He made a $25 million profit with over 700% return by betting on FTX bankruptcy claims

Original Title: Hedge funds that scooped up FTX bankruptcy claims are looking at 9-figure paydays. One investor shares how he could rake in $25 million

Author: Niamh Rowe, Fortune Magazine

Translation: Luffy, ForesightNews

When rumors began circulating online that FTX was in trouble, one of its customers, Louis d'Oringy, paid little attention and instead turned his focus back to the friends he was hosting at his Miami Beach apartment.

“Fake news,” he recalled. He put down his laptop and left the increasingly anxious cryptocurrency community to relax on the beach for the day.

But a few hours later, the mood changed. He returned home to see tweets about FTX customers' withdrawal requests being denied.

“Things got increasingly chaotic,” he recalled. As the sun set through the floor-to-ceiling windows, the then 31-year-old wondered how things would unfold next.

“Then,” he recalled, “suddenly we couldn’t withdraw the money we had in FTX.”

D'Oringy is one of over a million victims trying to recover lost funds from FTX. The exchange collapsed after the financial fraud of co-founder Sam Bankman-Fried was exposed.

“At that time, it felt like the end of the crypto world,” he said. “The outlook was very bleak, and no one thought Bitcoin would hit an all-time high again.”

But in the darkest moments of cryptocurrency, D'Oringy’s thoughts began to shift.

Louis d'Oringy has purchased over 1,000 FTX bankruptcy claims since December 2022.

“My view is that Sam didn’t have enough time to execute this fraud and lose money. I’m very confident they can recover a significant amount,” he said.

D'Oringy saw an opportunity: many creditors like him wanted to recover at least some of their funds, but there was no clear information on how the exchange would raise the total $8.7 billion funding gap at the time of the bankruptcy announcement, nor any guarantees. In other words, creditors might sell their claims at a low price.

So, what if they could hedge their claims?

Claim trading is both risk and opportunity

D'Oringy had previously purchased some Celsius bankruptcy claims with his own boutique fund, Arceau, but he was still a novice in this field. Most investors he knew were reluctant to wade into the murky waters of FTX—no one wanted to put up money to buy these claims.

But within weeks of the Miami incident, D'Oringy began using his own money to buy FTX positions from hedge funds and requested liquidation.

“We didn’t know any more information about the bankruptcy. We took a huge risk, and I just said let’s do it,” D'Oringy told Fortune.

Trading bankruptcy claims is a high-risk, high-reward strategy. Following the bankruptcies of Lehman Brothers, Enron, and General Motors, claim traders are believed to have made hundreds of millions or even billions from these once-mighty companies. But more often than not, claims can end up being worthless.

“The final outcome is much better than I expected,” he said.

When a company goes bankrupt, creditors face a lengthy court process, and there’s no guarantee of how much of their claims will be paid. Instead, many choose to sell their claims for cash to buyers willing to take on the risk of a collapse in claim value, with the buyers’ losses depending on how much the bankruptcy trustee can recover.

Since FTX filed for Chapter 11 bankruptcy in the Delaware District Court on November 11, 2022, calculating the exact timing and value of claim trading has been very complex. Industry traders told Fortune that some claim trades are conducted on online platforms, while others are private transactions, where buyers do not need to submit transfer requests immediately, leading to delays, and some claim trades are simply reported as their own claims.

As of March 28, there have been 49 trades on the industry’s major online trading platform, Claims Market, exchanging claims worth over $439 million. Meanwhile, according to court records as of March 20, hedge funds have purchased heavily discounted claims worth over $2.3 billion.

Although the bankruptcy court has yet to determine the specific date for creditors to receive payments, it now appears likely that they will receive full repayment. “It looks like customers are expected to receive full repayment,” Bankman-Fried told the Manhattan court during Thursday’s ruling.

When claims were first approved, creditors sold their claims at low prices. Over 60 claims totaling more than $1 million have been traded—selling for about 10% of their value in November 2022, now priced up to 93%, indicating growing confidence in repayment.

Meanwhile, two individuals familiar with the claim trading situation told Fortune that due to the rise in cryptocurrency values and the sale of FTX's stake in the AI startup Anthropic for over $880 million, these claims could exceed their initial value, reaching 120% to 140%.

A gamble with over 700% returns

Claim buyers told Fortune that the appointment of John J. Ray III as the new CEO when FTX filed for bankruptcy also sparked interest in the claims. “He immediately started selling all uncertain (price volatile) assets, which institutional claim buyers liked because they didn’t want Bitcoin,” D'Oringy explained.

According to data submitted in the FTX case report, FTX has so far recovered about $7 billion in assets, including liquidated cryptocurrencies, 38 properties in the Bahamas, and $2.6 billion in cash.

This estate includes about 59 million SOL and 21,482 Bitcoin, which have risen approximately 1,000% and 343%, respectively, since the company filed for bankruptcy. FTX plans to sell 41 million SOL to institutional investors at a price 68% lower than the current market price, valued at about $7.65 billion at the time of this article's publication. This angered some victims, including Sunil Kavuri, who criticized Bankman-Fried for “constantly lying during the ruling, saying we would all be fully compensated.”

As of March 20, Chapter 11 filings show that D'Oringy has purchased claims worth about $29 million. He stated that these claims were purchased with personal funds for $3.5 million: “This is an investment from my family office and some friends.” The return on this investment exceeds 700%.

D'Oringy made his first claim purchase during Christmas with his family. He recalled the worried expressions on his parents' faces, who joked that due to his gamble, the whole family might go bankrupt by next Christmas. According to contracts seen by Fortune, this claim was worth nearly $3 million and was settled at 6% of its original value on December 28, 2022.

So far, the buyers expected to gain the most from the FTX wreckage are hedge funds specializing in distressed debt. As of March 20, Attestor, Baupost, and Farallon have purchased claims worth over $520 million, $518 million, and $346 million, respectively, leading the competition. Sources confirmed that these funds used other entity names.

Another major player in this gamble, also a friend of D'Oringy, is Thomas Braziel, a bankruptcy claims broker at 117 Partners, who buys claims on behalf of some of the largest hedge funds in the market. Braziel said his first transaction was on November 12, 2022, before the bankruptcy was officially filed. He spent about $240,000 to buy $8 million in claims (about 3% of their stated value), while another transaction cost about $210,000 to buy $3.5 million in debt.

Claim trading is not easy

Current valuations differ significantly from those when claim buyers nearly faced disaster on April 27 last year.

During a Zoom call with a debtor in Singapore, D'Oringy was about to finalize a $3 million claim purchase agreement. During the call, news broke that the IRS had filed a $44 billion claim against FTX, accusing it of tax evasion.

“You know, we were scared during the call,” he said. But he ultimately decided to go ahead with the claim purchase. “It was really, really scary.”

Although the IRS reduced the claim amount to $20.4 billion, creditors would still face bankruptcy if no objections were raised. “We would end up with nothing,” D'Oringy said.

However, FTX has launched a legal battle over the claim, asking the court to dismiss it: it would “potentially indefinitely halt the debtor's progress and any distributions to customers and other creditors.” In other words, since the IRS's claim would force defrauded victims to pay out of pocket, this is unlikely to happen, sources told Fortune.

In July, FTX opened its public portal for customers to file claims. But in the early stages of trading, information about which assets could be liquidated or how to verify claims was limited. D'Oringy said many seemed to be crowdsourced through Twitter, and the KYC process was both time-consuming and a makeshift method.

Braziel said, “Buying claims is really, really difficult,” noting that at least two or three of the claims he purchased ultimately turned out to be fraudulent.

Due to the rapid pace of verifying claims, D'Oringy purchased 40 claims in the first year of trading. This gave him another idea: to speed up the due diligence process through automation. In December of last year, he co-founded his own portal, FTX Creditor, which he describes as a “custom CRM, KYC, and due diligence solution,” saying the portal has reduced the verification process from days to 30 minutes. The company currently has 14 employees across continents, available 24/7 to take calls from creditors.

The company specializes in claims under $100,000, aiming to provide a convenient way for retail investors to complete sales through a 30-minute call, avoiding being stuck in lengthy transaction confirmations.

Public records show that since December, FTX Creditor has purchased nearly 1,000 claims worth about $100 million. Based on market estimates, assuming a purchase price of 70% of the debt, this means the company would make about $30 million in profit—part of which may come from the claims D'Oringy purchased early on.

But D'Oringy explained that the rising value of claims has slowed down the pace of trading. However, according to a contract seen by Fortune, just this week, claims worth over $6 million were purchased in the market, while Braziel continues to buy claims at a 70% discount.

D'Oringy decided to continue operating FTX Creditor after FTX, but once these claims are repaid, he plans to take a vacation first.

Was putting money into these claims a well-considered smart move? Perhaps. But in D'Oringy’s view, the emergence of these situations was merely coincidental. He used a word that is entirely different from intelligence: “luck.”