FTX Bankruptcy Report Reveals Wrongdoings by Company Executives
A report has been released regarding the bankruptcy case of FTX, highlighting various misconducts by the company and its executives that led to its collapse. The report delves into the payment of fees to whistleblowers, the handling of the “capital issues” with banks, and when the executives were aware of FTX Group’s insolvency.
Who Knew?
The report contains information on which executives and the company were aware of the accounting discrepancies at FTX Group before its collapse. Accusations state that Ryan Salame was involved in creating a retrospective payment agency agreement, instructing other FTX Group employees to misreport the usage of FTX Group’s bank accounts to banks, diverting FTX Group’s assets to purchase real estate, restaurants, and food service companies, as well as other purchases and investments (including private planes), and withdrawing millions of dollars from his account before FTX.com halted customer withdrawals.
The report also highlights that Salame used FTX Group funds for millions of dollars in political donations.
Additionally, sailor Samuel Trabucco gained significant benefits before the bankruptcy, as “FTX Group spent over $15 million purchasing real estate, yachts, and dock spaces for Trabucco in priority.” Trabucco made substantial withdrawals from FTX.com exchange in September 2022.
In other communications, he expressed concerns about Alameda’s balance sheet and warned that if employees knew Alameda’s net asset value without the foreign trade trust fund, they would leak it.
Other executives were also investigated, including a former FTX Group employee who managed Alameda’s token investments and was involved in improperly recorded related sales transactions. This employee also made significant withdrawals close to the filing date.
The report also mentions another former FTX Group employee who became the subject of media coverage for transferring $600,000 worth of FTT to a charity he co-founded. Action against these individuals has not been decided yet due to the need to prioritize other lawsuits.
Furthermore, the report details avoidance lawsuits filed against employees who made other withdrawals in the days leading up to the bankruptcy.
The report further concludes that despite Bankman-Fried’s insistence, FTX US was not solvent on the filing date. FTX.US’s “bank balance” spreadsheet totaled $138.5 million, while the “wallet balance” spreadsheet, representing customer balances, totaled $184.7 million.
FTX.US’s Chief Financial Officer, Caroline Papadopoulos, pointed out an error in the calculations, stating that it “includes [WRS] cash, which should be treated as separate from FTX US.” She described the reconciliation described on the surface as “nonsense.”
Interestingly, the report concludes that the auditors did not see any evidence that Sullivan Cromwell (SC) knew about FTX Group’s fraudulent activities before the filing or that SC ignored the warning signs that required an investigation of the debtor’s statements.
The report reaches this conclusion despite the fact that “due to the use of Signal’s auto-deletion feature, it is possible – and indeed likely – that the production of these messages is incomplete and may never be completed.”
Additionally, despite CoinDesk’s report implying that Alameda Research overvalued its assets beyond the entire market cap, a SC lawyer assured Voyager five days after the report was published that FTX Group was “rock solid,” and the current issue was “Binance’s foolish behavior.”
The lawyer claimed that they only became aware of these issues the day after sending the email.
Lawyers and Whistleblowers
The report describes the deep connections between FTX Group and Fenwick West (FW), referred to as “Law Firm-1.” It is alleged that financial criminal Sam Bankman-Fried’s father, Joseph Bankman, advised hiring FW to assist FTX Group and recommended hiring Daniel Friedberg and Can Sun.
FW is described as the “primary external US counsel to FTX Group, providing advice on employment, tax, loan agreements, acquisitions, regulatory matters, government investigations, compliance and risk mitigation, equity incentives, collaboration agreements, trademark enforcement, intercompany service agreements, purchase agreements, and financing.”
“Between 2018 and 2022, Law Firm-1 received over $22 million in legal fees from FTX Group. In 2018, when Friedberg was a partner at Law Firm-1, Joseph Bankman encouraged Bankman-Fried to have Friedberg hold important positions at Alameda.”
Friedberg and Can Sun joined FTX Group in January 2020 and August 2021, respectively, after leaving Law Firm-1. Friedberg served as Chief Compliance Officer for FTX.US and General Counsel for Alameda, while Sun served as General Counsel for FTX Trading. However, Law Firm-1’s relationship with FTX Group extends beyond Friedberg and Sun.
“Joseph Bankman maintained unusually close personal relationships with several attorneys at Law Firm-1, providing subsidies for travel and attendance at sporting events to certain attorneys.”
This deep collaboration includes FW’s assistance in:
– FTX Group issuing “Founder Loans” that were used to transfer at least $2 billion in cash and assets between FTX Group entities and directly into the personal accounts of FTX Group leaders.
– Friedberg creating a retrospective payment agency agreement between FTX Trading and Alameda.
– FTX Group’s leadership’s efforts to conceal the close relationship between FTX Trading and Alameda from government regulatory agencies and investors.
– FTX Group’s leadership using unconventional settlement methods to keep credible whistleblowers silent.
– FTX Group’s efforts to downplay its relationship with the Serum Foundation and its control.
The exact details of these relationships are difficult to ascertain, partially because “Law Firm-1 frequently used messaging platforms such as Signal to communicate with individuals at FTX Group and has provided only 144 individual or group chat records between Law Firm-1 and FTX Group employees to date.”
“Of these chats, only 18 still contain messages, with the rest indicating the existence of group messages but without content.”
The report further suggests that FW may have been aware of the issues as far back as a few years before the eventual collapse, as the investigation found that “in December 2019, Bankman-Fried admitted to members of the firm that Alameda held large amounts of FTT, which had significant market value, but this value could not be realized unless the market collapsed.”
Additionally, the report alleges that FW “created the Serum Foundation, employing a system that allowed certain FTX Group employees to continue controlling the Serum Foundation and SRM tokens. Quinn Emanuel also found that FTX Group personnel used [FW] to create an entity called the Incentive Ecosystem Foundation to provide incentives for the SRM ecosystem and increase the market price of SRM while concealing the entity’s connection to FTX Group.”
This aligns with previous allegations that “the debtor reports that Friedberg – the former General Counsel of Alameda – commissioned the white paper for Maps and drafted significant portions of it in October 2020.”
Friedberg has become a target of the estate lawsuit, accused of assisting in paying whistleblower fees.
Furthermore, “Sun coordinated with Friedberg to evade scrutiny from the CFTC by concealing information about FTX Trading’s interested entities.”
The report also accuses FTX Group of following a certain pattern in their treatment of whistleblowers: “FTX Group attorneys did not properly investigate the substance of these whistleblowers’ complaints but rather settled with substantial amounts, primarily handled by Friedberg, Sun, Miller, and Joseph Bankman.”
Overall, FTX Group is reiterated to be a criminal enterprise engaged in various irresponsible and improper behaviors, with numerous executives and lawyers going to great lengths to maintain FTX’s operations.
