FTX was run as a “personal fiefdom”, faces hackers, missing assets – lawyers

NEW YORK/LONDON, Nov 22 (Reuters) – FTX was being run as a “personal fiefdom” by former CEO Sam Bankman-Fried, lawyers at the collapsed cryptocurrency exchange said in its first bankruptcy hearing as they described challenges in course as hacks and substantial missing assets.

In the most high-profile crypto explosion to date, FTX filed for protection in the US after traders pulled $6 billion from the platform in three days and rival exchange Binance abandoned a bailout deal. The collapse has left an estimated 1 million creditors facing losses totaling billions of dollars. Read more

An attorney for FTX said in a bankruptcy hearing on Tuesday that the company now intends to sell viable business units, but has been subject to cyberattacks and was lacking “substantial” assets.

FTX said Saturday that it has begun a strategic review of its global businesses and is preparing to sell or restructure some businesses. FTX said Tuesday it was receiving interest from potential buyers in its assets and would conduct a process to retool or sell them.

The hearing was held in US Bankruptcy Court in Wilmington, Delaware and was streamed to approximately 1,500 viewers on YouTube and Zoom.

An attorney also said the firm had been run as a “personal fiefdom” by Bankman-Fried with $300 million spent on real estate such as homes and vacation properties for senior staff. FTX, led since its bankruptcy filing by new CEO John Ray, accused Bankman-Fried of working with Bahamian regulators to “undermine” the US bankruptcy case and shift operations overseas.

Bankman-Fried did not immediately respond to an email request for comment.

Reuters previously reported that Bankman-Fried’s FTX, his parents and senior executives at the failed cryptocurrency exchange bought at least 19 properties worth nearly $121 million in the Bahamas over the past two years, official records show. property. Read more

The lawyers also said that an investigation into Binance’s sale of FTX in July 2021 must take place. Binance bought a stake in FTX in 2019.

Separately, a filing filed Monday by Ed Mosley of Alvarez & Marsal, an advisory firm that advises FTX, showed FTX’s cash balance of $1.24 billion as of Sunday was “substantially higher.” than previously thought.

It includes approximately $400 million in accounts related to Alameda Research, the cryptocurrency trading company owned by Bankman-Fried, and $172 million at the Japan arm of FTX.

Reuters reported that Bankman-Fried secretly used $10 billion of client funds to support its business and that at least $1 billion of those deposits had vanished.

DISCLOSURE DEBATE

At the hearing, FTX representatives argued that client names should be kept secret, as their disclosure could destabilize the cryptocurrency market and open clients up to attack. FTX also said its client list is a valuable asset, and its disclosure could jeopardize future sales efforts or allow rivals to steal its user base.

A judge said those names may remain under wraps until a future court hearing.

FTX’s lawyers also described an uneasy truce with the court-appointed liquidators overseeing the liquidation of FTX’s Bahamas unit, FTX Digital Markets.

The two sides have reached an initial agreement to coordinate their US-based insolvency proceedings before Judge John Dorsey, avoiding the possibility of conflicting rulings from two different US bankruptcy judges. But both sides signaled they still have broader disagreements over how to coordinate the recovery and preservation of assets held by various FTX affiliates.

Bankman-Fried, FTX and the Bahamian liquidators did not immediately respond to requests for comment.

FEARS OF CONTAGION

FTX’s fall from grace has sent shivers through the cryptocurrency world, driving bitcoin to its lowest level in about two years and triggering fears of contagion among other companies already recovering from the cryptocurrency market crash this year.

Major US crypto lender Genesis said on Monday it was trying to avoid bankruptcy, days after the collapse of FTX forced it to suspend customer repayments.

“Our goal is to resolve the current situation amicably without the need to file for bankruptcy,” a Genesis spokesman said in an emailed statement to Reuters, adding that it continues to have conversations with creditors.

A Bloomberg News report citing sources said Genesis was struggling to raise fresh cash for its lending unit.

The Wall Street Journal reported, citing sources, that Genesis had approached Binance looking for an investment but the cryptocurrency exchange decided against it, fearing a conflict of interest. Genesis has also approached private equity firm Apollo Global Management (APO.N) for capital assistance, the WSJ said.

Apollo did not immediately respond to a Reuters request for comment on the WSJ report, while Binance declined to comment.

Cryptocurrency exchange Gemini, which operates a cryptocurrency lending product in partnership with Genesis, tweeted on Monday that it was continuing to work with the company to allow its users to redeem funds from its yield-generating “Earn” program.

Gemini said on its blog last week that there was no impact on its other products and services after Genesis suspended withdrawals.

Since the implosion of FTX, some cryptocurrency players are turning to decentralized exchanges known as “DEXs” where investors trade peer-to-peer on the blockchain.

Overall daily trading volumes on DEXs jumped to their highest level since May on Nov. 10, when FTX imploded, according to data from DeFi market tracker Llama, but have trimmed gains since.

Reporting by Dietrich Knauth in New York and Tom Wilson in London; additional reporting by Manya Saini, Rishabh Jaiswal, Juby Babu and Lavanya Sushil Ahire in Bengaluru; Editing by Megan Davies, Alexander Smith and Nick Zieminski

Our standards: the Thomson Reuters Trust Principles.

Tom Hals

Thomson Reuters

Award-winning reporter with more than twenty years of international news experience focused on high-stakes legal battles on everything from government policy to corporate settlements.

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