FTX Indicates Substantial Amount of Stolen or Missing Crypto Assets

A significant amount of FTX assets are either missing or stolen, an attorney for the failed cryptocurrency exchange claims in court, promising to cast a wide net to potentially secure billions of dollars in funds that passed through the company he called the “personal fiefdom” of co-founder Sam Bankman-Fried.

Tuesday’s hearing marked an inflection point for FTX’s bankruptcy filing as its new executives begin to research assets they can salvage and try to figure out who might be responsible for losing the money. client.

“FTX was under the control of inexperienced and unsophisticated individuals, and some or all of them were compromised individuals,” FTX new management attorney James Bromley said in his first appearance in Delaware bankruptcy court after having filed the biggest chapter 11 in crypto. case earlier this month.

Mr. Bankman-Fried did not respond to a request for comment.

The new management is only beginning to take stock of FTX’s loss under Mr. Bankman-Fried on risky trade bets, and it has assembled a team of investigators to lead a global hunt for money that left FTX before its failure.

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New York and United States Securities and Exchange Commission prosecutors are investigating the company’s collapse, which sparked a new wave of financial stress in the cryptocurrency industry.

Customers’ funds on the exchange are frozen and they lose hope of ever recovering much. The extent of the gap between FTX’s obligations to its clients and the available assets it could use to help pay them is still not known, although Mr Bromley said his individual and institutional clients number in the millions. The 50 largest creditors alone owe more than $3 billion, according to court documents.

FTX, a target of ongoing cyberattacks that began when it filed for bankruptcy, also instituted new internal controls to try to protect the company from future hacks, Bromley said.

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He said FTX remains in “constant communication” with the US Department of Justice and the Cybercrimes Unit at the US Attorney’s Office in Manhattan has also opened an investigation, Bromley said in court. The US Attorney’s Office in Manhattan did not immediately respond to a request for comment.

FTX, now controlled by a new chief executive and directors appointed after Mr. Bankman-Fried resigned, faces the daunting task of using bankruptcy laws to secure client funds and other assets. Some of FTX’s assets are located outside of the United States, including the Bahamas, where FTX’s inner circle ran its operations.

Exchange officials have hired investigators formerly employed by the SEC and the Department of Justice who specialize in cybersecurity to track assets belonging to FTX that may have been taken without permission.

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FTX lawyers also on Tuesday presented their most searing allegations yet against the platform’s former executives, particularly Mr. Bankman-Fried, and their lack of professionalism in handling billions of dollars in FTX assets. customer cryptocurrency.

“What we have here is a global, international organization, but one that was run as a personal fiefdom of Sam Bankman-Fried,” Bromley said. He described the fall of FTX as “one of the most abrupt and difficult collapses in the history of American companies and in the history of companies around the world. ”

The Wall Street Journal reported that FTX was a chaotic mess of corporate entities and client assets under Mr. Bankman-Fried’s leadership almost from the company’s inception.

FTX’s new CEO, John J. Ray III,

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said in court documents last week that corporate funds were used to purchase homes for employees in the Bahamas without any form of internal documentation. Mr. Bankman-Fried often communicated decisions to his employees through messaging apps that automatically deleted his statements, according to the new CEO.

Mr. Ray, who helped sort out the collapse of Enron Corp. and other large corporate bankruptcies, will have an array of legal tools available in Chapter 11 to investigate, and potentially recover, transfers of money or assets made to insiders or other creditors. leading to the collapse of the business.

That could include clients who recently withdrew funds from the firm, or Mr. Bankman-Fried, who took in $300 million when FTX raised outside investment last year, the Journal reported.

FTX’s failure intensifies an unflattering spotlight on an industry that had already lost credibility with the investing public after a chain reaction of bankruptcies earlier this year revealed some companies weren’t as careful with funds. customers that they had implied.

Crypto exchange customers lack the safety nets such as deposit insurance that kick in when banks and regulated brokerages fail. The task of cleaning up after FTX and other recent crypto failures falls largely to US bankruptcy courts, which have only recently begun to answer the question of how crypto customers should fare in the event of a insolvency.

The contagion effects of FTX’s collapse continue to spread. Crypto lender BlockFi, with which FTX is financially tied, is exploring a potential bankruptcy filing, the Journal reported earlier this month. Another major lender, Genesis Global Trading, is seeking bailout after a wave of withdrawals from its lending platform, according to people familiar with the matter. Silvergate Capital Corp.
, a go-to bank for the crypto market, is being punished in the markets due to contagion fears. Other companies tout their reservations and downplay exposures.

FTX officials said it would take months to sort through customer complaints and bad bets from its trading affiliate Alameda Research that pushed FTX into bankruptcy. The Journal reported on Tuesday that Mr. Bankman-Fried had apologized for the company’s collapse to his former colleagues in a two-page letter that did not directly address the movement of FTX client funds to Alameda.

Judge John Dorsey of the U.S. Bankruptcy Court in Wilmington, Del., said on Tuesday he would grant a number of motions requested by FTX to help the company manage its bankruptcy, including to redact the identity for now. clients whose funds are frozen on the exchange.

Company management said it may need until January to draw up a full balance sheet detailing the company’s total assets and liabilities, but some business divisions appear solvent. The company has located about $1.4 billion in cash it says belongs to the business, more than double the figure shown in a court report last week. The salvageable units could be sold in the event of bankruptcy.

FTX has also received requests from the U.S. House of Representatives and Senate for Mr. Ray to appear before Congress in December, his lawyer said Tuesday.

Some FTX assets are stuck in the Bahamas, where the company relocated last year as the country sought to become a destination for digital currency companies around the world. Bahamian financial authorities seized digital assets from FTX’s local operations earlier this month, which its officials say was done through unauthorized access to its corporate network.

The Bahamas Securities Commission, the main local authority investigating FTX’s collapse, confirmed the transfer of assets, but said the coins were transferred to a government-controlled wallet “for safekeeping”. and in accordance with local laws.

Court-appointed liquidators in the Bahamas said the local subsidiary controls the private keys needed to transfer crypto in and out of the entire FTX complex, once estimated at around $16 billion in assets.

Lawyers representing the liquidators said in court on Tuesday that they did not necessarily agree with Mr Bromley’s characterization that the bankrupt US subsidiaries, as opposed to the FTX subsidiary in the Bahamas, controlled certain funds client.

“We have disagreements that we will work out over time,” said Christopher Shore, US attorney for the Bahamian liquidators.

Simone Morgan-Gomez, a Bahamas-based Callenders & Co. partner who is not involved in the bankruptcy case, said Bahamian liquidators will need to determine which creditors have the right to claim funds in any account grouped under the name of the company. .

Court documents filed in Delaware pointed to a culture of weak record-keeping at FTX and disagreements between its U.S. executives and Bahamian liquidators over who should control company assets and distributions to creditors.

“A liquidation of this magnitude will likely take a few years,” Ms. Morgan-Gomez said.

Write to Alexander Saeedy at alexander.saeedy@wsj.com and Jonathan Randles at Jonathan.Randles@wsj.com

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