Last year’s collapse in cryptocurrency prices forced a cavalcade of major companies into bankruptcy, prompting a government crackdown and wiping out the savings of millions of inexperienced investors.
But for a small group of corporate return specialists, crypto’s implosion has become a financial bonanza.
Lawyers, accountants, consultants, cryptocurrency analysts and other professionals have received more than $700 million in fees since last year from the bankruptcies of five major crypto companies, including digital currency exchange FTX, according to an analysis of court documents in the DailyExpertNews. That amount is likely to increase significantly as things develop in the coming months.
High costs are common in corporate bankruptcy, requiring complex and time-consuming legal work to untangle these matters. But in the crypto world, the rising fees have sparked widespread outrage because many of the people who owe money are amateur traders who have lost their personal savings, not businesses that can weather a financial crisis. Each dollar of provisions is subtracted from the amount of money that will be returned to creditors at the end of the bankruptcies.
The fees are “exorbitant and ridiculous,” said Daniel Frishberg, a 19-year-old investor who lost about $3,000 last year when crypto firm Celsius Network filed for bankruptcy. “An army of people is present at every hearing, and most of them don’t need to be there. You don’t need twenty people taking notes.”
To calculate the total cost, The Times analyzed more than 5,000 pages of account statements and other court documents from the bankruptcies of the crypto companies FTX, Celsius Network, Voyager Digital, BlockFi and Genesis Global. The totals include fees that a bankruptcy court has formally approved, as well as fees that are pending approval and may be reduced.
The biggest winners from the five cases include two major law firms. Sullivan & Cromwell, which is managing FTX’s bankruptcy, has charged more than $110 million in legal fees and incurred more than $500,000 in expenses. Kirkland & Ellis billed $101 million for its work on three of the crypto failures, with $2.5 million spent in expenses, according to The Times analysis.
According to the analysis, more than 50 other professionals have also benefited, including specialized start-ups that analyze crypto transactions, as well as accountants, consultants and investment bankers.
The rising costs reflect the broken promises of crypto, a renegade industry that was presented to amateur traders as a force for equality in the ultra-low-tech world of high finance. After months of rising prices and social media hype, the crypto market plunged into a crisis last year that cost investors billions in savings and allowed lawyers, bankers and other traditional power brokers to reap huge profits.
As the industry struggles to recover, bankruptcy costs have come under intense scrutiny from the hyper-online community of crypto obsessives, who have spent hundreds of hours analyzing the billing statements the companies are required to publicly file in court. submit.
During FTX’s bankruptcy, creditors raised concerns about the hourly rates charged by Sullivan & Cromwell, which are as high as $595 for paralegals and $2,165 for partners. Last fall, Voyager’s creditors filed a motion complaining that attorneys overseeing the bankruptcy were spending thousands of dollars per person on hotel stays and $10,000 per month on catering.
Lawyers and other bankruptcy professionals claim that they charge market rates for difficult work, which will ultimately help recover the money crypto investors lost. In the FTX case, Sullivan & Cromwell has said it has raised more than $7 billion in assets, though it’s unclear how much of that total will go back to creditors.
A spokesman for FTX’s new management said the bankruptcy was “extraordinary in almost every way imaginable,” requiring professionals to create documents from scratch and track down missing funds. Andrew Dietderich, a partner at Sullivan & Cromwell, said in a statement that the lack of clear crypto regulation made things more complex and time-consuming, driving up costs.
A spokeswoman for Kirkland & Ellis declined to comment.
In recent decades, corporate bankruptcy has become big business. John J. Ray III, the executive tapped by Sullivan & Cromwell to lead FTX after its collapse, has made a career of leading ailing companies like Enron and Fruit of the Loom. He has been charged $2.8 million for his work on the FTX bankruptcy, court records show.
Bankruptcies weren’t always so expensive. The average hourly rate for bankruptcy lawyers at Sullivan & Cromwell has increased this year from $1,300 in 2018 to $2,000, according to Reorg, a credit and bankruptcy data provider. And research by legal experts Lynn LoPucki and Joseph Doherty shows that bankruptcy attorneys’ fees increased about 10 percent per year between 1998 and 2007.
When the crypto market plummeted last year, Celsius and Voyager, which had labeled themselves experimental crypto banks, were the first to go under, costing investors more than $6 billion. FTX failed in November, wiping out a whopping $9 billion in user funds. That was followed by the demise of BlockFi and Genesis, which had also overseen billions of dollars.
Lawyers, accountants and advisers sprang into action. Kirkland & Ellis manages the bankruptcies of Celsius, Genesis and Voyager, while Alvarez & Marsal, a turnaround management firm, charged more than $125 million for its work on FTX, Celsius and Genesis.
Alvarez & Marsal did not respond to requests for comment.
The fees most highlighted are the bankruptcy of FTX, the largest and most prominent crypto company to go bankrupt. FTX’s case has cost more than $325 million to date, in the most expensive of the five bankruptcies, ahead of the roughly $200 million in fees that Celsius has generated.
In a number of cases, bankruptcy judges have appointed fee examiners—outside attorneys who monitor costs and work with businesses to eliminate unnecessary expenses.
In June, Katherine Stadler, the FTX fees researcher, wrote that the bankruptcy was “on track to get very expensive anyway.” She noted that expenses to that point amounted to 10 percent of FTX’s remaining cash.
In the end, Ms. Stadler called for only modest cuts. Fee examiners in the Celsius and Voyager cases have made similar recommendations.
Creditors have called for more aggressive cuts. In January, a group of Voyager customers filed a motion complaining about tens of thousands of dollars in meal and hotel expenses filed by attorneys for Kirkland & Ellis. They argued that the lawyers also duplicated each other’s efforts, repeatedly charging for the same work. In response, Kirkland & Ellis agreed to limit hotel costs per night to $550 and limit catering costs to $20 per person.
A few months later, Kirkland & Ellis angered investors when it billed nearly $100,000 for 77 hours spent considering a potential lawsuit against Tiffany Fong, a Celsius client and social media influencer who obtained leaked information about the bankruptcy process. No charges have been filed.
“They mainly used money from creditors in an attempt to sue me, a creditor,” said Ms. Fong. “It ended up being a complete waste.”
The fee debate has sometimes made things more expensive. The same month that Kirkland & Ellis pursued Ms. Fong, it billed $230,122 for work related to “fee matters.”
In the Celsius bankruptcy, Mr. Frishberg, the 19-year-old creditor, has filed a series of motions challenging various issues, including fees.
According to Mr. Frishberg’s own calculations, Kirkland & Ellis billed nearly $50,000 in September and October in response to his filings — about 16 times the amount he lost in the first place.