FTX lawyer says ‘substantial amount’ of assets either stolen or missing

Washington - Lawyers for

collapsed cryptocurrency exchange FTX

on Tuesday painted a grim picture of the firm’s finances and the fate of the billions of dollars in assets that customers lost.

“A substantial amount of assets have either been stolen or are missing,” Mr James Bromley, a partner at law firm Sullivan & Cromwell who is representing FTX, said at a bankruptcy hearing in the federal court in Delaware.

FTX filed for bankruptcy in November after a run on deposits left the company owing US$8 billion (S$11 billion). The firm’s failure has sparked investigations by the US Securities and Exchange Commission and the Justice Department, focused on whether FTX misappropriated customer funds when it lent billions of dollars to Alameda Research, a crypto hedge fund. Both firms were owned by Mr Sam Bankman-Fried, who gave up control of the companies at the time of the bankruptcy filing.

The stunning collapse has left amateur investors and major firms scrambling to recover billions of dollars in cryptocurrencies that they deposited on the FTX platform. The bankruptcy process will determine how much of that money can be retrieved.

But more than a week into the legal process, Mr Bankman-Fried’s poor management of FTX has left lawyers with limited information about the firm’s finances, Mr Bromley said at the hearing.

He said the company had faced cyber attacks, and that assets were still missing. He appeared to be referring to an apparent hack on the day the company filed for bankruptcy, which came to light when crypto researchers noticed the unauthorised movement of hundreds of millions of dollars in FTX assets.

At the hearing, Mr Bromley presented a detailed account of FTX’s corporate history and its abrupt collapse this month. He said Mr Bankman-Fried had established a sprawling corporate empire, which was run as his “personal fiefdom”.

But in the end, he said, “the emperor had no clothes”.

Over the past two weeks, FTX has faced intense scrutiny over how it spent its money. One business entity involved in the bankruptcy, Mr Bromley said,

bought almost US$300 million worth of real estate in the Bahamas.

A key issue at the hearing was whether FTX would have to publicly disclose more detailed information about its creditors, a group that likely includes hundreds of thousands of ordinary people who deposited money in the exchange.

US bankruptcy judge John Dorsey ruled that the information could stay private, at least for now.

The judge also let the company keep secret details about the firms tracking down assets and those protecting the platform from cyber attacks. Normally, every major firm hired by a bankrupt company must be made public in a court filing.

Asset protection and recovery is one of the top objectives for the case, Mr Bromley said at the hearing. Maximising value is key for the process, whether it means selling or reorganising businesses, and FTX will likely ask the judge for permission to sell some assets “quite quickly”, he added.

Meanwhile, Mr Bankman-Fried, who resigned as chief executive, has apologised to staff in a letter that outlined a crash in “collateral” to US$9 billion from US$60 billion.

“I didn’t mean for any of this to happen, and I would give anything to be able to go back and do things over again,” he wrote in the message sent to employees on Tuesday and obtained by Bloomberg News.

A slide in digital asset markets in spring roughly halved collateral to US$30 billion, while liabilities were US$2 billion, he said.

A combination of a credit squeeze, a further sell-off in virtual coins and a “run on the bank” left collateral at US$9 billion ahead of FTX’s Nov 11 bankruptcy, he wrote.

“I did not realise the full extent of the margin position, nor did I realise the magnitude of the risk posed by a hyper-correlated crash,” Mr Bankman-Fried said. He did not give exact details on the make-up of the collateral or the liabilities. NYTIMES, BLOOMBERG