Home Business Sam Bankman-Fried ran crypto exchange FTX as ‘personal fiefdom’

Sam Bankman-Fried ran crypto exchange FTX as ‘personal fiefdom’

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Spent millions on items unrelated to the business such as vacation homes in the Bahamas

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FTX founder Sam Bankman-Fried ran the cryptocurrency exchange as his “personal fiefdom” before its implosion, according to a lawyer working on the bankruptcy, with “substantial amounts of money” spent on items unrelated to the business such as vacation homes in the Bahamas.

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“We have witnessed one of the most abrupt and difficult collapses in the history of corporate America,” James Bromley of Sullivan & Cromwell told a U.S. court on Tuesday. He added that bankruptcy proceedings had “allowed everyone for the first time to see under the covers and recognize the emperor had no clothes.”

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FTX filed for U.S. bankruptcy protection on Nov. 11 as its customers fled and executives discovered billions of dollars in missing funds, exacerbating turmoil in cryptocurrency markets.

The team of lawyers charged with winding down FTX is attempting to identify a complex web of assets in order to repay creditors. The case has been marked by allegations of misconduct and major governance failures, as well as a jurisdictional dispute between the U.S. and the Bahamas, where FTX’s small inner circle ran the business.

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According to the company, FTX’s overall valuation peaked at US$40 billion — US$32 billion for its international business and US$8 billion for its U.S. operations based on funds raised from venture capital investors.

Bromley said the bankruptcy team had found that “substantial funds” were transferred from the exchange to Bankman-Fried’s crypto hedge fund Alameda Research, and “substantial amounts of money were spent on things not related to the business.”

This included about US$300 million of real estate in the Bahamas that were “homes and vacation properties used by the senior executives” of FTX, he said.

The Alameda hedge fund also appeared to have used FTX funds to make billions of dollars of illiquid venture investments in funds such as Sequoia Capital and companies like Elon Musk’s SpaceX and The Boring Company.

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FTX filed for bankruptcy protection following an “effective run on the bank”, Bromley said, after rival crypto exchange Binance moved to liquidate its FTT tokens, the cryptocurrency issued by FTX. The token lost 80 per cent of its value in two days, while also tumbling from a peak of US$9.6 billion in total market value to just US$422 million.

Bromley also revealed that the team of lawyers and investigators working on the bankruptcy would investigate a transaction last year between FTX and Binance. The rival crypto exchange, which is run by Changpeng Zhao, divested an equity stake in FTX for around US$2.1 billion in cash and cryptocurrencies.

FTX is now led by new chief executive and chief restructuring officer John J. Ray III. The bankruptcy team includes investigation firms such as Kroll, blockchain research group Chainalysis, and a cyber security firm whose identity has not been disclosed over security concerns as it battles hacking attempts on FTX and its assets.

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Bromley added the company was working with the U.S. government and international regulators with an interest in the FTX collapse, including the U.S. Department of Justice and the Securities and Exchange Commission.

Prosecutors working with the justice department’s Southern District of New York and the Financial Crimes Investigation Branch of Bahamas have launched two separate criminal probes into the implosion of FTX.

A list of the 20 largest creditors in the FTX businesses has been sealed by the court. However, U.S. bankruptcy judge John Dorsey ordered the lawyers to make public the names of individuals and entities on the bankruptcy creditors’ committee, which is likely to include institutional investors that acquired stakes in FTX.

Dorsey also approved FTX’s requests to pay remaining employees and vendors.

© 2022 The Financial Times Ltd.

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