Key Takeaways
- • Hedge fund Contrarian Capital Management acquired trade claims against the bankrupt SPhinX hedge fund complex beginning in 2010, purchasing distressed debt at a discount from original creditors seeking liquidity rather than waiting for bankruptcy resolution.
- • SPhinX funds held $312 million with Refco before the commodities broker collapsed in 2005 following CEO Phillip Bennett's $430 million fraud; the fund recovered only $263 million in the initial bankruptcy proceeding, leaving investors with significant losses.
- • Contrarian Capital, a $3.4 billion Greenwich-based firm, became the only trade claims creditor to SPhinX that was not an original investor, positioning itself uniquely in the liquidation process that continues in Grand Cayman under U.K. law.
- • Contrarian and Deutsche Bank jointly proposed a scheme of arrangement for SPhinX creditor repayment that secured over 95 percent investor approval, demonstrating the leverage that trade claims purchasers can achieve in restructuring negotiations.
- • The trade claims market allows hedge funds to acquire bankruptcy claims at steep discounts (often cents on the dollar) and profit through eventual recovery, settlement agreements, or restructuring control—a strategy increasingly deployed across distressed investment opportunities.
Summary
The secondary market for bankruptcy trade claims has emerged as a distinct profit opportunity for hedge funds, exemplified by the case of SPhinX hedge funds and the strategic intervention of Contrarian Capital Management. When the Chicago-based commodities broker Refco collapsed in late 2005 following a $430 million accounting fraud by CEO Phillip Bennett, it triggered a cascading series of bankruptcies, including the failure of PlusFunds Group and its associated SPhinX hedge fund complex. SPhinX had maintained $312 million in assets at Refco; while founder Christopher Sugrue initially recovered funds following Bennett's compliance with withdrawal demands, bankruptcy court subsequently reversed the distribution, forcing SPhinX to return $263 million and abandon claims to the remainder—leaving original investors significantly impaired.
Original creditors facing extended liquidation timelines and uncertain recovery rates frequently sell their bankruptcy claims at discounts to specialized investors. Beginning in 2010, Contrarian Capital systematically acquired these SPhinX trade claims on the secondary market, entering the case despite holding only a small historical position in SPhinX dating to 2007. This acquisition strategy positioned Contrarian uniquely: the firm became the only trade claims creditor that was not an original investor, granting it distinct leverage in subsequent restructuring negotiations. As the $3.4 billion hedge fund continued its accumulation strategy, it gained material influence over the liquidation process.
The depth of Contrarian's claims position enabled partnership with Deutsche Bank to propose a comprehensive scheme of arrangement for SPhinX creditor repayment—a restructuring proposal that achieved over 95 percent approval from investors. This outcome underscores a critical dynamic in bankruptcy claims trading: hedge funds acquiring discounted claims can leverage their consolidated positions to shape restructuring terms, potentially capturing value unavailable to smaller, dispersed original creditors. The SPhinX liquidation, ongoing in Grand Cayman under U.K. law, demonstrates that trade claims acquisition remains a viable alternative investment avenue, though investors in the original fund have yet to realize distributions years after the initial Refco collapse.
Original creditors facing extended liquidation timelines and uncertain recovery rates frequently sell their bankruptcy claims at discounts to specialized investors. Beginning in 2010, Contrarian Capital systematically acquired these SPhinX trade claims on the secondary market, entering the case despite holding only a small historical position in SPhinX dating to 2007. This acquisition strategy positioned Contrarian uniquely: the firm became the only trade claims creditor that was not an original investor, granting it distinct leverage in subsequent restructuring negotiations. As the $3.4 billion hedge fund continued its accumulation strategy, it gained material influence over the liquidation process.
The depth of Contrarian's claims position enabled partnership with Deutsche Bank to propose a comprehensive scheme of arrangement for SPhinX creditor repayment—a restructuring proposal that achieved over 95 percent approval from investors. This outcome underscores a critical dynamic in bankruptcy claims trading: hedge funds acquiring discounted claims can leverage their consolidated positions to shape restructuring terms, potentially capturing value unavailable to smaller, dispersed original creditors. The SPhinX liquidation, ongoing in Grand Cayman under U.K. law, demonstrates that trade claims acquisition remains a viable alternative investment avenue, though investors in the original fund have yet to realize distributions years after the initial Refco collapse.
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