FTX founder Sam Bankman-Fried ran the cryptocurrency exchange as his “personal fiefdom” before the implosion, according to a lawyer working the bankruptcy, with “substantial amounts of money” spent on items unrelated to the company, such as vacation homes in the Bahamas.
“We have witnessed one of the most abrupt and difficult collapses in the history of corporate America,” James Bromley of Sullivan & Cromwell told a US court on Tuesday. He added that the bankruptcy proceedings had “enabled everyone for the first time to look under the covers and recognize that the emperor had no clothes”.
FTX filed for US bankruptcy protection on Nov. 11 when its clients fled and executives discovered billions of dollars in missing funds, exacerbating turmoil in the cryptocurrency markets.
The team of lawyers in charge of winding down FTX is trying to identify a complex web of assets to repay creditors. The case was marked by allegations of misconduct and serious managerial failures, as well as a jurisdictional dispute between the US and the Bahamas, where FTX’s narrow circle ran the company.
According to the company, FTX’s total valuation peaked at $40 billion — $32 billion for its international operations and $8 billion for its U.S. operations based on funds raised from venture capital investors.
Bromley said the bankruptcy team had discovered “substantial funds” were being transferred from the exchange to Bankman-Fried’s crypto hedge fund Alameda Research, and “substantial amounts of money were being spent on matters unrelated to the company.”
This included about $300 million in Bahamas real estate that was “homes and vacation properties used by the senior executives” of FTX, he said.
The Alameda hedge fund was also found to have used FTX funds to make billions of dollars in illiquid venture investments in funds like Sequoia Capital and companies like Elon Musk’s SpaceX and Boring Company.
FTX filed for bankruptcy protection after an “effective run on the bank,” Bromley said, after rival crypto exchange Binance proceeded to liquidate its FTT tokens, the cryptocurrency issued by FTX. The token lost 80 percent of its value in two days, tumbling from a peak of $9.6 billion in total market value to just $422 million.
Bromley also revealed that the team of lawyers and investigators working on the bankruptcy would investigate a transaction between FTX and Binance last year. The rival crypto exchange, which is run by Changpeng Zhao, has divested an equity stake in FTX for approximately $2.1 billion in cash and cryptocurrencies.
FTX is now led by new CEO and Chief Restructuring Officer John J Ray III. The bankruptcy team includes research firms such as Kroll, blockchain research group Chainalysis and a cybersecurity firm whose identity has not been disclosed due to security concerns as it battles hacking attempts on FTX and its assets.
Bromley added that the company was cooperating with the US government and international regulators interested in the FTX’s collapse, including the US Department of Justice and the Securities and Exchange Commission.
Prosecutors working with the Southern District of New York of the Justice Department and the Bahamas’ Financial Crimes Investigation Branch have launched two separate criminal investigations into the FTX implosion.
A list of the 20 largest creditors in the FTX companies has been sealed by the court. However, U.S. bankruptcy judge John Dorsey ordered the attorneys to disclose the names of individuals and entities on the bankruptcy creditors’ committee, which likely included institutional investors who acquired interests in FTX.
Dorsey also approved FTX’s requests to pay the remaining employees and suppliers.