bankman-Fried, was convicted of stealing from customers.

“The market is crazy,” said Mr. Braziel, a partner at investment firm 117 Partners. “It’s so hot.”

The initial despair over FTX’s failure has given way to a strange afterlife for the bankrupt exchange: a trading frenzy that has intensified in recent weeks as major financial firms seek opportunity in the rubble of one of the worst corporate collapses in decades. FTX’s story has come full circle, as investors who once used the platform to place risky crypto bets are now betting on the company’s prospects in bankruptcy court — and any profits flowing back into the resurgent crypto market.

For speculators, the math is simple: They’re betting that if they buy a $10 million claim for, say, 50 cents on the dollar, they’ll pocket significant profits if more than $5 million is ultimately repaid by the estate. In total, $1 billion to $1.5 billion in FTX claims have changed hands since the bankruptcy began, according to Xclaim, a company that connects buyers and sellers.

Most of the claims represent the crypto and cash assets that FTX customers had stored on the exchange when it filed for bankruptcy in November 2022. Some claims have a face value of only a few million dollars, while others are worth tens of millions. According to market participants, some claims worth $100 million have been shopped around in recent weeks.

The market has attracted a number of well-known hedge funds and investment firms, including Farallon Capital, Silver Point Capital, Hudson Bay, Contrarian Capital Management and Canyon Partners, court records show.

But it has also attracted investors with a more checkered history in the financial sector. In June, a court-appointed investigator in Delaware accused Mr. Braziel of falsifying bank records and embezzling funds from a bankruptcy estate he managed. Lawyers for Mr. Braziel responded by objecting to the conclusions about his “actual or potential criminal liability.”

Another figure involved in the claims market is a former FTX executive who worked closely with Mr Bankman-Fried. Ramnik Arora, one of FTX’s top fundraisers, recently started one online claims trading platform for FTX customers and began buying some smaller claims for itself, according to company records and two people familiar with the matter. Mr Arora was due to testify for the prosecution at Mr Bankman-Fried’s criminal fraud trial in October, but was ultimately not called as a witness; he has not been charged with any wrongdoing.

An FTX spokesperson declined to comment.

Claims trading is not new, especially in complex bankruptcies that take years to complete. But recent bankruptcy filings by high-profile crypto companies, including lenders Genesis Global, Celsius Network and BlockFi, have created a cottage industry of brokers who specialize in matching buyers and sellers.

The market gives creditors with money tied up in legal proceedings the chance to get paid immediately instead of waiting years for a payment. The trade-off is that they must accept far less than the face value of a claim – and possibly less than the bankruptcy estate can ultimately pay out.

Yet hundreds of crypto investors are accepting that deal. According to Andrew Glantz, the company’s chief strategy officer, Xclaim has processed $70 million in Genesis transactions and $4 million in Celsius transactions in the past 18 months.

The bankruptcy of FTX has attracted by far the most attention. After the company went bankrupt, John Ray, a corporate turnaround veteran who handled Enron’s resolution, took over from Mr. Bankman-Fried. In lawsuits and testimony before Congress, Ray called FTX the worst corporate mess he had ever seen, raising fears that the money would be impossible to recover.

But the recovery process is going faster than expected. Mr. Ray estimated in August that FTX had recovered $7 billion, although it was unclear how much of that money would return to creditors given the number of outstanding claims.

Yet claims that once traded for just a few cents on the dollar have increased in value. “Our first trade was in the teens,” says Jay Conklin, managing partner at hedge fund Park Walk, which began working with institutional investors to buy and sell claims shortly after the FTX collapse. “Now there are deals in the 1970s,” Mr. Conklin said.

One of the most outspoken evangelists for the claims market is Mr. Braziel, who lives in Forte dei Marmi, a seaside resort in Italy, and has become a well-known face on the crypto conference circuit. Not long ago, he said, he convinced Scott Galloway, the popular podcaster, to purchase $2.5 million worth of FTX claims. Mr. Galloway discussed the investment in one of his shows.

“He was lucky – we bought him a basket in the 1920s,” Mr Braziel said. “He’s going to make at least three or four times his money.”

In bankruptcies, transfers of claims are usually registered on the court docket within a few weeks of closing. The filing almost always identifies the buyer, but the seller’s identity is often redacted for privacy reasons.

There are risks on all sides. Brokers operate with limited oversight and no one regulates who can buy claims or arrange deals. Some matchmakers require sellers to give them an exclusive period to find a buyer, which can limit a creditor’s ability to buy out a claim.

Bradley Max, director of claims broker Cherokee Acquisition, said some sellers were struggling to negotiate deals on their own because they had to comply with the “know your customer” rules that buyers use to avoid transactions with bad actors.

“No one wants to buy Vladimir Putin’s FTX claim or anything like that,” said Mr Max, whose company has a online platform for trade claims.

It’s also unclear how much FTX will ultimately pay back. By this fall, lawyers and other professionals working on the bankruptcy case had collected more than $300 million in fees — money that was subtracted from the money supply that flows back to creditors.

And in recent months, the Internal Revenue Service has filed $24 billion in claims, arguing that FTX owed “income taxes, employment taxes and penalties” to the government from 2018 to 2022. (The IRS did not respond to a request for comment.)

The IRS is typically paid before all other creditors in a bankruptcy, so a large tax claim could drastically reduce the funds available to clients. But the amount FTX is actually owed remains in dispute, and a hearing will take place early next year.

For now, the speculators are not worried.

“A foolish, foolish thing,” Mr. Braziel said of the IRS’s efforts to claim billions of dollars in unpaid taxes. “No basis in facts.”

Kirsten Noyes And Sheelagh McNeill research contributed.