Lawyers for collapsed crypto exchange FTX said in the company’s first bankruptcy hearing on Tuesday that regulators in the Bahamas, where FTX is headquartered, have agreed to consolidate proceedings in Delaware.
FTX attorneys, who were brought in by new executives to handle the restructuring, filed an emergency motion last week to secure the move to the United States. Tuesday’s hearing was the first step in resolving the biggest cryptocurrency bankruptcy on record.
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“We are dealing with a different kind of animal,” said FTX attorney James Bromley. “Unfortunately FTX’s debtors weren’t particularly well managed, to put it mildly.”
As for FTX’s founder, it was an organization that was “actually run as a personal fiefdom of Sam Bankman-Fried,” an attorney for FTX told the court.
FTX attorneys confirmed earlier reports that the Southern District of New York Cyber Crimes Unit had opened an investigation into the matter. FTX lawyers also referenced cyber attacks, suggesting there were multiple attacks beyond the $477 million hack that occurred shortly after the company went bankrupt on Nov. 11. In this attack, hackers mined ether from FTX wallets.
The main challenge for the new team is to “work to bring order out of the mess”, Bromley told the court. After introducing his fellow lawyer, Bromley dove into what FTX did to understand the complex quagmire of data and finance left behind by FTX and Bankman-Fried, who was replaced by restructuring expert John Ray III.
Bankman-Fried wielded a level of control over the business that “none of us have ever seen,” Bromley said, referring to bankruptcy experts and lawyers the company has employed as part of of the restructuring process.
FTX was valued by private investors at $32 billion earlier this year, and Bankman-Fried was posing as an industry savior during the crypto winter.
“The FTX situation is the latest and greatest failure in this space,” Bromley said. “There has indeed been a run on the bank, both in terms of international exchange […] as well as the American stock market. At the same time as the run on the bank was happening, there was a crisis of leadership […] The FTX companies were controlled by a very small group of people, led by Mr. Sam-Bankman-Fried. During the bank run, Mr. Fried’s leadership frayed, and that led to resignations.”
FTX has just started implementing “standard” risk and data management practices, he said. As part of the process, attorneys previously had to approve about $1 million in salary expenses for existing FTX employees.
The process is designed to get as much creditors as possible, Bromley said.
“It’s critical that we first maximize the value of the assets we own, whether it’s selling assets, selling businesses or restructuring businesses,” he said. “It’s all on the table.”
FTX’s clients had a global presence, but many were based in tax havens. The largest geographic areas represented included:
- Cayman Islands — 22% of registered customers.
- US Virgin Islands — 11% of registered customers.
- China — 8% of registered customers.
“We’ll be in front of you pretty soon with an attempt to sell some of the business that we understand […] are independent and robust [with] interest of others,” Bromley added.
FTX lawyers said they have established four silos for company assets and various entities. They are:
- The WRS (West Realm Shires) silo, which controls and encompasses US holdings.
- The Alameda silo, which includes Alameda Research, Bankman Fried’s now defunct hedge fund.
- The venture capital silo, which has invested in crypto companies and startups.
- The dot-com silo, which encompasses international business, the bulk of FTX’s filings.
Bromley said asset recovery and protection efforts not only encompass crypto assets and currency, but also “information.” The company also brought in independent directors for the first time.
“A substantial amount of assets have been stolen or gone missing,” Bromley said. “Furthermore, ‘substantial funds appear to have been transferred from other silos to Alameda.’
A key aspect of the FTX crisis relates to Alameda and the FTT token, a coin issued by FTX. The attorneys walked through the history of FTX and affiliates, highlighting the creation of the FTT token in April 2019 and the founding of the Alameda entities in November 2017.
Investments have been made in crypto and technology, Bromley said, but nearly $300 million has also been spent on real estate in the Bahamas. That number is higher than previously reported, and Bromley said most of those purchases were vacation homes and properties for senior executives.
Employees left the company en masse. As of October 2022, FTX’s main parent company had 330 employees worldwide, including 127 in the United States. Including Australian businesses and FTX Digital Markets which had 190 employees, the global headcount was 520.
The best estimate of the current roster, according to FTX attorneys, is “around 260.”
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