FTX Creditor Sues Hedge Fund Over Claim Payout

An FTX customer has taken hedge fund Olympus Peak to court, accusing the firm of underpaying him for his bankruptcy claim. Nikolas Gierczyk, a California-based FTX creditor, sold his $1.59 million claim last year at a 42% discount but now claims Olympus Peak stands to profit significantly from their agreement.

In a lawsuit filed Thursday in Manhattan federal court, Gierczyk alleges that Olympus Peak owes him additional funds following FTX’s approval of a bankruptcy reorganization plan expected to return between 129% and 146% of customer claims.

Dispute Over Claim Agreement

The crux of the lawsuit centers on Gierczyk’s argument that his agreement with Olympus Peak entitles him to further recovery if the value of his claim increases. According to the complaint, Gierczyk negotiated a provision in his deal allowing him to receive a portion of any excess distribution from the bankruptcy. Specifically, he asserts that Olympus Peak agreed to buy any additional claim at the same 42% discount. The agreement reads:

“If the Claim is ultimately allowed […] in an amount that is greater than the Claim Amount (such additional amount is the ‘Excess Claim Amount’), Buyer will purchase such Excess Claim Amount by paying […] an amount equal to the Excess Claim Amount multiplied by the Purchase Rate.”

Despite this clause, Gierczyk claims that Olympus Peak has refused to honor the terms of the deal, leaving him at a significant financial disadvantage as the hedge fund stands to gain over $1 million from his original claim.

Hedge Funds and Distressed Assets

It is common practice for hedge funds to buy distressed assets, like bankruptcy claims, at a discount. This allows creditors to receive immediate cash, while the funds wait for lengthy bankruptcy processes to potentially profit from payouts. Olympus Peak, by purchasing claims at a steep discount, is well-positioned to capitalize on FTX’s massive recovery pool.

Unusually for a bankruptcy case, FTX has accumulated far more money than needed to cover customer losses. The company, which collapsed in November 2022 amid allegations of fraud and misuse of funds, has managed to recover billions through asset sales and rising cryptocurrency prices. On Monday, a bankruptcy judge approved FTX’s restructuring plan, clearing the firm to begin redistributing roughly $16 billion to its creditors.

A Unique Recovery Situation

What makes FTX’s case particularly unusual is the potential for customers to receive more than 100% of their claims. Bankruptcy courts typically see creditors receiving fractions of what they are owed, but FTX’s recovery efforts and favorable market conditions have created a rare scenario where payouts could exceed original losses. This situation is what Gierczyk hopes to leverage in his lawsuit against Olympus Peak, claiming that the hedge fund is profiting unfairly from their agreement.

The legal battle between Gierczyk and Olympus Peak highlights the complexities of bankruptcy claims and the strategies hedge funds use to profit from distressed assets. With FTX poised to redistribute billions to creditors, the case will likely draw further attention as more creditors seek to recover losses from the crypto exchange’s dramatic downfall.