EXCLUSIVE At least $1 billion of client funds missing at failed crypto firm FTX – sources

  • FTX founder Bankman-Fried secretly transferred $10 billion in funds to trading company Alameda – sources
  • Bankman-Fried showed colleagues spreadsheets revealing transfer of funds to Alameda – sources
  • Spreadsheets say between $1 billion and $2 billion of customer money goes unaccounted for – sources
  • Executives set up accounting ‘backdoor’ that thwarted red flags – sources
  • The location of the missing funds is unknown – sources

New York, Nov 11 (Reuters) – At least $1 billion in client funds disappeared from the collapse of crypto exchange FTX, according to two people familiar with the matter.

Exchange founder Sam Bankman-Fried secretly transferred $10 billion in client funds from FTX to Bankman-Fried’s trading firm Alameda Research, the people told Reuters.

Much of that total has since disappeared, they said. One source put the missing amount at around $1.7 billion. The other said the gap was between $1 billion and $2 billion.

Although FTX is known to have transferred client funds to Alameda, the missing funds are reported here for the first time.

The financial hole was revealed in filings Bankman-Fried shared with other senior executives last Sunday, according to both sources. The records provided an up-to-date account of the situation at the time, they said. Both sources held senior positions at FTX until this week and said they were briefed on the company’s finances by top employees.

Bahamas-based FTX filed for bankruptcy on Friday after a wave of client withdrawals earlier this week. A bailout deal with rival exchange Binance fell through, precipitating the most high-profile crash in crypto in recent years.

In text messages to Reuters, Bankman-Fried said he “disagrees with the characterization” of the $10 billion transfer.

“We didn’t transfer secretly,” he said. “We had confusing internal labeling and we misread it,” he added, without giving further details.

Asked about the missing funds, Bankman-Fried replied: “???”

FTX and Alameda did not respond to requests for comment.

In a tweet on Friday, Bankman-Fried said he was “putting together” what happened at FTX. “I was shocked to see things unfold the way they did earlier this week,” he wrote. “I’ll be writing a more comprehensive play-by-play article soon.”

At the heart of FTX’s troubles were losses at Alameda that most FTX executives were unaware of, Reuters previously reported.

Client withdrawals surged last Sunday after Changpeng Zhao, CEO of crypto exchange giant Binance, said Binance would sell its entire stake in FTX’s digital token, worth at least $580 million. dollars, “due to recent revelations”. Four days prior, news outlet CoinDesk reported that a large portion of Alameda’s $14.6 billion in assets were held in the token.

That Sunday, Bankman-Fried held a meeting with several executives in Nassau, the capital of the Bahamas, to calculate how much outside financing he needed to cover FTX’s shortfall, the two people with knowledge of FTX’s finances said. FTX.

Bankman-Fried confirmed to Reuters that the meeting took place.

Bankman-Fried showed several spreadsheets to officials from the company’s regulatory and legal teams that revealed that FTX transferred about $10 billion in client funds from FTX to Alameda, the two people said. The spreadsheets showed how much money FTX loaned Alameda and what it was used for, they said.

The documents showed that between $1 billion and $2 billion of those funds were not counted among Alameda’s assets, the sources said. The spreadsheets did not show where that money had been moved, and the sources said they did not know what happened to it.

Upon subsequent review, FTX’s legal and finance teams also learned that Bankman-Fried had implemented what the two described as a “backdoor” into FTX’s accounting system, which was built using custom software.

They said the “backdoor” allowed Bankman-Fried to execute commands that could alter the company’s financial records without alerting others, including external auditors. This setup meant that the movement of the $10 billion in funds to Alameda did not trigger any internal compliance or accounting red flags at FTX, they said.

In his text message to Reuters, Bankman-Fried denied setting up a “backdoor”.

The U.S. Securities and Exchange Commission is investigating FTX.com’s handling of customer funds, as well as its crypto lending activities, a source familiar with the investigation told Reuters on Wednesday. The Department of Justice and the Commodity Futures Trading Commission are also investigating, the source said.

The FTX bankruptcy marked a stunning reversal for Bankman-Fried. The 30-something established FTX in 2019 and led it to become one of the biggest crypto exchanges, amassing a personal fortune estimated at nearly $17 billion. FTX was valued in January at $32 billion, with investors including SoftBank and BlackRock.

The crisis has sent reverberations across the crypto world, with the price of major coins plummeting. And the FTX collapse draws comparisons to major trading collapses before.

On Friday, FTX said it ceded control of the company to John J. Ray III, the restructuring specialist who handled the liquidation of Enron Corp — one of the biggest bankruptcies in history.

Reporting by Angus Berwick; edited by Paritosh Bansal and Janet McBride

Our standards: The Thomson Reuters Trust Principles.

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