Lawyers say FTX was run as a ‘personal fiefdom,’ hacked faces, lost assets

© Reuters. FILE PHOTO: Representations of virtual cryptocurrencies are placed on US dollar banknotes in this illustration taken November 28, 2021. REUTERS/Dado Ruvic/Illustration/File Photo

Written by Dietrich Knuth, Tom Hales, and Tom Wilson

NEW YORK/LONDON (Reuters) – Attorneys for the crashing cryptocurrency exchange said at its first bankruptcy hearing that FTX was being run as the “personal fiefdom” of former CEO Sam Bankman-Fried, in its first bankruptcy hearing, detailing the issue. Ongoing challenges such as hacks and lost large assets.

In the biggest crypto blowout to date, FTX filed for protection in the US after traders withdrew $6 billion from the platform in three days and rival exchange Binance abandoned a bailout deal. The crash caused an estimated one million creditors to suffer billions of dollars in losses.

The company now intends to sell healthy business units, but it has been hit by cyberattacks and lost “significant” assets, an attorney for FTX said at a bankruptcy hearing Tuesday.

FTX said on Saturday it has launched a strategic review of its global assets and is preparing to sell or reorganize some companies. FTX said on Tuesday that it is receiving interest from potential buyers in its assets and will conduct a process to reorganize or sell them.

The hearing took place in US Bankruptcy Court in Wilmington, Delaware and was broadcast live to about 1,500 viewers on YouTube and Zoom.

A lawyer also said the company was being run as a “personal fiefdom” of Pinkman-Fried with $300 million spent on real estate such as homes and vacation properties for senior employees. FTX, which has been led by new CEO John Ray since declaring bankruptcy, has accused Bankman-Fried of working with regulators in the Bahamas to “undercut” the US bankruptcy case and shift assets abroad.

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

Reuters previously reported that Bankman-Fried’s FTX, his parents and top executives at the failed cryptocurrency exchange had purchased at least 19 properties worth nearly $121 million in the Bahamas over the past two years, according to official property records.

The lawyers also said that an investigation should be conducted into Binance’s sale of FTX in July 2021. Binance bought a stake in FTX in 2019.

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

They include about $400 million in accounts related to Alameda Research, the cryptocurrency trading firm owned by Bankman Fried, and $172 million in an FTX arm in Japan.

Reuters reports that Bankman-Fried secretly used $10 billion in customer funds to support its trading business, and that at least $1 billion of those deposits has disappeared.

Disclosure discussion

At the hearing, FTX representatives argued that customer names should be kept confidential, as revealing them could destabilize the crypto market and open customers up to hacking. FTX has also argued that its customer list is a valuable asset, and disclosure of this could impair future sales efforts or allow competitors to grab its user base.

A judge said those names could be kept confidential until an upcoming court hearing.

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

The two sides reached an agreement in principle to harmonize the insolvency proceeding in the United States before Judge John Dorsey, avoiding the possibility of conflicting rulings from two different US judges on bankruptcy. But both sides have indicated that they still have broader differences over how to coordinate the recovery and preservation of assets held by various FTX affiliates.

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

Communication concerns

FTX’s fall from grace has sent shivers through the cryptocurrency world, sending bitcoin to its lowest level in nearly two years and sparking contagion fears among other companies already reeling from the cryptocurrency market meltdown this year.

US crypto lending company Genesis said on Monday it was trying to avoid bankruptcy, days after the collapse of FTX forced it to suspend customer refunds.

“Our goal is to resolve the current situation by mutual consent without the need for any bankruptcy filing,” a Genesis spokesperson said in a statement emailed to Reuters, adding that the company continues to hold talks with creditors.

A Bloomberg News report, citing sources, said Genesis is struggling to raise new funds for its lending unit.

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

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

Crypto exchange Gemini, which operates a cryptocurrency lending product in partnership with Genesis, tweeted Monday that it continues to work with the company to enable its users to redeem money from its revenue-generating “earning” program.

Gemini said in its blog post last week that there has been no impact on its other products and services after Genesis paused recalls.

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.

Total daily trading volumes on DEXs jumped to their highest since May on Nov. 10 as FTX collapsed, according to data from market tracker DeFi Llama, but has pared gains since then.

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