FTX says assets are “missing” or “stolen” early in bankruptcy proceedings

Lawyers for collapsed cryptocurrency exchange FTX on Tuesday painted a bleak picture of the firm’s finances and the fate of billions of dollars in assets that have lost customers.

“A significant amount of assets have either been stolen or disappeared,” said James Bromley, a partner at law firm Sullivan & Cromwell who represents FTX, at a bankruptcy hearing in federal court in Delaware.

FTX filed for bankruptcy this month after a deposit rush left the company $8 billion in debt. The company’s failure has sparked investigations by the Securities and Exchange Commission and the Justice Department, which have focused on whether FTX misappropriated client funds when it loaned 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 at the time of the bankruptcy filing.

The stunning collapse has seen amateur investors and large corporations scramble to recover billions of dollars in cryptocurrencies they deposited on the FTX platform. In the coming months, the bankruptcy proceedings will determine how much of that money can be recovered.

But more than a week into the court case, 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 was facing “cyberattacks” and that assets were still missing. He appeared to be referring to an apparent hack 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.

At the hearing, Mr. Bromley presented a detailed account of FTX’s corporate history and its abrupt collapse earlier this month. Mr. Bankman-Fried had built a corporate empire that 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 as to how it was spending its money prior to the collapse. A business entity involved in the bankruptcy, Mr. Bromley said, bought nearly $300 million worth of properties in the Bahamas, where FTX was based, including homes and vacation properties used by senior FTX executives.

Mr. Bromley also offered new details about the last hours before Mr. Bankman-Fried relinquished control of the firm on November 11. Mr. Bankman-Fried didn’t make the decision until early this morning, Mr. Bromley said after consulting with his attorneys 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 criticism of Mr. Bankman-Fried’s management expressed in a stunning court filing last week by John Jay Ray III, who succeeded Mr. Bankman-Fried as Chief Executive of FTX.

Mr. Ray, a veteran of corporate failure management, was previously responsible for winding up energy trading company Enron. But in last week’s filing, he wrote that the chaos at FTX was the worst he’d seen in his career.

In a letter to employees Tuesday, Mr Bankman-Fried apologized for the company’s collapse. He said he regrets filing for bankruptcy and reluctantly gave in to the pressure.

“Potential interest in billions of dollars in funding came about eight minutes after I signed the Chapter 11 documents,” he said in the letter, which was obtained by the New York Times. “With those funds, the billions of dollars of collateral the company still held, and the interest we had received from other parties, I think we could have probably given great value back to customers and saved the business.”

In court filings, FTX’s new management has sought to distance itself from Mr Bankman-Fried, stressing that he does not speak for the company. Much of Tuesday’s hearing focused on a number of legal issues that arose in the early stages of the bankruptcy.

Over the weekend, FTX released an edited list of its top 50 creditors, showing that those companies or individuals were owed about $3.1 billion in total. However, the company kept silent about the names of the creditors.

A key issue at the hearing was whether FTX would need to release more detailed information about its creditors, a group that likely includes hundreds of thousands of ordinary people who have deposited funds into the exchange. Lawyers for FTX and some of the creditors argued that disclosing this information would compromise users’ privacy.

US Bankruptcy Court Judge John Dorsey ruled that the information could remain private, at least for now. “Everyone in this room knows that the internet is fraught with potential dangers,” he said. “It’s important that we protect the people who want to be involved in this case.”

The hearing drew an unusual level of attention for bankruptcy proceedings, as more than 500 people logged on to a Zoom broadcast. During a break, a person on the line started blasting the song “Sorry” by Justin Bieber.

“I understand we had conversation while we were at recess,” Judge Dorsey said as he returned to the courtroom.