Lawyers for once-powerful crypto exchange FTX described a company riddled with dysfunction and mismanagement during a Tuesday court hearing as they attempted to explain how the sprawling empire founded by Sam Bankman-Fried collapsed in a matter of days.
“We have witnessed one of the most abrupt and difficult collapses in American corporate history,” said James Bromley, an attorney representing the company.
For the past month, FTX has been one of the most popular cryptocurrency exchanges in the world. Today, it’s figuring out how to sell assets, pay customers, and satisfy creditors as part of a large and complex bankruptcy filing. And its new management team, put in place just prior to the Chapter 11 request for the exchange, is only just beginning to understand the magnitude of the mess they’ve inherited.
Here is what we learned during the first court hearing in bankruptcy proceedings:
Customer money is MIA
Bromley confirmed what many of FTX’s millions of customers had feared. He said his team found that “a significant amount of assets were either stolen or missing”.
FTX presented itself as a safe way for ordinary people to invest in the confusing and opaque world of cryptocurrencies, and these people now have little understanding of what happened to their funds.
In court, Bromley and his colleagues offered little detail about what was left unaccounted for and did not explain what “missing” meant.
According to a court filing, the company’s new CEO, John J. Ray III, hired a cybersecurity consultancy to trace the funds.
FTX – a giant digital company – has bad data and intentionally destroyed internal messages
As Ray and his team began gathering information, they immediately identified glaring problems with FTX’s data.
There are huge gaps in information and they try to separate fact from fiction.
Or as Bromley said of FTX, “The debtors have unreliable books and records.”
According to the company’s lawyers, they have no reason to believe the financial statements have ever been audited. This means that no trained professionals from outside the company and its dozens of subsidiaries have ever objectively reviewed FTX’s books to ensure investors are receiving truthful information. As a result, the new management has engaged an external auditing firm to review FTX’s financial information.
Ray and his team also claim important correspondence is missing. They say Bankman-Fried communicated with colleagues through apps that automatically delete messages.
Estimates that FTX was valued at $32 billion may be underestimated
It was previously reported that FTX was worth $32 billion as of January 2022.
But FTX lawyers said the company was valued at a whopping $40 billion just 10 months ago. NPR has not been able to independently verify this review.
FTX’s legal team detailed how much money the company has received from investors since its inception in 2019, and in its latest funding round, it raised an additional $400 million for its US operations and $500 million for its larger international ones Activities.
It wasn’t just a “run on the bank” that caused FTX to collapse
“There was practically a run on the bench,” Bromley said, “and a leadership crisis.”
After Bankman-Fried’s rival, Binance CEO Changpeng Zhao, announced his plans to divest a significant amount of a cryptocurrency created by FTX, other investors panicked.
Patricia de Melo Moreira/AFP via Getty Images
/
AFP via Getty Images
FTX failed to meet the withdrawal request, and lawyers said that at that moment of the crisis, it became apparent that there were serious problems with FTX’s management.
The company “had a lack of corporate controls at a level that none of us in the industry who have looked at it have ever seen,” Bromley said.
Everyone fears hackers, and there are major disputes over how customer data is handled
FTX has been, and continues to be, the target of cyberattacks, which complicates the work of its attorneys.
Since Ray took over the company’s operations on Nov. 11, he and his team “have struggled to gain access to customer data due to ongoing security risks,” according to Brian Glueckstein, another attorney representing FTX.
There was also disagreement over customer data between the company’s lawyers and its creditors, as well as the US trustee overseeing the case.
FTX has millions of customers, whom Glückstein described as “the lifeblood of the company.”
He argued the customer database was valuable – “essential for any reorganization or sale to maximize value for everyone involved” – and for that reason this information should not be made public.
FTX also asked Judge John Dorsey to allow the company to file redacted lists of its top creditors, citing concerns about their privacy and security.
But Ben Hackman, an attorney for the US trustee, objected, suggesting that information be made available with few exceptions in the interests of greater transparency.
Copyright 2022 NPR. To see more, visit https://www.npr.org.