On Tuesday, attorneys at cryptocurrency exchange FTX painted a grim picture of the company’s finances and the chances of recovering lost assets from customers.
“A substantial amount of assets have been stolen or are missing,” said James Bromley, a partner at the Sullivan & Cromwell law firm that represents FTX, during a bankruptcy hearing in federal court in Delaware.
FTX filed for bankruptcy in early November after a run on filings left the company owing $8 billion. The company’s failure sparked investigations by the Securities and Exchange Commission and the Department of Justice, focusing on whether FTX wrongly loaned customer deposits to Alameda Research, a crypto hedge fund. Both companies were owned by Sam Bankman-Fried, a former crypto billionaire who relinquished control of the companies upon filing for bankruptcy.
Mr Bankman-Fried’s mismanagement of FTX left lawyers with limited information about the company’s finances, Mr Bromley told the hearing.
He said the company had faced “cyberattacks” and assets were still missing. It appeared to refer to the sudden movement of hundreds of millions of dollars of FTX assets into unauthorized transactions on the day the company filed for bankruptcy.
During the hearing, Mr Bromley gave a detailed account of the history of the FTX business and its abrupt collapse this month. Mr Bankman-Fried had established a sprawling business empire, which was run as his “personal fiefdom”, Mr Bromley said.
But in the end, he said, “the emperor had no clothes.”
Mr Bromley was echoing criticism of Mr Bankman-Fried’s management that came out last week in a stunning court filing of John Jay Ray III, who succeeded Mr Bankman-Fried as chief executive of FTX .
A veteran of dealing with corporate meltdowns, Mr. Ray previously oversaw the breakup of energy trading firm Enron. But in last week’s filing, he wrote that the mess at FTX was the worst he’s seen in his career.
Much of Tuesday’s hearing focused on a series of legal issues that arose early in the bankruptcy.
Over the weekend, FTX disclosed a redacted list of its top 50 creditors, revealing that these entities or individuals owed a combined total of approximately $3.1 billion. But the company has kept the names of those creditors confidential.
A key question during the hearing was whether FTX should publicly disclose the names of its creditors, including hundreds of thousands of ordinary people who have deposited money into the exchange. FTX’s attorneys and some of the creditors argued that disclosing this information would endanger users’ privacy and make them vulnerable to hacking.
US Bankruptcy Judge John Dorsey ruled the information could be kept private, at least for now. “Everyone in this room knows the internet is filled with potential dangers,” he said.
The hearing attracted an unusual level of attention for bankruptcy proceedings, with more than 500 people watching a Zoom broadcast. During a recess, a call person started blasting Justin Bieber’s song “Sorry.”
“I heard we entertained ourselves while we were on a break,” Judge Dorsey said as he returned to the courtroom.
This is a developing story. Check back for updates.