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Madoff, MF Global Offer Guidance as FTX Faces CFTC in Bankruptcy

Dec. 15, 2022, 5:40 PM

The Commodity Futures Trading Commission’s lawsuit against bankrupt FTX sets up the government as a potential creditor, but other high-profile Chapter 11 cases provide a glimpse of how the dynamic will play out.

Bankruptcies that followed large-scale financial scandals, from Bernie Madoff to MF Global, could provide a roadmap for how the US derivatives regulator can go after penalties tied to and its affiliates.

FTX’s legal troubles intensified this week after the barrage of government enforcement actions, including the arrest of founder Sam Bankman-Fried in the Bahamas. The CFTC lawsuit landed on the same day the Securities and Exchange Commission and the Justice Department filed civil and criminal suit against Bankman-Fried, respectively.

Unlike the SEC or the DOJ, the CFTC named FTX as a defendant. If the CFTC succeeds in its suit against FTX, the agency could become one of the firm’s largest creditors, or find itself in a separate claims process outside of bankruptcy altogether.

The CFTC said Tuesday in a complaint that Bankman-Fried and the FTX entities “comingled, mishandled, and misappropriated” customers’ funds. Their actions violated the Commodities Exchange Act, the CFTC said.

The laundry list of government agencies vying for control over FTX’s remains is among the biggest challenges for John Ray, FTX’s new CEO who’s spearheading its restructuring.

“For purposes of efficiency, there will need to be some coordination among the John Ray’s team, the creditors’ committee and the CFTC regarding recovery actions against related parties, keeping in mind that their common goal should be maximizing creditor and customer recoveries,” said Rick Hyman, a partner at Crowell & Moring LLP.

Police Power

The CFTC is seeking restitution for defrauded customers and civil monetary penalties to be paid to the government.

Despite the surge of enforcement this week, FTX entities’ Chapter 11 cases, including that of affiliate Alameda Research, is expected to keep chugging along. Bankman-Fried, who is bearing the brunt of the legal actions, isn’t a debtor in the case.

But since the CFTC named FTX Trading and Alameda as defendants its lawsuit, the agency could end up as one of the largest creditors in the Chapter 11 cases if the suit succeeds, said Deborah Kovsky-Apap, partner at Troutman Pepper.

The CFTC generally isn’t bound by bankruptcy’s automatic stay protection due to the “police powers” exception which allows governmental units to enforce their regulatory authority, Hyman said.

But there are caveats. That issue was recently complicated by a ruling in the mass tort bankruptcy of a Johnson & Johnson subsidiary, said Melanie Cyganowski, a former bankruptcy judge now with the law firm Otterbourg PC.

The court extended a stay in that case to stop state attorneys general from pursuing suits against J&J for allegedly violating consumer protection and consumer fraud laws. The ruling indicated the police power exception may not be as far-ranging as previously thought.

Ray hasn’t made any request to the court to stop the investigations.

The Madoff Model

The government is no stranger to being a stakeholder in large, corporate bankruptcies. But how its claims were handled in Chapter 11 cases has varied across the board, suggesting that there are options for the CFTC and FTX.

The CFTC sued New York trading firm MF Global for for unlawful use of customer funds, and violating customer protection laws. MF Global in 2013 agreed to settle all charges against it, including paying back 100% restitution of the roughly $1 billion lost by its commodity customers, according to a CFTC press release. The CFTC also imposed a $100 million penalty against MF Global.

After MF Global filed for bankruptcy, the CFTC filed a proof of claim to preserve its right as a creditor. It likely will do so in the FTX bankruptcy as well, Hyman said. In MF Global, the agency agreed to subordinate its claim to those of all other secured and unsecured creditors.

In other cases, the agency has also filed adversary complaints against individuals in bankruptcy court to argue that restitution is debt that can’t be discharged because it resulted from money obtained by false pretenses or fraud.

The CFTC could also look to the DOJ’s approach in the bankruptcy of Madoff’s investment firm. The firm’s property that was subject to forfeiture to the federal government was used to establish a victims’ fund by the Department of Justice, said Joseph Cioffi, a partner at Davis+Gilbert.

The DOJ had its own process to process victims’ claims and give out distributions, Cioffi said. Its process ran concurrently, but apart from, with the bankruptcy court liquidation and distributions to customers, he said.

The Madoff liquidation could be instructive in understanding how the CFTC’s efforts to recover ill-gotten gains from officers and directors. It could also serve as guidance for the agency in trying to potentially recover property that was sent to customers and political organizations through fraudulent means or preferential treatments, Cioffi said.

Theoretically, conflicts could arise if a government agency like the CFTC uses its “police powers” to try to go after FTX funds outside of the bankruptcy court, Cyganowski said. In that situation, a government entity could try to disgorge funds and give it to investors outside of a plan approved by the bankruptcy court, she said.

So far, FTX’s management hasn’t taken any steps to interfere with the police powers of the CFTC. But its leaders have their own fiduciary duty, and it’s unclear what path any possible distributions may take.

“There can theoretically be a conflict, but most times the courts, and the government, and the debtors will try to work it out so that it fits together,” Cyganowski said.

To contact the reporter on this story: James Nani in New York at

To contact the editors responsible for this story: Maria Chutchian at; Roger Yu at