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FTX Proposes Controversial Exculpation Clause in Amended Bankruptcy Plan

FTX’s new bankruptcy proposal includes a controversial clause that would absolve law firm Sullivan & Cromwell of future liabilities, sparking debates among creditors.

FTX, the cryptocurrency exchange that went bankrupt, has introduced a new amendment to its proposal for repaying creditors that includes a contentious exculpation clause. This clause, if approved, would absolve the bankruptcy law firm Sullivan & Cromwell (S&C), along with all debtors, from future liabilities arising from their actions during the bankruptcy process.

Details of the Exculpation Clause

The amended proposal, released on May 7, aims to secure billions in compensation for creditors but has stirred dissatisfaction due to the inclusion of the exculpation clause. This legal provision seeks to protect certain parties from liability for damages incurred in the execution of the bankruptcy. According to Sunil, a prominent FTX creditor and member of the FTX Customer Ad-Hoc Committee, this clause appears designed to shield S&C from potential liabilities such as the alleged discounted sales of FTX assets to their clients and insiders, and decisions against restarting FTX 2.0.

Exculpation clause. Source: Sunil

The clause has nearly three months after top FTX creditors filed a lawsuit against Sullivan & Cromwell, accusing the firm of participating in FTX’s alleged multibillion-dollar fraud. The creditors contended that S&C was aware of the fraudulent activities and stood to financially benefit from them, thus implicating the firm in assisting FTX’s unlawful actions for its own gain.

Financial Implications and Creditor Reactions

The proposal has caused outrage among the cryptocurrency investment community, particularly due to the implications of the exculpation clause which might lead some creditors to vote against the plan. The plan suggests that over 98% of creditors would receive an 11% payout, with additional compensation projected to amount to billions. However, the compensation is based on a Bitcoin price of $16,800, which many creditors find unacceptable considering the substantial appreciation of Bitcoin since the collapse of FTX.

Statements from Industry Leaders

Mike Belshe, CEO of BitGo, expressed his dissatisfaction in a post, stating that no FTX creditors would find the compensation adequate, as the offered Bitcoin price does not reflect current market values. He acknowledged the procedural necessity of the bankruptcy process but criticized the notion that creditors are fully compensated or that the fallout from FTX was anything less than disastrous.