When rumors began to circulate on the internet that FTX was in trouble, one of FTX’s clients, Louis d’Oringy, ignored them and turned his attention back to the friends he was entertaining at his Miami Beach apartment.
"Fake news," he recalled. He put down his laptop and left the increasingly anxious cryptocurrency community for a day of relaxation at the beach.
But within a few hours, the mood changed. He came home and saw tweets about FTX customers’ withdrawal requests being rejected.
"Things were getting hectic," he recalled. As the sun set through the floor-to-ceiling windows, the then 31-year-old wondered how things would play out next.
“Then,” he recalled, “all of a sudden we couldn’t withdraw the money we had at FTX.”
D'Oringy is one of more than a million victims trying to recover lost funds from FTX. FTX has collapsed since co-founder Sam Bankman-Fried’s financial fraud came to light.
“At the time, it felt like the end of the crypto world,” he said. "The outlook is very pessimistic, no one thinks Bitcoin will hit another all-time high."
But during cryptocurrency’s darkest hour, d’Oringy’s thinking began to shift.
Louis d'Origny has purchased over 1,000 FTX bankruptcy claims since December 2022
"My view is that Sam didn't have enough time to commit this fraud and lose money. I'm pretty sure they were able to recover a significant amount of money," he said.
D'Oringy saw an opportunity: Many creditors like him wanted to get at least some of their money back, but there was no clarity and no guarantees on how the exchange would raise a total $8.7 billion shortfall when it declared bankruptcy. In other words, creditors may sell their claims at a discount.
So what if they could hedge their claims?
Debt trading is both a risk and an opportunity
D'Oringy had used his own former boutique fund, Arceau, to buy some of the Celsius bankruptcy claims, but he was new to the field. Most investors he knew didn’t want to wade into FTX’s murky waters—no one was willing to put up money to buy the claims.
But within weeks of the Miami incident, d'Oringy began using his own money to buy FTX positions from hedge funds and demanded liquidation.
"We don't know anything more about the bankruptcy. We took a big risk, and I just said it and did it," d'Oringy told Fortune.
Trading bankruptcy claims is a high-risk, high-reward strategy. As Lehman Brothers, Enron and General Motors went bankrupt, debt traders are believed to have made hundreds of millions, if not billions, of dollars from these once-giant companies. But more often than not, the debt may end up being worthless.
"The end result was much better than I imagined," he said.
When a company goes bankrupt, creditors face lengthy bankruptcy proceedings in court with no guarantee of a percentage of their claims. Instead, many choose to immediately sell their claims for cash to a buyer willing to take the risk of a collapse in the value of the claims, with the buyer's losses depending on how much of the debt the bankruptcy administrator is able to recover.
Calculating the exact timing and value of the debt transactions has been complicated since FTX filed for Chapter 11 bankruptcy in the District Court of Delaware on November 11, 2022. Industry traders told Fortune that some debt transactions were conducted on online platforms, while others were private transactions where buyers were not required to submit transfer applications immediately, creating delays, while some debt transactions were simply reported as their own claims.
On Claims Market, the industry’s main online trading platform, more than $439 million worth of claims had been exchanged in 49 transactions as of March 28. Meanwhile, hedge funds had bought more than $2.3 billion worth of deeply discounted claims as of March 20, according to court records.
While the bankruptcy court has not yet set a specific date for creditors to be paid, it now appears likely that they will be paid in full. "It looks like customers are on track to be paid in full," Bankman-Fried told the Manhattan court at Thursday's sentencing.
When claims are first approved, creditors sell claims at low prices. More than 60 claims with a total value of more than $1 million have transacted on the market – selling at around 10% in November 2022 and now at 93%, signaling growing confidence in repayment.
Meanwhile, two people with knowledge of the debt transactions told Fortune that they are estimated to have been driven by rising cryptocurrency values and the sale of FTX’s stake in artificial intelligence startup Anthropic for more than $880 million. The value of the claim may exceed its original value by 120% to 140%.
A huge bet with a return rate of over 700%
The appointment of John J. Ray III as the new CEO as FTX filed for bankruptcy also fueled interest in the debt, debt buyers told Fortune. “He immediately started selling all the assets that were uncertain (price fluctuations), and institutional debt buyers liked that because they didn’t want Bitcoin,” d’Oringy explained.
According to data submitted in the FTX case report, FTX has recovered approximately $7 billion in assets to date, including liquidated cryptocurrencies, 38 properties in the Bahamas, and $2.6 billion in cash.
The estate includes approximately 59 million SOL and 21,482 Bitcoin, tokens that have risen by approximately 1,000% and 343%, respectively, since the company filed for bankruptcy. FTX will sell 41 million SOL to institutional investors at a 68% discount to the current market price, worth approximately $7.65 billion as of this writing. This has angered some victims, including Sunil Kavuri, who criticized Bankman-Fried for "continuously lying that we would all be adequately punished" at sentencing.
As of March 20, Chapter 11 filings show d'Oringy had purchased about $29 million worth of claims. He said the bonds were purchased for $3.5 million with personal funds: "It was a family office investment of mine and some friends." The return on the investment was more than 700 percent.
d'Oringy purchased his first bond at Christmas when he was reunited with his family. He recalls the worried looks on his parents' faces, who teased him that the family might be bankrupt by next Christmas because of his gamble. The claim, worth nearly $3 million, settled on Dec. 28, 2022, for 6% of its original value, according to the contract seen by Fortune.
So far, the buyers poised to reap the biggest returns from FTX’s remains are hedge funds that specialize in distressed debt. Attestor, Baupost and Farallon are leading the race, having purchased more than $520 million, $518 million and $346 million worth of claims, respectively, as of March 20. The funds used other entity names, people familiar with the matter confirmed.
Another big player in the gamble, and a friend of d'Oringy's, is Thomas Braziel, a bankruptcy claim broker at 117 Partners who buys claims on behalf of some of the largest hedge funds in the market. Braziel said his first trade was on Nov. 12, 2022, before the bankruptcy was formally filed. He spent about $240,000 to buy $8 million in claims (about 3% of their stated value), while another trade cost about $210,000 to buy $3.5 million in debt.
Debt trading is not easy
The current valuations are a far cry from what they were when bond buyers narrowly avoided disaster on April 27 last year.
In a Zoom call with debtors in Singapore, d'Oringy was close to finalizing a $3 million debt purchase agreement. During the call, news broke that the IRS had filed a $44 billion claim against FTX, accusing it of evading taxes.
"You know, during the call, we were freaking out," he said. But he ultimately decided to buy the debt. "This is really, really scary."
Although the IRS reduced the claim to $20.4 billion, creditors in this case would still face bankruptcy if no objection is filed. "We would get nothing," d'Oringy said.
However, FTX has launched a legal battle over the claim, asking the court to dismiss it: it "may indefinitely halt the debtor's progress and any distributions to customers and other creditors." In other words, since the IRS's claim will Fraud victims pay out of pocket, so that's unlikely to happen, sources tell Fortune.
In July, FTX launched its own public portal for customers to file claims. But in the early days of the deal, there was limited information about which assets could be liquidated or how claims could be verified. Many appear to be crowdsourced via Twitter, and KYC is conducted in a time-consuming and ad hoc manner, d'Oringy said.
“It’s really, really difficult to buy claims,” said Braziel, who said he purchased at least two or three claims that turned out to be fraudulent.
Because of the speed with which claims were verified, d'Oringy purchased 40 claims in the first year of trading. That gave him another idea: speeding up the due diligence process through automation. In December, he co-founded his own portal, FTX Creditor, which he describes as a "custom CRM, KYC and due diligence solution," which he says has reduced the verification process from days to 30 minutes . The company currently has 14 employees spread across all continents who answer calls from creditors 24 hours a day.
The company, which specializes in claims under $100,000, aims to provide retail investors with a convenient way to complete sales over a 30-minute phone call, rather than being tied up in lengthy trade confirmations.
FTX Creditor has purchased nearly 1,000 claims worth about $100 million since December, public records show. Assuming a purchase price of 70% of the debt, that would mean the company would make a profit of about $30 million, according to market estimates — some of which may have been proceeds from d'Oringy's earliest debt purchases.
But d'Oringy explained that rising debt values have slowed transactions somewhat. Still, more than $6 million worth of debt is on the market this week alone, and Braziel is still buying debt at a 70% discount, according to a contract seen by Fortune.
D'Oringy decided to continue running FTX Creditor after FTX, but once those claims were paid off, he would take a vacation first.
Is it calculated wisdom to put money into these claims? K. But in D'Oringy's opinion, these situations arise just by chance. He used a word that was completely different from intelligence: "luck."
