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HomeCryptocurrencyLawyers Detail How Massive Crypto Exchange FTX Fell Down: NPR

Lawyers Detail How Massive Crypto Exchange FTX Fell Down: NPR

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When FTX collapsed in early November, Samuel Bankman-Fried handed over control of the cryptocurrency exchange he founded to John J. Ray III, a corporate recovery specialist.

Saul Loeb/AFP via Getty Images


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Saul Loeb/AFP via Getty Images


When FTX collapsed in early November, Samuel Bankman-Fried handed over control of the cryptocurrency exchange he founded to John J. Ray III, a corporate recovery specialist.

Saul Loeb/AFP via Getty Images

Lawyers for once-powerful crypto exchange FTX outlined a company plagued by dysfunction and mismanagement during a court hearing on Tuesday, as they sought to explain how the sprawling empire founded by Sam Bankman-Fried was brought to its knees in a matter of days. .

“We have witnessed one of the most abrupt and difficult collapses in the history of corporate America,” said James Bromley, an attorney representing the company.

Last month, FTX was one of the most popular cryptocurrency exchanges in the world. Today, you’re figuring out how to sell assets, pay customers, and satisfy creditors as part of a large and complex bankruptcy filing. And their new management team, who came on board just before the exchange filed for Chapter 11, is just beginning to comprehend the scale of the mess they inherited.

This is what we learned during the first court hearing in the bankruptcy proceeding:

Customers’ money is MIA

Bromley confirmed what many of FTX’s millions of customers feared. He said his team has determined that “a substantial amount of assets have been stolen or are missing.”

FTX was presented as a safe way for ordinary people to invest in the confusing and opaque world of cryptocurrencies, and those people now have little understanding of what happened to their funds.

In court, Bromley and his colleagues offered scant details about what has not been explained and no explanation of what “missing” means.

The company’s new CEO, John J. Ray III, hired a cybersecurity consultancy to track the funds, according to a court filing.

FTX, a massive digital company, has bad data and intentionally destroyed internal messages

When Ray and his team began collecting information, they immediately recognized obvious problems with the FTX data.

There are significant gaps in the information and they are trying to distinguish fact from fiction.

Or, as Bromley said of FTX: “Debtors have unreliable books and records.”

According to the company’s lawyers, they have no reason to believe that the financial statements were ever audited. That means that no trained professional outside of the company and its dozens of affiliates objectively reviewed FTX’s books to ensure investors received truthful information. Therefore, the new management hired an outside accounting firm to review FTX’s financial information.

Ray and his team also allege critical correspondence is missing. They say Bankman-Fried communicated with colleagues on apps that automatically delete messages.

Estimates that FTX was worth $32 billion may be too low

It was previously reported that, as of January 2022, FTX was valued at $32 billion.

But FTX’s lawyers said that just ten months ago, the company was valued at a whopping $40 billion. NPR has not been able to independently verify that assessment.

FTX’s legal team outlined how much money the company has received from investors since it was founded in 2019, and in its most recent funding round, it raised an additional $400 million for its US business and $500 million for its operations. largest international.

It wasn’t just a “bank run” that led to the collapse of FTX

“There was effectively a run on the bank,” Bromley said, “and a leadership crisis.”

After Bankman-Fried’s rival, Binance CEO Changpeng Zhao, announced his plans to divest a substantial amount of an FTX-created cryptocurrency, other investors panicked.

Clients panicked after Binance co-founder and CEO Changpeng Zhao, one of FTX founder Sam Bankman-Fried’s rivals, suggested that he had lost faith in a cryptocurrency created by FTX.

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Patricia de Melo Moreira/AFP via Getty Images


Clients panicked after Binance co-founder and CEO Changpeng Zhao, one of FTX founder Sam Bankman-Fried’s rivals, suggested that he had lost faith in a cryptocurrency created by FTX.

Patricia de Melo Moreira/AFP via Getty Images

FTX was unable to meet the demand for withdrawals, and lawyers said that, at that moment of crisis, it became clear that there were serious problems with FTX’s management.

The company “had a lack of corporate controls on a level that none of us in the profession who have looked at it so far have seen,” Bromley said.

Everyone is worried about hackers, and major disputes are brewing over how to handle customer data.

FTX has been and continues to be the target of cyberattacks, and that complicates the work of its lawyers.

Since Ray took over the company’s operations on November 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 to FTX.

There was also disagreement between the company’s lawyers and its creditors, and the US trustee overseeing the proceedings, over customer data.

FTX has millions of customers, whom Glueckstein called “the soul of the company.”

It argued that its customer database is valuable, “important to any reorganization or sale to maximize value for all stakeholders,” and for that reason, such information should not be made public.

FTX also asked Judge John Dorsey to allow the company to submit redacted lists of its top creditors, citing privacy and security concerns.

But Ben Hackman, a lawyer representing the US trustee, argued against it, suggesting that the information should be made available, with only a few exceptions, in the interest of greater transparency.

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