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Vulture investors who bought up bankruptcy claims from FTX could see huge returns


Since the collapse of cryptocurrency exchange FTX, much of the coverage has focused on the crimes and punishment of founder Sam Bankman-Fried. He was recently sentenced to 25 years in prison. But as Alexi Horowitz-Ghazi of our Planet Money podcast reports, FTX customers have been caught in a feeding frenzy over the remains of the bankrupt company.

ALEXI HOROWITZ-GHAZI, BYLINE: When FTX customer Bhagumshi Kannegundla heard that FTX filed for bankruptcy back in November of 2022, he found out two things - first, that all FTX accounts had been frozen and, second, that he had more than $170,000 worth of cryptocurrency on the platform.

BHAGUMSHI KANNEGUNDLA: I was just like, oh, my God, I think I'm going to lose everything.

HOROWITZ-GHAZI: But Bhagumshi soon learned he was now the owner of an FTX bankruptcy claim, basically an IOU that FTX was obligated to pay him back if and when they could recover enough money to do so. And he found out he was allowed to sell that IOU.

KANNEGUNDLA: I was just like, wait. There's a way to sell this toxic asset. I was like - I was in disbelief.

HOROWITZ-GHAZI: Here is how this works. Chapter 11 bankruptcy offers a company in distress a way to hit the pause button and regroup. The company comes up with a plan to either restructure or to sell assets and pay off as many debts as possible. And the company's creditors, the people who are owed money, are given claims. And because you can buy and sell these claims, some so-called distressed asset investors view bankruptcy as an opportunity.

THOMAS BRAZIEL: I kind of liken it to, like, economic dumpster diving.

HOROWITZ-GHAZI: Thomas Braziel brokers trades between bankruptcy claim buyers and sellers for a commission. He says that distressed investors are making a kind of bet that a bankrupt company may look more hopeless than they really are. So claims that start out cheap could rise in value. And at first, he says, the FTX bankruptcy looked pretty risky.

BRAZIEL: But I just sort of thought, like, you know, for the right price, we would stick our toes into the water on this.

HOROWITZ-GHAZI: So Thomas started digging online for valuable assets the FTX estate might be able to sell off. He finds PR announcements for big investments, sees that the company still has a lot of crypto. He thinks the FDX creditors may eventually get around $0.10 for every dollar they are owed. So he decides to start bidding at three to $0.06 on the dollar.

BRAZIEL: And I'm the only person even putting in a bid, so that's usually a good place to start.

HOROWITZ-GHAZI: The market quickly grew. And by the spring of last year, several big, traditional distressed investment firms started to get in on the action, helping to push the price up from $0.20 on the dollar to 30 to 50. And all the while, the FTX estate was finding assets.

BRAZIEL: All of 2023 was nothing but good news. Every time you'd wake up - oh, my gosh - they'd have this asset they didn't know about or they settled this for $100 million or they recovered that, and that's another $50 million. It's like, holy moly.

HOROWITZ-GHAZI: And lastly, the crypto market has seen a big rebound. By January of this year, the FTX estate announced it could cautiously predict it would be able to pay back FTX creditors the full value of their claims - 100 cents for every dollar they're owed. Lawyers for Sam Bankman-Fried use this news to try to argue for a lower prison sentence but were unsuccessful. Many argued that FTX customers will never be made whole because claim amounts were locked in during a collapse in crypto prices, and some customers have gone bankrupt in the meantime. As for distressed asset investors like Thomas Braziel, they could potentially see huge returns from the bankruptcy, as high as 10X for people who bought in early.

BRAZIEL: I think this is the biggest thing that ever happened since the invention of the whole idea of buying these.

HOROWITZ-GHAZI: As for Bhagumshi Kannegundla, the FTX customer from the top, he ended up selling his FTX bankruptcy claim worth around $170,000 for just $19,000. And he says he hasn't paid attention to the bankruptcy since.

KANNEGUNDLA: After I sold my claim, I don't even think about it. I felt like as if a big weight has been lifted off my shoulders.

HOROWITZ-GHAZI: Bhagumshi reinvested that money into crypto, which has made a lot of gain, but not enough yet to erase his FTX losses.

Alexi Horowitz-Ghazi, NPR News. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

Alexi Horowitz-Ghazi is a host and reporter for Planet Money, telling stories that creatively explore and explain the workings of the global economy. He's a sucker for a good supply chain mystery — from toilet paper to foster puppies to specialty pastas. He's drawn to tales of unintended consequences, like the time a well-intentioned chemistry professor unwittingly helped unleash a global market for synthetic drugs, or what happened when the U.S. Patent Office started granting patents on human genes. And he's always on the lookout for economic principles at work in unexpected places, like the tactics comedians use to protect their intellectual property (a.k.a. jokes).