September 28, 2023

Judge in FTX bankruptcy dismisses media challenge, says client names can remain secret

DOVER, Del. (AP) — The names of individual customers of collapsed cryptocurrency exchange FTX Trading may be permanently shielded from public disclosure, a Delaware bankruptcy judge ruled Friday.

After a two-day hearing, Judge John Dorsey rejected arguments from lawyers before several media outlets and before the U.S. bankruptcy trustee, which serves as the government’s watchdog in Chapter 11 reorganization cases, and challenged FTX’s request that the names of clients and creditors be kept secret. .

Dorsey ruled that customer identities constitute a trade secret. He also said that FTX customers should be protected from bad actors who could attack them by scouring the internet and the “dark web” for their personal information.

“It’s the customers that matter most here,” he said. “I want to make sure that they are protected and that they don’t fall victim to any kind of scam that may be out there.”

Katie Townsend, a media attorney, had argued that the press and public have a “compelling and legitimate interest” in knowing the names of those affected by FTX’s stunning collapse.

“That collapse sent shockwaves not just through the cryptocurrency industry, but the entire financial industry,” said Townsend. “And at this point, we don’t even know where the shockwaves, both individual and institutional, have hit the hardest, and which institutions may have the greatest or no exposure as a result.”

But lawyers for FTX and its official unsecured creditors committee argued that his client list is both a valuable asset and confidential commercial information. They argue that secrecy is necessary to protect FTX customers from theft and possible scams, and to ensure that potential competitors do not “peck” FTX customers. FTX believes its customer list can be valuable as part of an asset sale or as part of a reorganization.

“The debtors are able to extract value from these customer lists,” said FTX attorney Brian Glueckstein.

FTX went bankrupt in November when the global exchange ran out of money after the equivalent of a bank run. Founder Sam Bankman-Fried has pleaded not guilty to charges that he defrauded investors and looted client deposits to make lavish real estate purchases, campaign contributions to politicians and risky trades at Alameda Research, his cryptocurrency hedge fund trading firm. Three former FTX executives have pleaded guilty to fraud charges and are cooperating with investigators.

In January, Dorsey ruled that FTX could remove the names of all customers and the addresses and email addresses of non-individual customers from court documents for 90 days. He also authorized FTX to keep the addresses and email addresses of individual creditors and shareholders permanently confidential.

On Friday, the judge approved the permanent sealing of the names of individual clients and extended the secrecy regarding the names of institutional clients for another 90 days.

However, Dorsey refused to go ahead with allowing FTX to shield the names of individual creditors or shareholders who are citizens of the United Kingdom or European Union countries and are covered by a consumer protection program known as the General Data Protection Regulation , or GDPR. FTX sought similar treatment for individuals subject to Japan’s data privacy laws.

Dorsey said that, in response to an objection from the US trustee, FTX had provided no evidence to show that those foreign persons could be harmed, or that FTX could be penalized, if their names were disclosed.

Dorsey also rejected a request from lawyers for an ad hoc committee of non-US clients to keep the names of its members secret. If the commission wants to take part in the case, the names of its members must be disclosed, he said.

According to redacted court documents, the ad hoc commission currently has 35 members, with estimated economic interests in FTX ranging from $64,434 to $1.5 billion. Dorsey noted that some members may decide to resign based on his ruling.

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