Documents Show FTX Executives Worried About Customer Funds

by Wall Street Rebel - Michael London | 01/18/2023 8:34 AM
Documents Show FTX Executives Worried About Customer Funds

The New York Times has uncovered documents that provide new information about the internal deliberations of FTX's senior management just before the cryptocurrency exchange's collapse in November. Executives at FTX knew that regulatory supervision was inadequate and that the defunct cryptocurrency exchange lacked corporate management.


A senior executive voiced a nagging fear at a meeting with FTX founder Sam Bankman-Fried a few weeks before the exchange's demise.

The executive had only later discovered that the cryptocurrency trading business that Mr. Bankman-Fried had also formed, Alameda Research, had borrowed nearly $13 billion from FTX. Alameda was in a bind: the company had recently announced that it had incurred a loss of around $5 billion, and it looked that this loss included money that clients of FTX had put with the exchange for the purpose of safety.

According to records describing the interaction acquired by The New York Times, Mr. Bankman-Fried recognized that there was an issue when he was contacted about it. According to the documents, Mr. Bankman-Fried informed the coworker that the "situation was giving him worry" and preventing him from being as productive as possible. According to documentation detailing the interaction The New York Times acquired, Mr. Bankman-Fried recognized an issue when he was questioned about it. According to the records, Mr. Bankman-Fried told his coworker that he was "concerned" about the situation and was affecting his work.

The story provides a new context for the closing days of FTX, when the company's senior executives began to panic, as is reported in confidential emails between the governments of the United States and the Bahamas. The exchange collapsed in November when a rush of deposits dried up, leaving a huge hole in the company's finances and prompting it to declare bankruptcy. Mr. Bankman-Fried, 30, was charged with fraud, money laundering, and campaign finance offenses by federal authorities in Manhattan last month.

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The authorities allege that Mr. Bankman-Fried stole billions of dollars worth of client cash from FTX and used those assets to make political donations, support trading at Alameda, and purchase luxurious real estate in the Bahamas, where FTX was headquartered. On December 12th, Bahamian police took Mr. Bankman-Fried into custody, and he was subsequently extradited to the United States.

The government records that the New York Times was able to get illustrate how the United States officials explained the situation to the Bahamians as they advocated for Mr. Bankman-detention. Fried's In addition, the records provide a comprehensive picture of the conversations that took place between officials from FTX and Alameda about the usage of client cash by the exchange. Although some aspects of those talks have been reported in public charging papers, other elements have not been made public up to this point.

There is just a mention of Mr. Bankman-Fried in the materials; none of the other executives are mentioned. However, two of them are identified as high-level software engineers who worked on FTX's code. One of these top-level programmers met with Mr. Bankman-Fried to go through the financial arrangements with the customers.

Gary Wang and Nishad Singh, who helped build FTX alongside Mr. Bankman-Fried, have been recognized by the police as two FTX executives who worked on the coding for the exchange. These individuals have been identified in public charging papers. The second individual discussed in the correspondence is not identified, but they refer to them as a high-level figure at Alameda. This is most likely a reference to Caroline Ellison, who once served as Alameda's chief executive officer.

Fraud charges have been brought against Ms. Ellison and Mr. Wang, who have entered guilty pleas and agreed to assist with the prosecution. Mr. Singh has not been given any charges at this time.

Mr. Wang and Mr. Singh's attorneys refused to comment. Ms. Ellison's attorney did not reply to a request for comment. A spokeswoman for the office of the United States attorney for the Southern District of New York, which is handling the criminal investigation into FTX, also refused to comment.

The government communications occurred at a very early period of the investigation against Mr. Bankman-Fried, before Ms. Ellison and Mr. Wang pled guilty, and it is likely that prosecutors' knowledge of some case aspects has altered since then. In 2020, one of the FTX software programmers designated as CC-1 ran a query in a corporate database and noticed that Alameda had "approximately hundreds of millions of dollars" in negative balance on the exchange. According to the documents, the evidence prompted CC-1 to determine that Alameda used customer funds improperly.

According to the documents, the executive discussed the issue with Mr. Bankman-Fried, who replied that "it was fine" since the money Alameda had borrowed was backed by FTT, a cryptocurrency produced by FTX. This data is derived from the documents.

According to the records, at about the same time, FTX was being audited. The high-level Alameda executive asked Mr. Bankman-Fried if the auditors would raise any issues about Alameda's usage of client cash during the audit. According to the records, Bankman Fried answered that auditors normally do not focus on such concerns.

The situation in Alameda has been giving people increasing cause for concern since approximately September of last year. According to the records, Mr. Bankman-Fried reportedly broached the subject of liquidating the company after it suffered a loss of around $5 billion not long ago.

According to the records, at around that time, one of the software developers, who was identified only as CC-1, revealed to the second software developer, who was identified only as CC-2, that Alameda had borrowed nearly $13 billion from FTX.

According to the records, CC-2 was "alarmed" that FTX looked to have lost client funds and met with Mr. Bankman-Fried to voice this worry.

"Bankman-Fried stated that the scenario was giving him worry, leading him to be '5-10 percent less productive,'" according to the records. "Bankman-Fried noted that the problem may be rectified if more capital was obtained and the price of cryptocurrencies increased."

However, the situation did not improve. Beginning in November, the run-on deposits precipitated FTX's rapid slide. According to the records, the executive designated as CC-1 performed early estimates suggesting that "FTX would be able to service all client withdrawals." "Bankman-Fried then suggested to CC-1, in essence, and in part, that CC-1 had missed a second, concealed account containing an $8 billion debt owing by Alameda to"

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In their correspondence, U.S. officials informed the Bahamas that Mr. Bankman-Fried posed a flight risk. "Prosecutors have cause to think that Bankman-Fried would depart the Bahamas and attempt to destroy evidence if he learned he was under investigation by U.S. officials, potentially facing criminal charges."

Mr. Bankman-Fried "personally gained billions of dollars from his involvement in the criminal conspiracy," according to the United States, and "has the means and may soon have the incentive to leave the Bahamas."

The day after his arrest, Mr. Bankman-Fried appeared in court in the Bahamas, where he was refused bail and sent to the infamous Fox Hill jail. But even as the U.S. authorities argued behind the scenes that Mr. Bankman-Fried posed a flight risk, U.S. prosecutors bargained with his attorneys to enable him to post a bond in the U.S.

Mr. Bankman-legal Fried's team has maintained that his choice to remain in the Bahamas even as his firm went bankrupt in November demonstrates that he never meant to depart.

Mr. Bankman-Fried consented to extradition in late December and was promptly freed under tight terms requiring him to stay confined to his parent's residence in Palo Alto, California. The assistant U.S. attorney prosecuting the case, Nicolas Roos, said in court that Mr. Bankman-wealth Fried's had "substantially decreased" and that his family and community connections helped support a bail package.

This month, Mr. Bankman-Fried returned shortly to New York to enter a not-guilty plea. He has begun assembling a comprehensive defense from his boyhood home near the Stanford University campus.

Last Monday, he stated on the internet site Substack, "I did not steal money, and I surely did not hide billions of dollars." Nearly all of my assets were and continue to be used to support FTX clients.

He also maintained that the American subsidiary of FTX, FTX US, was solvent and should be able to reimburse its clients. It is absurd that FTX US consumers have not yet been fully whole and their cash returned, he said.

Mr. Bankman-Fried resigned from his position as CEO of FTX after the business declared bankruptcy. During a hearing last week, one of the company's attorneys said that the new leadership had recovered more than $5 billion in cash and crypto assets since the filing.


                       The FTX Disaster is Deeper Than you Think

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