Hedge funds made a killing on FTX—Then it got complicated

Hedge funds and other distressed investors rejoiced last month when bankruptcy managers said the corporate carcass of FTX, Sam-Bankman Fried’s collapsed crypto exchange, had enough assets to more than make its creditors whole.

Since FTX’s 2022 implosion, hedge funds had scooped up the rights to customers’ frozen accounts for pennies on the dollar, with five firms alone buying claims with a combined face value of about $2.4 billion. That meant a huge payday was in store.

But collecting these winnings won’t be straightforward. Investors are mired in legal battles with some of the original owners of the claims. They allege those former FTX customers abruptly reneged on trades and are suffering from an age-old affliction: seller’s remorse.

The FTX case has thrust investment firms, some for the first time, into the Wild West of crypto. Compared to typical bankruptcy cases—where investors buy claims from relatively staid corporate creditors—firms this time are instead cutting deals with crypto traders.

“We have sellers from all over the world that are interfacing with buyers and the bankruptcy court for the first time and have never experienced a U.S. Chapter 11 case," said Andrew Glantz, chief strategy officer of Xclaim, a platform that has facilitated more than $200 million of FTX claims transactions.

The core problem underlying this and other disputes: FTX claim values have jumped as the prospect of a larger eventual payout has grown, thanks in part to a fierce rebound in crypto prices. That means many FTX clients who sold quickly missed out on getting a better price later or securing a direct payout from the FTX estate.

Many sellers, including some sophisticated crypto players, are now demanding bigger payouts, according to court documents and people familiar with the matter. Others have tried to back out entirely, or have tried to find other buyers to take their claims.

Olympus Peak, a Greenwich, Conn.-based hedge-fund firm that oversees nearly $500 million, filed a lawsuit in November accusing two sellers—Singapore-based Ethereal Tech and Hong Kong-based Burdy Technology—of backing out of agreements to sell their claims.

In its lawsuit, Olympus stated that Ethereal and Burdy signed binding trade confirmations last July, agreeing to sell their claims, valued at a combined $12 million, for 30 cents on the dollar.

Ethereal’s parent company is BitFuFu, a cloud crypto mining platform that started trading this year on the Nasdaq exchange after merging with a blank-check company.

Olympus alleged the sellers dragged their feet in providing necessary information, and that neither seller “took any steps to close their transactions." In October, Olympus Peak alleged, the sellers approached the deal’s broker, asking: Did they need to continue to deal with Olympus or could the firm offer a more attractive proposal?

Lawyers for Ethereal and Burdy didn’t respond to requests for comment. BitFuFu also didn’t respond. In a court filing earlier this year, previous lawyers for the sellers stated that Ethereal and Burdy worked in good faith to complete the sales.

London-based Attestor Capital is estimated to be the top buyer of FTX claims, with a document filed to bankruptcy court in early May showing that a subsidiary of the firm had purchased FTX claims valued at nearly $675 million.

At the end of last month, that total stood at slightly more than $800 million, according to Cherokee Acquisition, which runs Claims Market, a platform that facilitates FTX claims transactions.

Attestor, too, has run into legal headaches. The $8 billion investment firm is pursuing Panamanian firm Lemma Technologies.

A lawsuit filed by Svalbard Holdings, an Attestor subsidiary, in New York state court this year said it agreed at auction last June to buy claims from Lemma. It was set to pay about $58 million, or roughly 35% of the claims’ face value when FTX collapsed.

Months later, however, the suit said that Lemma claimed there were complications over its authority to sell the claims and that president and principal investor Junho Bang, as his name is listed in the lawsuit, “could be exposed to liability to his business associates" if the deals closed. The lawsuit said Lemma began trying to renegotiate the purchase price.

The sale wasn’t completed, and Attestor is seeking damages. In May, Attestor said in court documents that it hadn’t been able to serve Lemma with court papers and requested assistance from authorities in Panama.

Bang didn’t respond to requests for comment. Neither he, Lemma nor a lawyer have responded to Attestor’s lawsuit in court.

Earlier this year, prosecutors in South Korea arrested and indicted Bang, who is also one of the heads of crypto company B&S Holdings, according to the Seoul Southern District Prosecutors’ Office.

Among the charges: deceiving Haru Invest, a crypto-yield platform that suspended user withdrawals last year. Haru Invest didn’t respond to a request for comment sent to company email addresses.

The spats over FTX offer a glimpse into the broader world of claims trading, an opaque market where distressed investors buy the debts of bankrupt companies. Prices are usually agreed on directly between buyers and sellers, who often trade via brokers or marketplaces.

This world has been the preserve of a small group of sophisticated investors, who have scooped up claims tied to bankrupt companies such as California utility PG&E. Several hedge funds scored big paydays a decade ago picking through the remains of collapsed bank Lehman Brothers.

Tom Braziel, a claims broker, sold tens of millions of dollars of FTX claims to big investment firms like Oaktree Capital, Attestor and Silver Point Capital.

He said many of the sellers don’t have lawyers and “don’t realize that a verbal contract to sell a claim is binding under New York law, where most of these hedge funds are based."

With FTX, some disputes have been settled in advance of lawsuits, people familiar with the matter say. One reason: The bankruptcy administrators may withhold distribution to a creditor if there is pending litigation over an FTX claim.

But the lawsuits are nevertheless springing up. Last month, Silver Point, a Greenwich, Conn.-based credit investment firm that oversees $31 billion, sued a seller for reneging on the nearly $1.4 million sale of a claim with a face value of roughly $10.5 million.

Another target of Silver Point: Attestor’s Svalbard unit, which it accuses of swooping in later to take the claim.

—Jim Oberman and Elisa Cho contributed to this article.

Write to Caitlin McCabe at caitlin.mccabe@wsj.com, Alexander Saeedy at alexander.saeedy@wsj.com and Jiyoung Sohn at jiyoung.sohn@wsj.com