Lawyers for the collapse of cryptocurrency exchange FTX on Tuesday painted a grim picture of the company’s finances and the fate of the billions of dollars in assets that customers lost.
“A substantial amount of assets have been stolen or are missing,” said James Bromley, a partner at the Sullivan & Cromwell law firm that represents FTX, during a bankruptcy hearing in federal court in Delaware.
FTX filed for bankruptcy in early November after a run on filings left the company owing $8 billion. The company’s failure has sparked investigations by the Securities and Exchange Commission and the Department of Justice, focused on whether FTX misappropriated client funds when it lent billions of dollars to Alameda Research. , a crypto hedge fund. Both companies were owned by Sam Bankman-Fried, a former crypto billionaire who relinquished control of the companies upon filing for bankruptcy.
The staggering collapse left amateur investors and big corporations scrambling to recover billions of dollars in cryptocurrencies they deposited on the FTX platform. In the coming months, the bankruptcy process will determine how much of that money can be recovered.
But more than a week into the legal process, Mr. Bankman-Fried’s mismanagement of FTX has left lawyers with limited information about the company’s finances, Mr. Bromley told the hearing.
The consequences of the fall of FTX
The sudden collapse of the crypto exchange left the industry stunned.
- A spectacular rise and fall: Who is Sam Bankman-Fried and how did he become the face of crypto? The Daily charted the dramatic rise and fall of the man behind FTX.
- A symbiotic relationship: Mr. Bankman-Fried built FTX in part to help the business operations of Alameda Research, his first company. The links between the two entities are now under scrutiny.
- Wall Street seeks to profit from: Brokers offer FTX clients pennies on the dollar for bankruptcy rights on their funds trapped on the platform.
- A failing business: FTX’s new chief executive, who helped run Enron after its collapse, said he had never seen “such a complete failure of corporate control.”
He said the company had faced “cyberattacks” and assets were still missing. It appeared to refer to an apparent hack on the day the company filed for bankruptcy, which came to light when crypto researchers noticed the unauthorized movement of hundreds of millions of dollars in FTX assets.
During the hearing, Mr Bromley gave a detailed account of the history of the FTX business and its abrupt collapse this month. Mr Bankman-Fried had established a sprawling business empire, which was run as his “personal fiefdom”, Mr Bromley said.
But in the end, he said, “the emperor had no clothes.”
Over the past two weeks, FTX has come under intense scrutiny over how it was spending its money before the dramatic collapse. A business entity involved in the bankruptcy, Mr. Bromley said, purchased nearly $300 million in real estate in the Bahamas, where FTX was based, including homes and vacation properties used by senior FTX executives .
Mr Bromley also provided new details of the final hours before Mr Bankman-Fried relinquished control of the business on November 11. Mr. Bankman-Fried did not make the decision until early that morning, Mr. Bromley said, after consulting with his lawyers at the Paul Weiss law firm and with his father, Joe Bankman, a professor at Stanford Law. School.
In his account of the chaos at FTX, Mr Bromley echoed the criticisms of Mr Bankman-Fried management that were voiced last week in a stunning court filing by John Jay Ray III, who succeeded Mr Bankman -Fried as Managing Director of FTX. .
A veteran of dealing with corporate meltdowns, Mr. Ray previously oversaw the breakup of energy trading firm Enron. But in last week’s filing, he wrote that the mess at FTX was the worst he’s seen in his career.
Much of Tuesday’s hearing focused on a series of legal issues that arose early in the bankruptcy.
Over the weekend, FTX disclosed a redacted list of its top 50 creditors, revealing that these entities or individuals owed a combined total of approximately $3.1 billion. But the company has kept the names of the creditors confidential.
A key question during the hearing was whether FTX should publicly disclose more detailed information about its creditors, a group that likely includes hundreds of thousands of ordinary people who have deposited money into the exchange. FTX’s attorneys and some of the creditors argued that disclosing this information would endanger users’ privacy.
US Bankruptcy Judge John Dorsey ruled the information could be kept private, at least for now. “Everyone in this room knows the internet is filled with potential dangers,” he said. “It’s important that we protect people who want to be involved in this case.”
The hearing drew an unusual level of attention for bankruptcy proceedings, with more than 500 people tuning into a Zoom broadcast. During a recess, a call person started blasting Justin Bieber’s song “Sorry.”
“I heard we entertained ourselves while we were on a break,” Judge Dorsey said as he returned to the courtroom.
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