Judge Affirms Sealing of FTX Customer Names in Bankruptcy Case
On Tuesday, December 3, 2024, U.S. District Judge Colm F. Connolly of the United States District Court for the District of Delaware denied a request from major news outlets to unseal the names of customers involved in the bankruptcy proceedings of the defunct cryptocurrency platform FTX Trading Ltd. The decision allows FTX to continue keeping customer information confidential, which the judge argued is essential for protecting the assets of the estate and its creditors from potential cybercrime.
In his ruling, Judge Connolly upheld a June 2023 decision made by U.S. Bankruptcy Judge John T. Dorsey, who had permitted FTX to redact the names and personal information of approximately nine million account holders from public bankruptcy filings. The ruling was based on Section 107 of the Bankruptcy Code, which allows for the sealing of documents containing confidential business information or trade secrets, particularly when disclosure could pose risks such as identity theft.
Judge Connolly’s opinion emphasized that the bankruptcy court had relied on substantial testimony from financial and cybersecurity experts in determining that FTX’s customer list constituted a valuable business asset. He stated, “The Bankruptcy Court’s determination that the debtors’ customer list fell within the ambit of 107(b)(1) was not clear error, and its determination to protect the customer list was not an abuse of discretion.”
FTX filed for bankruptcy in November 2022, following significant turmoil in the cryptocurrency market that rendered its assets inaccessible to customers. The court proceedings have since transformed those customers into creditors, with their digital assets frozen as part of the Chapter 11 filing.
During the trial in June 2023, Judge Dorsey concluded that the public release of customer information could lead to phishing schemes and other forms of digital fraud, a concern that has been validated by similar incidents in other cryptocurrency bankruptcies. This decision extended an earlier order that permitted certain redactions, ultimately allowing FTX to keep confidential the personal details of individual, non-business creditors.
Major media organizations, including the New York Times, Bloomberg, The Wall Street Journal, and the Financial Times, objected to the sealing of this information, arguing that transparency is crucial in cases of this magnitude. They sought to reverse the bankruptcy court’s decision, claiming it contributed to an “extraordinary level of secrecy” surrounding the case and raised questions about the adequacy of FTX’s recordkeeping and cybersecurity measures.
In their appeal, the media outlets contended that Judge Dorsey improperly classified customer accounts as trade secrets, thereby justifying the redactions. They also questioned the validity of testimony suggesting that cryptocurrency users are more vulnerable to cyberattacks.
However, FTX, supported by its official committee of unsecured creditors, defended the bankruptcy court’s ruling, asserting that it was appropriate and necessary. Judge Connolly ultimately sided with FTX, noting that the media’s challenges did not demonstrate any clear errors in the bankruptcy court’s judgment.
In his remarks, Judge Connolly highlighted the risks associated with cryptocurrency ownership, stating that while phishing attacks can target anyone, the nature of cryptocurrency inherently places holders at a higher risk. He concluded that the evidence presented by FTX validated the need for continued confidentiality of customer information.
Following the decision, Judge Connolly affirmed the bankruptcy court’s order and instructed that the appeal be closed, maintaining the current level of secrecy regarding the identities of FTX’s customer base.
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