Exclusive – At Least $1 Billion Of Client Funds Missing From Failed Crypto Firm FTX

Image shows FTX logo, stock chart and cryptocurrency representation

At least $1 billion in client funds have disappeared from the crashed crypto exchange FTX, according to two people familiar with the matter.

Stock exchange founder Sam Bankman-Fried secretly moved $10 billion of 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 about $1.7 billion. The other said the gap was between $1 billion and $2 billion.

While FTX is known to have moved client funds to Alameda, the missing money is being reported here for the first time.

The financial hole was revealed in documents Bankman-Fried shared with other senior executives last Sunday, according to the two sources. The records provided an updated description 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 staff.

Bahamas-based FTX filed for bankruptcy on Friday after a rush of customer withdrawals earlier this week. A bailout deal with rival exchange Binance collapsed, precipitating the highest crypto crash in years.

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

“We didn’t smuggle,” he said. “We had internal labels mixed up and misread it,” he added, without elaborating.

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 had happened at FTX. “I was shocked to see things unfold the way they did earlier this week,” he wrote. “I will write a more comprehensive play by play post soon.”

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

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

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

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

Bankman-Fried showed several spreadsheets to the heads of the firm’s regulatory and legal teams that revealed FTX had moved 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 included in Alameda’s assets, the sources said. The spreadsheets didn’t show where that money moved, and the sources said they don’t know what happened.

In a subsequent examination, FTX’s legal and financial teams also learned that Bankman-Fried implemented what the two people described as a “backdoor” into FTX’s bookkeeping system, which was built using custom software.

They said the “backdoor” allowed Bankman-Fried to execute orders that could change the company’s financial records without notifying other people, including outside auditors. That arrangement meant moving the $10 billion in funds to Alameda didn’t raise any internal compliance or accounting red flags at FTX, they said.

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

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

FTX’s bankruptcy marked a stunning turnaround for Bankman-Fried. The 30-year-old had founded FTX in 2019 and led it to become one of the largest 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 reverberated through the cryptocurrency world, with the price of major coins plummeting. And the collapse of FTX is drawing comparisons to past major business collapses.

On Friday, FTX announced that it had handed over control of the company to John J. Ray III, the restructuring expert who handled the liquidation of Enron Corp – one of the biggest bankruptcies in history.

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