The fall in cryptocurrency prices last year forced a procession of major companies into bankruptcy, triggering a government crackdown and wiping out the savings of millions of inexperienced investors.
But for a small group of corporate turnaround specialists, the crypto implosion has turned into a financial bonanza.
Lawyers, accountants, consultants, cryptocurrency analysts and other professionals have earned more than $700 million in fees since last year from the bankruptcy of five major crypto companies, including digital currency exchange FTX, according to an analysis by New York Times on court records. That amount is likely to rise significantly as cases unfold in the coming months.
Large fees are common in corporate bankruptcies, which require complex and intensive legal work to resolve. But in the crypto world, the rising fees have sparked widespread outrage because many of the people in debt are novice traders who have lost their personal savings, rather than corporations capable of facing a financial crisis. Every dollar in fees is deducted from the pool of funds that will be returned to creditors at the end of the bankruptcies.
The fees are “extremely high and ridiculous,” said Daniel Frishberg, a 19-year-old investor who lost about $3,000 when crypto company Celsius Network filed for bankruptcy last year. “At every hearing, they have an army of people there, and most of them don’t need to be there. You don’t need 20 people writing.”
To calculate the total fees, The Times reviewed more than 5,000 pages of billing statements and other court documents from the bankruptcies of crypto firms FTX, Celsius Network, Voyager Digital, BlockFi and Genesis Global. The totals include fees that have been formally approved by a bankruptcy judge as well as some that are awaiting approval and may be reduced.
Among the biggest winners from the five cases were two major law firms. Sullivan & Cromwell, which handled FTX’s bankruptcy, billed more than $110 million in legal fees and recorded more than $500,000 in costs. Kirkland & Ellis billed $101 million for its work on three of the crypto bankruptcies, with $2.5 million in expenses, according to an analysis by The Times.
More than 50 other professionals also benefited, including specialized start-ups analyzing crypto transactions as well as accountants, consultants and investment bankers, according to the review.
The ballooning costs reflect the broken promises of crypto, a treacherous industry that has been tasked with novice traders as a force for equality in the ultra-stratified world of high finance. After months of soaring prices and hype on social media, the crypto market last year spiraled into a crisis that cost investors billions in savings and allowed lawyers, bankers and other traditional power broker who reaped enormous profits.
As the industry struggles to recover, the bankruptcy filings have come under intense scrutiny from the hyper-online community of crypto obsessives, who have spent hundreds of hours reviewing the billing statements that companies are required to file. of the public in court.
In the FTX bankruptcy, creditors raised concerns about the hourly rates charged by Sullivan & Cromwell, which reach as high as as $595 for paralegals and $2,165 for partners. Last fall, Voyager creditors filed a motion complaining that bankruptcy attorneys spend thousands of dollars per person for hotel stays and charge $10,000 per month for catering.
Lawyers and other bankruptcy professionals argue that they charge market rates for the hard work that will ultimately help recover money lost by crypto investors. In the case of FTX, Sullivan and Cromwell say it has been scratched more than $7 billion in assets, although it is unclear how much of that total will return to creditors.
A spokesman for FTX’s new management said the bankruptcy was “extraordinary in almost every conceivable way,” requiring professionals to recreate records from scratch and track down missing funds. Andrew Dietderich, a partner at Sullivan & Cromwell, said in a statement that the lack of clear crypto regulations has made cases more complex and time-consuming, driving up costs.
A Kirkland and Ellis spokesman declined to comment.
Over the past few decades, corporate bankruptcy has become big business. John J. Ray III, the executive tapped by Sullivan & Cromwell to run FTX after it collapsed, made a career of managing distressed companies like Enron and Fruit of the Loom. He was charged $2.8 million for his work in the FTX bankruptcy, court records show.
Bankruptcy cases are not always very expensive. The average hourly rate for bankruptcy attorneys at Sullivan & Cromwell rose to $2,000 this year from $1,300 in 2018, according to Reorg, a credit and bankruptcy data provider. And research by legal experts Lynn LoPucki and Joseph Doherty shows that professional fees in bankruptcies grew about 10 percent a year between 1998 and 2007.
When the crypto market crashed last year, Celsius and Traveler, who styled themselves as experimental crypto banks, were the first to go down, costing investors more than $6 billion. FTX failed in November, wiping out up to $9 billion in user funds. That was followed by the demise of BlockFi and Genesis, which also managed billions of dollars.
Lawyers, accountants and consultants stepped into action. Kirkland & Ellis handled the Celsius, Genesis and Voyager bankruptcies, while Alvarez & Marsal, a turnaround management firm, billed more than $125 million for its work on FTX, Celsius and Genesis.
Alvarez and Marsal did not respond to requests for comment.
The fees that drew the most scrutiny came in the bankruptcy of FTX, the largest and highest profile of crypto firms to fail. The FTX case is worth more than $325 million so far, the costliest of the five bankruptcies, before about $200 million in fees accrued to Celsius.
In some of the cases, bankruptcy judges have appointed fee examiners – outside lawyers who track costs and work with companies to eliminate unnecessary spending.
In June, Katherine Stadler, the fee examiner at FTX, wrote that bankruptcy is “on track to be very expensive by any measure.” He noted that spending up to that point amounted to 10 percent of FTX’s remaining cash.
In the end, Ms. Stadler for only moderate spending cuts. Fee reviewers in the Celsius and Voyager cases 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 food and hotel expenses filed by lawyers at Kirkland & Ellis. They argued that lawyers were also duplicating each other’s efforts, charging repeatedly for the same work. In response, Kirkland & Ellis agreed to cap nightly hotel expenses at $550 and limit catering expenses to $20 per person.
A few months later, Kirkland & Ellis angered investors when this happened charged nearly $100,000 for 77 hours spent considering a possible case against Tiffany Fong, a Celsius customer and social media influencer who obtained leaked information about the bankruptcy process. No charges have been filed.
“Essentially they used creditor funds in an attempt to sue me, a creditor,” Ms. Fong. “It turned out to be absolute rubbish.”
The fee debate has sometimes made lawsuits expensive. In the same month that Kirkland and Ellis pursued Ms. Fong, it charged $230,122 for work related to “fee matters.”
In the Celsius bankruptcy, Mr. Frishberg, the 19-year-old creditor, filed a series of motions contesting various issues, including fees.
By Mr.’s own calculations. Frischberg, Kirkland and Ellis charged nearly $50,000 in response to his filings in September and October — about 16 times the amount he initially lost.
