FTX Isn’t Just Bankrupt — Tons of Money Has Been Stolen

Photo: Tom Williams/CQ-Roll Call, Inc via Getty Images

The wreckage of FTX is going to get only messier. On Tuesday, the lawyers representing the defunct crypto exchange made their first appearance in Delaware bankruptcy court to lay out the bleak situation left behind by Sam Bankman-Fried, the former billionaire CEO of what is now ground zero for the largest crypto fraud in history. “A substantial amount of assets have either been stolen or are missing,” said James Bromley, the lawyer at Sullivan & Cromwell who’s representing FTX. On November 11, the day Bankman-Fried formally filed for Chapter 11, there was a breach that cost the firm roughly $600 million, and attempts to hack the exchange have continued, lawyers said. There are more than 1 million creditors around the world, and the people trying to figure out what was going on inside the company have little more than an email address associated with many of those accounts. Bromley reiterated a point made by the new CEO, John J. Ray III — the guy who restructured Enron after it collapsed — that the company was run by “compromised individuals.”

Tuesday’s hearing was an overview of what led to the collapse of FTX and the long road ahead to return money to the customers and lenders who were under the false impression that the exchange was safe and well run. FTX was “one of the most abrupt and difficult collapses in the history of corporate America and the history of corporate entities around the world,” Bromley said, according to The Wall Street Journal.

If this hearing is any indication, the coming months, if not years, are going to be a fight over what gets made public and what will stay shrouded in corporate secrecy. The central issue Tuesday was whether FTX would be forced to expose the identities of those to whom it owes money. Lawyers for FTX even went so far as to say that exposing the creditors would “disincentivize participation in the case” and could make it harder for the company to recoup funds — hinting at one of the worst-case scenarios here, which is that FTX creditors may be so exposed and so interconnected that just saying who they are could inject more fear into the crypto markets, causing more selling and leading to even smaller returns for the people whose money is trapped on the exchange. Judge John Dorsey ended up granting FTX this request, at least on an interim basis.

Likely to come is a painstaking autopsy into Bankman-Fried’s management of the company in an attempt to reckon where all this money went. Reuters reported Tuesday that $300 million of the company’s funds went into Bahamian real estate. The roughly $600 million hacked from FTX is already being swapped in and out of different cryptocurrencies, according to Wired. Bromley said there would likely be an investigation into the divestment by Binance, FTX’s chief rival, whose CEO’s public vote of no-confidence was one of the most significant actions leading to the company’s demise.

The next hearing will be in mid-December. Bromley confirmed that the U.S. Attorney’s Office in Manhattan has opened a criminal investigation into the matter, though Bankman-Fried still apparently remains in the Bahamas and has not been charged with a crime. There are still going to be jurisdictional issues to work out — especially since Bahamian regulators have already transferred some FTX assets to digital wallets owned by the Bahamian government and are seeking to protect one of the FTX entities from the Delaware bankruptcy court’s oversight. Still, what’s happening here is that an army of lawyers, investigators, and journalists is trying to reverse engineer a giant slush fund of digital currencies with almost no records and nobody else really knowing what’s going on except FTX’s impresario. “What we have here,” Bromwell said, “is a worldwide, international organization, but which was run as a personal fiefdom of Sam Bankman-Fried.”