Lawyers for the collapsed crypto exchange FTX said Tuesday at the company’s first bankruptcy hearing that regulators in the Bahamas, where FTX is headquartered, have agreed to merge the Delaware proceedings.
FTX lawyers, brought in by new management to handle the restructuring, filed an emergency petition last week to secure the move to the US. Tuesday’s hearing was the first step in resolving the largest cryptocurrency bankruptcy in history.
“We are dealing with a different kind of animal,” FTX advisor James Bromley said. “Unfortunately, FTX’s debtors weren’t particularly well managed, and that’s an understatement.”
As for the founder of FTX, it was an organization that was “actually run as a personal fiefdom of Sam Bankman-Freed,” FTX’s lawyer told the court.
FTX lawyers have confirmed earlier reports that the Southern District of New York’s Cybercrime Unit has opened an investigation into the case. Lawyers for FTX also cited cyberattacks, suggesting that there were several attacks in addition to the $477 million hack that occurred shortly after the company went bankrupt on Nov. 11. In this attack, the hackers extracted ether from FTX wallets.
The main task of the new team is to “bring order to the mess,” Bromley told the court. Introducing his fellow legal adviser, Bromley delved into what FTX is doing to understand the complex data and financial morass left by FTX and Bankman-Fried, who was replaced by restructuring expert John Ray III.
Bankman-Fried exercised a level of control over the business that “none of us has ever seen,” Bromley said, referring to the bankruptcy experts and lawyers the company hired as part of the restructuring process.
Earlier this year, private investors valued FTX at $32 billion, and Bankman-Fried positioned himself as the industry’s savior during the crypto winter.
“The FTX situation is the latest and biggest failure in this area,” Bromley said. “There was actually a bank run, as in regards to international exchange […] as well as the US stock exchange. At the same time as the bank run was taking place, there was a leadership crisis. […] The FTX companies were controlled by a very small group of people led by Mr. Sam-Bankman-Freed. During the bank raids, Mr. Freed’s management faltered, and this led to resignations.”
FTX has just begun to implement “standard” risk and data management practices, he said. As part of this process, lawyers previously had to approve approximately $1 million in payroll costs for existing FTX employees.
According to Bromley, this process is designed to get as much as possible for creditors.
“It’s important that we first maximize the value of the assets we have, whether it’s an asset sale, a business sale, or a business restructuring,” he said. “It’s all on the table.”
FTX clients were represented all over the world, but many of them were based in tax havens. The largest geographic areas represented included:
- Cayman Islands – 22% of registered customers.
- US Virgin Islands – 11% of registered customers.
- China – 8% of registered customers.
“We’ll get in front of you pretty quickly trying to sell some of the business we know. […] self-sufficient and reliable [with] interest from others,” Bromley added.
FTX lawyers said they have created four vaults for the assets of the company and various organizations. They are:
- The WRS (West Realm Shires) bunker that controls and covers US holdings.
- The Alameda bunker, which includes Alameda Research, the now defunct hedge fund Bankman Fried.
- A venture bunker that has invested in crypto companies and startups.
- The dot-com bunker, which covers international business, makes up the bulk of FTX’s deposits.
Bromley said asset recovery and protection efforts are not just about crypto assets and currency, but also about “information.” The company also attracted independent directors for the first time.
“A significant number of assets have either been stolen or are missing,” Bromley said. “In addition, “significant funds appear to have been transferred from other bunkers to the Alameda.”
A key aspect of the FTX crisis has to do with Alameda and the FTT token, a coin issued by FTX. Lawyers studied the history of FTX and subsidiaries, pointing to the creation of the FTT token in April 2019 and the founding of the Alameda companies in November 2017.
According to Bromley, the investment was in the crypto and tech venture space, but nearly $300 million was also spent on real estate in the Bahamas. That number is higher than previously reported, and Bromley said most of those purchases were homes and vacation properties for senior executives.
Employees leave the company en masse. As of October 2022, FTX’s primary parent company had 330 employees worldwide, 127 of them in the US.
According to FTX lawyers, the best estimate of the number of employees now is “about 260 people.”
This is an evolving story. Please stay tuned for updates.