$1 to 2 billion in FTX client money missing: Report

Sam Bankman-Fried, co-founder and CEO of FTX, in Hong Kong, China, on Tuesday, May 11, 2021.

Lam Yik | Bloomberg | Getty Images

As Sam Bankman-Fried’s FTX enters bankruptcy protection, Reuters reports that between $1 billion and $2 billion of client funds have disappeared from the failed crypto exchange.

Both Reuters and the Wall Street Journal found that Bankman-Fried, now the former CEO of FTX, transferred $10 billion of client funds from the crypto exchange to digital asset trading house Alameda Research.

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Alameda, also founded by Bankman-Fried, was considered a sister company to FTX. Those cozy ties are now under investigation by multiple regulators, including the Justice Department, as well as the Securities and Exchange Commission, which is investigating how FTX handled client funds, according to multiple reports.

Much of the $10 billion sent to Alameda “has since disappeared,” according to two people speaking to Reuters.

Reuters revealed that both sources “held senior positions at FTX until this week” and added that they were “briefed on the company’s finances by senior staff.”

One source put the gap at $1.7 billion. The other put it at something in the $1 billion to $2 billion range.

Reuters appears to have reached Bankman-Fried via text message. The former head of FTX wrote that he “disagrees with the characterization” of the $10 billion transfer, adding that, “We did not transfer secretly.”

“We had confusing internal labeling and misread it,” the text message read, and when asked specifically about the allegedly missing funds, Bankman-Fried wrote, “???

Emergency meeting in the Bahamas

Last Sunday, Bankman-Fried called a meeting with executives in Nassau to go over FTX’s books and figure out how much cash the company needed to plug the hole in its balance sheet. (Bankman-Fried confirmed to Reuters that the meeting took place.)

It had been a rough few days of trading for FTX after Binance CEO Changpeng Zhao tweeted that his company was selling the last of its FTT tokens, FTX’s native currency. This followed an article in CoinDesk, which pointed out that Alameda Research, Bankman-Fried’s hedge fund, held a huge amount of FTT on its balance sheet.

Not only did Zhao’s public statement cause the price of FTT to plunge, it sent FTX clients reaching for the exits. Bankman-Fried said in a tweet that FTX clients on Sunday requested about $5 billion in withdrawals, which he called “the largest by a huge margin.” This was the day of the SBF emergency meeting in the Bahamian capital.

The heads of FTX’s regulatory and legal teams were reportedly in the room as Bankman-Fried revealed several spreadsheets detailing how much cash FTX had loaned Alameda and for what purpose, according to Reuters.

Those documents, which apparently reflected the company’s most recent financial status, showed a transfer of $10 billion in customer deposits from FTX to Alameda. They also revealed that some of those funds — somewhere between $1 billion and $2 billion — could not be included in Alameda’s assets.

The financial discovery process also revealed a “backdoor” in FTX’s books created with “custom software.”

The two sources who spoke to Reuters described it as a way for former CEO Bankman-Fried to make changes to the company’s financial history without flagging the transaction either internally or externally. That mechanism could theoretically, for example, prevent Alameda’s $10 billion transfer from being flagged either by its internal compliance team or outside auditors.

Reuters reports that Bankman-Fried issued a categorical denial of the so-called backdoor.

Both FTX and Alameda Research did not immediately respond to CNBC’s request for comment.

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