FTX’d: Conflicting Public and Private Interests in Chapter 11

Abstract

Chapter 11 of the Bankruptcy Code is often justified by vague assertions that reorganizing troubled companies is in the “public interest.” This is trivially true in the sense that the power to create the system is vested in Congress by virtue of the Constitution’s Bankruptcy Clause (art I, § 8, cl 4). There has, however, been surprisingly little effort to consider seriously what this public interest is, how it should be operationalized, or who should pay for it.

Based on a case study of the recent and controversial bankruptcy of crypto complex FTX, this Article develops a three-part typology of public interests at stake in chapter 11 and shows how they can conflict with one another and with private interests: (1) The paramount public interest in the integrity of the judicial process; (2) bankruptcy-specific public interests in maximizing value through efficient, consolidated proceedings; and (3) “other” public interests, such as the prosecution and defense of serious crimes.

We place FTX’s counsel, Sullivan & Cromwell (S&C), at the center of this triptych. We present evidence, some revealed for the first time, which shows that S&C had undisclosed potential conflicts of interest due to apparent errors, omissions and deceptions in their work for the company and its founder, Sam Bankman-Fried, before, at and during the bankruptcy, thereby undermining the first-order public interest in procedural integrity. S&C’s role as debtor’s counsel has cast a troubling shadow over puzzling and costly decisions in the case—including bargain-basement asset-sales to favored insiders—thereby undermining the second, bankruptcy-specific form of the public interest. S&C has justified its actions by reference to the third, “other” facet of the public interest, supporting the prosecution of disfavored insiders such as Bankman-Fried, a pricey task (they have already charged creditors over $200 million) which may have distorted those prosecutions without producing observable economic benefit to the bankruptcy estate.

FTX is a cautionary tale about the power that lawyers have to frame, control, and profit from, claims about the public interest in chapter 11. An examiner may yet shed light, but S&C’s resistance to that intervention means that much of the damage cannot be undone. We situate our findings in a nascent body of literature exploring the public interest in bankruptcy, and offer guidance to improve the functioning of the principal custodians of the public interest in chapter 11: the debtor’s attorney, the bankruptcy examiner, and the United States Trustee.

Keywords: public interest, judicial process, FTX, Sullivan & Cromwell (S&C), Bankruptcy, chapter 11, bankruptcy examiner, corporate reorganization, Sam Bankman-Fried, conflicts of interest, disinterestedness, crypto currency, Binance, CTFC, United States Trustee.

JEL Classification: G33, G38, K22, K23