FTX Case: Lawyers and Creditors Oppose SBF's Request for Legal Fee Reimbursement

Sam Bankman-Fried's recent petition to have his legal expenses reimbursed has encountered strong opposition from lawyers representing the cryptocurrency exchange FTX and its creditors committee. Bankman-Fried's lawyers filed a motion on March 15 requesting coverage of his court costs by directors and officers (D&O) insurance policies. If the judge approves the motion, Bankman-Fried would be placed at the top of the payout queue.

While defense costs are typically covered in most policies, insurers have provisions for counsel selection. Therefore, even if approved, the insurer is unlikely to approve the high-priced lawyers Bankman-Fried has retained or requires.

On March 29, FTX's lawyers filed an objection to Bankman-Fried's attempt to prioritize his own legal fees over other potential claimants, asserting:

"It would be unfair, inequitable, and contrary to the interests of justice to allow Mr. Bankman-Fried to drain the D&O Policies for his sole benefit."

FTX's lawyers argue that if the court rules in favor of Bankman-Fried, the insurance payout should also apply to other directors and officers who have a claim to the funds.

The Official Committee of Unsecured Creditors filed an objection on the same day, stating that D&O insurance policies only apply "where they make honest decisions in the ordinary course of the business." The committee claims this does not apply to Bankman-Fried's request and that the court should therefore deny it, labeling him the "alleged perpetrator of one of the largest criminal frauds in the last decade."

D&O liability insurance is designed to protect individuals from personal losses if they are sued for serving as a director or an officer of a firm. Firms can also use these policies to cover legal fees and costs resulting from a lawsuit against a former officer or director.

However, the creditors committee argued that Bankman-Fried had not justified his claim to the $10 million in available coverage, which should instead go towards covering FTX's losses. Reports indicate that the former FTX CEO is currently paying his legal fees with $10 million he had previously gifted to his father, Joseph Bankman, after borrowing the funds from Alameda Research.

Bankman-Fried was charged with 12 criminal counts on February 22, including multiple fraud charges, and a 13th count was added on February 28 following allegations that he attempted to bribe a Chinese official with $40 million.