Former FTX CEO Seeks $10M Insurance Fund for Legal Defense, Request Opposed by FTX Debtors and Unsecured Creditors

Court filings reveal that the FTX co-founder is seeking access to a $10 million insurance plan to cover his attorney fees. FTX debtors and unsecured creditors have opposed Sam Bankman-Fried’s request, arguing that every dollar spent on his defense is “one less dollar” available to cover the losses of the debtors.

Sam Bankman-Fried (SBF), the former CEO of FTX, is seeking access to a $10 million legal insurance fund to cover his defense expenses. The filing notes that FTX’s $10 million director and officer (D&O) insurance policy covers individuals who are “legally obligated to pay on account of any claim first made against them.” However, FTX debtors and the committee of unsecured creditors have criticized SBF’s request, arguing that granting him access to the insurance funds would harm the debtors and cause “material prejudice.”

“Thus, for every dollar extended by the insurance carrier to Mr. Bankman-Fried’s defense costs, there is one less dollar to pay the WRS Debtors’ covered Losses,” the debtors declare.

The debtors emphasize that the insurance policy excludes claims arising from “violations of securities laws, violations of money laundering laws, and any willful or fraudulent acts or omissions.” The lawyers explain that the D&O policy belongs to the debtors’ estates, and therefore, the court should not grant Sam Bankman-Fried unrestricted access to it.

Instead, the debtors believe that the court should require SBF to adhere to the bankruptcy court’s 2016 compensation rules. Although SBF argues that depleting the D&O policy would not harm the debtors’ estate, the debtors and unsecured creditors strongly disagree, stating that this assertion is “flat wrong.”

The court filing adds:

Mr. Bankman-Fried is also wrong in claiming that coverage for the debtors’ estate is ‘hypothetical or speculative’ and that the debtors ‘have no present contractual interest in the proceeds of the D&O policies.’ As noted above, the debtors have retained pool counsel to represent certain current or former employees of the debtors, whose fees are an insurable expense.

The recent objections to SBF’s request for D&O funds are a result of the allegations that he has been using Alameda funds to cover his legal defense expenses. According to sources cited by Forbes, SBF is purportedly using a gift of $10 million he gave to his father in 2021 to pay for his white-collar legal team.

Do you think Sam Bankman-Fried should be granted access to the $10 million legal insurance fund for his defense expenses, or should the court require him to comply with the bankruptcy court’s 2016 compensation rules? Share your thoughts in the comments below.