FTX’s legal bills show progress on exploring a crypto exchange reboot

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Whether FTX’s new chief executive officer actually pushes forward with an effort to restart the bankrupt crypto exchange, its lawyers are billing it for the job.

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Attorneys for FTX have been exploring tax issues surrounding a potential reboot of FTX as well as the cybersecurity implications and testing user experience, according to monthly fee statements from law firm Sullivan & Cromwell LLP.

Their bill for February came to $13.5 million for tasks ranging from recovering billions of assets to cooperating with law enforcement, as well as considering “long-term options for the exchange.”

John J. Ray III, the new CEO of FTX, told the Wall Street Journal in January that he’s exploring restarting FTX.com, the company’s main international exchange, in a bid to recoup value for creditors and customers.

Any effort comes even after Ray, who has for decades steered companies including Enron Corp. through bankruptcy, called it the worst failure of corporate controls he had ever seen.

The collapse left creditors with at least $11.6 billion of claims and destabilized an entire market with ramifications that are still being felt. In the face of those challenges, a restart would be complex.

“With the compliance and risk-management deficiency, building an exchange is extremely challenging,” said Daniel Tramel Stabile, a partner at law firm Winston & Strawn LLP who co-leads its digital-assets group and isn’t involved in the FTX reboot effort.

Still, Ray’s core mission is to create as much value as possible for creditors, which could include assessing whether a revival of the exchange would be preferable to simply selling assets, Stabile said.

It’s unclear whether FTX’s new management team would ultimately go forward with restarting the exchange.

It’s also unclear whether the restart is a limited effort for processing any withdrawals, or a broader effort to relaunch the business, once run by Sam Bankman-Fried, who faces trial in October after pleading not guilty to fraud and campaign-finance law charges.

According to a fee statement in February, Sullivan & Cromwell lawyers worked on a variety of issues related to the effort.

One note mentions analyzing “potential security concerns re: potential FTX exchange reboot.” Another mentions corresponding with Sygnia Inc., the cybersecurity firm that advised FTX after the platform was hit by a post-bankruptcy hack in November, on potential reboot issues.

User experience

Lawyers also corresponded with Ray on tax issues. One fee was to “analyze possible reestablishment of exchange and associated tax consequences,” including US taxing jurisdiction. Other tasks in February included email exchanges with Ray and other advisers on the “creation of mock-up exchange to test user experience.”

The FTX debtors’ group declined to comment on whether the exchange is planning to reboot. Sullivan & Cromwell and Sygnia didn’t respond to requests for comment.

The FTX exchange lacked fundamental financial and accounting controls, and “reconstruction of the debtors’ balance sheets is an ongoing, bottom-up exercise that continues to require significant effort by professionals,” FTX CEO Ray said in a report released Sunday.

In the monthly fee statement, Sullivan & Cromwell said the services it performed for FTX represent “one of the most complicated, multidisciplinary exercises by any law firm in any area of law.”

In traditional, non-digital-asset industries, there are many examples of companies coming back from a Chapter 11 process, such as American Airlines Group Inc. and General Motors Co., Stabile said.

But, for FTX, reviving the exchange as a long-term business would be a “more ambitious plan with a number of obstacles, including regulatory, compliance and reputational challenges,” he said.

“When we talk about restarting — rebooting — it’s not totally clear what they have in mind,” Stabile said. “There could be a rebooting in the sense of reopening the exchange with a limited purpose for getting assets off the exchange.”

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