A $700 Million Bonanza for the Winners of Crypto’s Collapse: Lawyers

The collapse in cryptocurrency prices last year forced a procession of major firms into bankruptcy, trigging a government crackdown and erasing the savings of millions of inexperienced investors.

But for a small group of corporate turnaround specialists, crypto’s implosion has become a financial bonanza.

Lawyers, accountants, consultants, cryptocurrency analysts and other professionals have racked up more than $700 million in fees since last year from the bankruptcies of five major crypto firms, including the digital currency exchange FTX, according to a New York Times analysis of court records. That sum is likely to grow significantly as the cases unfold over the coming months.

Large fees are common in corporate bankruptcies, which require complex and time-intensive legal work to untangle. But in the crypto world, the mounting fees have sparked widespread outrage because many of the people owed money are amateur traders who lost their personal savings, rather than corporations with the ability to weather 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 “exorbitant and ridiculous,” said Daniel Frishberg, a 19-year-old investor who lost about $3,000 when the 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 taking notes.”

To tally the overall fees, The Times analyzed more than 5,000 pages of billing statements and other court documents from the bankruptcies of the crypto firms FTX, Celsius Network, Voyager Digital, BlockFi and Genesis Global. The totals include fees that a bankruptcy judge has formally approved as well as some that are awaiting approval and could be reduced.

Among the biggest winners from the five cases are two major law firms. Sullivan & Cromwell, which is managing FTX’s bankruptcy, has charged more than $110 million in legal fees and recorded over $500,000 in expenses. Kirkland & Ellis has billed $101 million for its work on three of the crypto bankruptcies, with $2.5 million in expenses, according to The Times’s analysis.

More than 50 other professionals have also profited, including specialized start-ups that analyze crypto transactions as well as accountants, consultants and investment bankers, according to the analysis.

The ballooning costs reflect the broken promises of crypto, a renegade industry that was pitched to amateur traders as a force for equality in the ultra-stratified world of high finance. After months of rising prices and social media hype, the crypto market last year spiraled into a crisis that cost investors billions in savings and allowed lawyers, bankers and other traditional power brokers to reap immense profits.

As the industry has struggled to rebound, the bankruptcy fees have come under intense scrutiny from the hyper-online community of crypto obsessives, who have spent hundreds of hours analyzing billing statements that the companies are required to file publicly in court.

In FTX’s bankruptcy, creditors have raised concerns about the hourly rates charged by Sullivan & Cromwell, which reach as high as $595 for paralegals and $2,165 for partners. Last fall, creditors of Voyager filed a motion complaining that lawyers overseeing the bankruptcy were expensing thousands of dollars per person for hotel stays and billing $10,000 a month for catering.

Lawyers and other bankruptcy professionals argue that they are charging market rates for difficult work that will ultimately help recover the money that crypto investors lost. In the FTX case, Sullivan & Cromwell has said it has scraped together more than $7 billion in assets, though it’s unclear how much of that total will go back 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 made the cases more complex and time-consuming, driving up costs.

A Kirkland & Ellis spokeswoman declined to comment.

Over the past few decades, corporate bankruptcy has become a big business. John J. Ray III, the executive whom Sullivan & Cromwell tapped to run FTX after its collapse, has made a career of managing distressed companies like Enron and Fruit of the Loom. He has billed $2.8 million for his work on the FTX bankruptcy, court records show.

Bankruptcy cases were not always so expensive. The average hourly rate for bankruptcy lawyers 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 the 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 tumbled last year, Celsius and Voyager, which had styled themselves as experimental crypto banks, were the first to go under, costing investors more than $6 billion. FTX failed in November, erasing as much as $9 billion in user funds. That was followed by the demise of BlockFi and Genesis, which had also overseen billions of dollars.

Lawyers, accountants and consultants sprang into action. Kirkland & Ellis is managing the Celsius, Genesis and Voyager bankruptcies, while Alvarez & Marsal, a turnaround management firm, has charged more than $125 million for its work on FTX, Celsius and Genesis.

Alvarez & Marsal didn’t respond to requests for comment.

The fees drawing the most scrutiny have come in the bankruptcy of FTX, the largest and highest-profile of the crypto firms that failed. FTX’s case has cost more than $325 million so far, in the most expensive of the five bankruptcies, ahead of the roughly $200 million in fees that Celsius has generated.

In several of the cases, bankruptcy judges have appointed fee examiners — outside lawyers who monitor costs and work with the firms to eliminate unnecessary spending.

In June, Katherine Stadler, the FTX fee examiner, wrote that the bankruptcy was “on track to be very expensive by any measure.” She noted that the spending up to that point amounted to 10 percent of FTX’s remaining cash.

Ultimately, Ms. Stadler called for only modest reductions in spending. Fee examiners in the Celsius and Voyager cases have made similar recommendations.

Creditors have called for more aggressive cuts. In January, a group of Voyager customers filed a motion complaining about the tens of thousands of dollars in meal and hotel expenses filed by lawyers at Kirkland & Ellis. They argued that the lawyers were also duplicating one another’s efforts, repeatedly charging for the same work. In response, Kirkland & Ellis agreed to cap nightly hotel expenses at $550 and limit catering costs to $20 per person.

A few months later, Kirkland & Ellis angered investors when it billed nearly $100,000 for 77 hours spent considering a possible lawsuit against Tiffany Fong, a Celsius customer and social media influencer who had obtained leaked information about the bankruptcy process. No suit has been filed.

“They essentially used creditor funds in an attempt to sue me, a creditor,” Ms. Fong said. “It ended up being a complete waste.”

The fee debate has at times made the cases more expensive. The same month that Kirkland & Ellis pursued Ms. Fong, it billed $230,122 for work involving “fee matters.”

In the Celsius bankruptcy, Mr. Frishberg, the 19-year-old creditor, has filed a series of motions contesting various issues, including fees.

By Mr. Frishberg’s own calculations, Kirkland & Ellis billed nearly $50,000 responding to his filings last September and October — about 16 times the amount that he lost in the first place.