FTX operates as a ‘personal fiefdom’, faces hacks, loses assets – lawyer

NEW YORK/LONDON, Nov 22 (Reuters) – FTX is operating as the “personal fiefdom” of former CEO Sam Bankman-Fried, lawyers for the failed cryptocurrency exchange said in its first bankruptcy hearing. They detailed ongoing challenges, such as hacking attacks and large numbers of lost assets, said the meeting.

In the most high-profile cryptocurrency outbreak to date, FTX filed for protection in the U.S. after traders withdrew $6 billion from the platform in three days and rival exchange Binance dropped its bailout deal. The collapse resulted in an estimated 1 million creditors facing losses totaling billions of dollars.read more

A lawyer for FTX said at a bankruptcy hearing on Tuesday that the company now intends to sell healthy business units, but has been the target of cyberattacks and lost “substantial” assets. FTX said on Saturday it has launched a strategic review of its global assets and is preparing to sell or restructure some of its businesses.read more

The hearing was held in U.S. Bankruptcy Court in Wilmington, Delaware, and was broadcast live on YouTube and Zoom to an audience of about 1,500.

A lawyer also said the company had been operating as Bankman-Fried’s “personal fief” and had spent $300 million on real estate such as senior employee homes and vacation properties. FTX, led since new CEO John Ray filed for bankruptcy, has accused Bankman-Fried of working with Bahamian regulators to “sabotage” the U.S. bankruptcy and move assets offshore.

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

Reuters earlier reported that official property records showed that Bankman-Fried’s FTX, his parents and senior executives at the failed cryptocurrency exchange bought at least 19 properties in the Bahamas worth nearly $121 million over the past two years. real estate.read more

The lawyer also said that Binance’s sale of FTX in July 2021 must be investigated. Binance purchased a stake in FTX in 2019.

Separately, a Monday evening filing by Ed Mosley of Alvarez & Marsal, an advisory firm that advises FTX, showed FTX had a cash balance of $1.24 billion as of Sunday, “significantly higher than” previous expectations.

That included about $400 million in accounts tied to Alameda Research, a cryptocurrency trading firm owned by Bankman-Fried, and $172 million in the Japanese arm of FTX.

Bankman-Fried secretly tapped $10 billion in client funds to prop up his trading business, with at least $1 billion in deposits disappearing, according to Reuters.

disclosure debate

During the hearing, FTX representatives argued that customer names should be kept private because disclosing them could destabilize the cryptocurrency market and make customers vulnerable to hacking. FTX also argued that its client list was a valuable asset and that disclosing it could hurt future sales efforts or allow competitors to poach its user base.

A judge said the names could be kept private until a future court hearing.

Lawyers for FTX also described a precarious truce with a court-appointed liquidator overseeing the liquidation of FTX’s Bahamian subsidiary, FTX Digital Markets.

The two parties reached a preliminary agreement to coordinate their U.S. bankruptcy proceedings before Judge John Dorsey, avoiding conflicting rulings by two different U.S. bankruptcy judges. But both sides said they remained at odds more broadly on how to coordinate the restoration and protection of assets held by FTX’s various affiliates.

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

contagious fear

FTX’s fall from grace has sent shudders across the cryptocurrency world, pushing bitcoin to its lowest level in two years and raising concerns about other firms already reeling from the cryptocurrency market crash this year.

Genesis, a major U.S. cryptocurrency lender, said Monday it is trying to avoid bankruptcy, days after the FTX debacle forced it to suspend customer redemptions.

“Our goal is to resolve the current situation by consensus and to continue the dialogue with creditors without the need to file any bankruptcy filings,” a Genesis spokesman said in an emailed statement to Reuters.

A Bloomberg report, citing sources, said Genesis was working to raise fresh cash for its lending unit.

Citing sources, The Wall Street Journal said that Genesis approached Binance for investment, but the cryptocurrency exchange decided to decline due to concerns about conflicts of interest. Genesis also sought financial assistance from private equity firm Apollo Global Management (APO.N), the Journal said.

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

Cryptocurrency exchange Gemini, which operates a crypto lending product in partnership with Genesis, tweeted Monday that it will continue to work with the company to enable its users to redeem funds from its yield-generating “Earn” program.

Gemini said on its blog last week that its other products and services were not affected after Genesis suspended withdrawals.

Since the FTX debacle, some cryptocurrency players have turned to decentralized exchanges called “DEXs,” where investors trade peer-to-peer on the blockchain.

On Nov. 11, DEX’s overall daily trading volume jumped to its highest level since May. According to data from market tracker DeFi Llama, FTX plummeted on Oct. 10, but gains have since eased.

Reporting by Dietrich Knauth in New York and Tom Wilson in London; Additional reporting by Manya Saini, Rishabh Jaiswal, Juby Babu and Lavanya Sushil Ahire in Bangalore; Editing by Megan Davis, Alexander Smith and Nick Ziminski

Our Standards: Thomson Reuters Trust Principles.

Tom Hals

Thomson Reuters

Award-winning journalist with more than 20 years of experience in international journalism, focusing on high-stakes legal disputes in everything from government policy to corporate transactions.

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