Sam Bankman-Fried ran FTX as a personal fiefdom, lawyers say

A significant amount of FTX’s assets are missing or stolen, a lawyer for the bankrupt cryptocurrency exchange said in court, vowing to cast a wide net to potentially protect billions of dollars in funds that have passed through the firm which called the co-founder Sam Bankman-Fried’s “personal fiefdom”.

Tuesday’s hearing marked a turning point for FTX’s bankruptcy case as its new leaders begin researching what assets they can salvage and try to determine who could be responsible for losing clients money.

“FTX was under the control of inexperienced and unsophisticated individuals, and some or all of them were compromised individuals,” said James Bromley, a consultant to FTX’s new management, in his first Delaware bankruptcy court appearance after filing the largest chapter 11 on cryptocurrencies. case earlier this month.

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

New management is only starting to take stock of how much FTX lost under Mr. Bankman-Fried on risky trade bets and has assembled a team of investigators to lead a global hunt for the money that left FTX before it went bankrupt.

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New York prosecutors and the US Securities and Exchange Commission are looking into the company’s collapse, which has unleashed a new wave of financial stress in the cryptocurrency industry.

Clients’ funds on the exchange are frozen and they are losing hope of recovering much. The size of the gap between FTX’s obligations to its clients and the available resources it could use to help pay them is not yet known, although Mr. Bromley said his individual and institutional clients number in the millions. Court documents show the top 50 creditors alone are owed more than $3 billion.

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

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He said FTX remains in “constant communication” with the US Justice Department, and the US Attorney’s Office in Manhattan’s Cyber ​​Crimes Unit has also opened an investigation, Mr. 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 CEO and its directors appointed after Mr. Bankman-Fried stepped down, faces the daunting task of using bankruptcy laws to protect client funds and other assets. Some of FTX’s assets are located outside of the United States, including in the Bahamas, where FTX’s inner circle ran its operations.

The exchange operators have hired investigators formerly employed by the SEC and the Department of Justice who specialize in cybersecurity to track down assets belonging to FTX that may have been misappropriated without authorization.

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FTX lawyers also filed their most searing allegations on Tuesday against the platform’s past leaders, most notably Mr. Bankman-Fried and their lack of professionalism in handling billions of dollars in clients’ cryptocurrency assets.

“What we have here is a worldwide, international organization, but one that has been run as a personal fiefdom by Sam Bankman-Fried,” Mr. Bromley said. He described FTX’s fall as “one of the most sudden and difficult collapses in the history of corporate America and in the history of corporate entities around the world. “

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

FTX’s new Chief Executive Officer, John J. Ray III,

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

Mr. Ray, who helped resolve the collapse of Enron Corp. and other major corporate bankruptcies, will have a number 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 company.

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

FTX bankruptcy intensifies an unflattering spotlight on an industry that had already lost credibility with the investing public after a chain reaction of bankruptcies revealed earlier this year that some firms weren’t as mindful of client funds as they had hinted.

Clients of cryptocurrency exchanges lack the safety nets like deposit insurance that kick in when banks and regulated intermediaries fail. The job of cleaning up after FTX and other recent cryptocurrency bankruptcies has largely fallen to the US bankruptcy courts, which have only recently begun to answer how cryptocurrency customers should behave in the event of insolvency.

The contagion effects from the FTX crash continue to spread. Crypto lender BlockFi, with which FTX is financially involved, is exploring a possible bankruptcy filing, the Journal reported earlier this month. Another sizable lender, Genesis Global Trading, is seeking a bailout after a wave of withdrawals from its lending platform, according to people familiar with the matter. Capital Silvergate Corp.
, a benchmark bank for the cryptocurrency market, is being punished in the markets for fears of contagion. Other companies are touting their reserves and downplaying exposures.

FTX managers said it will take months to resolve customer complaints and bad bets at its affiliate trading firm Alameda Research that drove FTX into bankruptcy. The Journal reported Tuesday that Mr. Bankman-Fried apologized for the company’s collapse to his former colleagues in a two-page letter that didn’t directly address the movement of FTX’s client funds to Alameda.

Judge John Dorsey of the U.S. bankruptcy court in Wilmington, Del., said on Tuesday that he will grant a number of requests filed by FTX to help the company handle its bankruptcy, including withholding the identities of funded clients for now frozen on exchange.

Company management said it could take until January to compile a comprehensive balance sheet detailing the company’s total assets and liabilities, but some corporate divisions appear to be solvent. The firm has identified about $1.4 billion in cash that it says belongs to the company, more than double the amount listed in a court report last week. Recoverable units could be sold after bankruptcy.

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

Some FTX assets are locked up in the Bahamas, where the firm relocated last year as the country looks to become a destination for digital currency companies around the world. Financial authorities in the Bahamas seized the digital assets of FTX’s local operations earlier this month, which its managers said was done through unauthorized access to its corporate network.

The Securities Commission of the Bahamas, the lead local authority investigating the FTX crash, confirmed the asset transfer, but said the coins were moved to a government-controlled wallet “for safekeeping” and in compliance with laws locals.

Court-appointed liquidators in the Bahamas said the local branch controls the private keys needed to move cryptocurrencies in and out of the entire FTX complex, which was once estimated to hold around $16 billion in assets.

On Tuesday, attorneys representing the liquidators said in court that they did not necessarily agree with Mr. Bromley’s characterization that the bankrupt US-based affiliates, as opposed to FTX’s Bahamian branch, had control on some client funds.

“We have some disagreements that we will resolve over time,” said Christopher Shore, US counsel for the Bahamian liquidators.

Simone Morgan-Gomez, a partner at Callenders & Co. based in the Bahamas, which is not involved in the bankruptcy case, said Bahamian liquidators will have to determine which creditors have the right to request funds in any mixed accounts under the name of the society.

Court documents filed in Delaware indicated a culture of poor record keeping at FTX and disagreements between its US executives and Bahamian liquidators over who should oversee the company’s assets and distributions to creditors.

“A liquidation of this magnitude will probably take a few years,” the lady said. said Morgan Gomez.

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

Corrections and amplifications
A photo in an earlier version of this article showed FTX advisors, including some lawyers, arriving at bankruptcy court on Tuesday. The photo caption incorrectly stated that they were all attorneys for FTX. The photo has been removed. (Correct on November 23)

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