A new report from the FTX team that’s digging through the financial guts of the failed exchange said the company owed its customers $8.7 billion after commingling and misusing their deposits, and senior executives started hiding that trouble as early as August 2022.
About $6.4 billion of the money the FTX.com exchange owed its customers was “in the form of fiat currency and stablecoin that had been misappropriated,” according to the report filed on Monday. About $7 billion in liquid assets have been recovered so far, and those searching the company’s assets “anticipate additional recoveries.”
“The image that the FTX Group sought to portray as the customer-focused leader of the digital age was a mirage,” said John J. Ray III, the CEO who is trying to recover money for creditors, in a statement. “From the inception of the FTX.com exchange, the FTX Group commingled customer deposits and corporate funds, and misused them with abandon at the direction and by the design of previous senior executives.”
A product of months of analysis and forensic auditing, the new report paints a picture of company management and at least one senior lawyer knowingly misusing customer money, saying they “lied to banks and auditors, executed false documents, and moved the FTX Group from jurisdiction to jurisdiction, taking flight from the United States to Hong Kong to the Bahamas, in a continual effort to enable and avoid detection of their wrongdoing.”
The 33-page review is the second filed by Ray after he’d detailed an initial examination in April that provided a number of revelations of improper activity under founder and former CEO Sam Bankman-Fried’s watch. Bankman-Fried is facing a number of criminal charges set for an October trial in New York.
The company is now in the midst of bankruptcy proceedings in Delaware. Ray has been trying to settle the exchange’s affairs since its November collapse, and there have been some hints that its operations could be restarted as FTX 2.0.
Those trying to trace FTX transactions and funding are finding the task "extraordinarily challenging," the report indicated.
The company's senior executives, including Caroline Ellison, the former CEO of FTX's trading affiliate Alameda Research, knew as early as August of 2022 that the firm owed more than $8 billion to customers, and it didn't have the money, according to Ray's report.
"They did not disclose the shortfall, but at that time, for the first time, they created a sham customer account on FTX.com to reflect the hidden fiat currency liability," as described in the document. "To minimize the risk of scrutiny, the FTX Senior Executives and Ellison referred to this sham account only as 'our Korean friend’s account.' The account reflected that their 'Korean friend' owed the FTX.com exchange $8.9 billion."
The company also routinely misled its banking partners about how it was using accounts. A former employee of Alameda Research told the bankruptcy team that the company "made no meaningful distinction between customer funds and Alameda funds," the report said.
Bankman-Fried also gave false testimony to senators at a Feb. 9, 2022, hearing when he spoke about his company's practices in protecting customers and their money, according to the report.
UPDATE (June 26, 2023, 18:21 UTC): Adds further accusations from the report.
UPDATE (June 26, 2023, 19:50 UTC): Adds information about executives knowing about shortfalls in August 2022.
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