The examiner appointed in FTX's bankruptcy case has released a report highlighting a variety of bad behavior by the company and its top executives that led to its collapse. The report touches on how whistleblowers were paid, the bank's "capital issues" were dealt with, and when various senior executives knew the FTX Group entity was insolvent.
Who knows?
The report includes information about which senior executives and companies were aware of the holes in FTX Group's accounts before it collapsed. The charges allege that Ryan Salame participated in the creation of backdated payment agency agreements, directed other FTX Group employees to misrepresent the use of FTX Group bank accounts to banks, and misappropriated FTX Group assets to purchase real estate, restaurants and food service companies, and make other purchases and investments, including private aircraft) and withdrew millions of dollars from FTX.com’s accounts before halting customer withdrawals.
The report also states that Salame used FTX Group funds to make millions of dollars in political donations.
In addition, Seaman Samuel Trabucco obtained substantial interests before bankruptcy. FTX Group spent more than $15 million to purchase real estate, yachts and marina berths for Trabucco during the priority period. Trabucco was exchanged from FTX.com in September 2022 Large withdrawals were made.
In other communications, he expressed concern about Alameda's balance sheet, warning that if employees knew Alameda's net worth without the Foreign Trade Trust Fund, they would "exodus."
Other senior executives are also being investigated, including a former FTX Group employee who managed Alameda’s token investments and participated in related sales transactions that were not properly recorded. The employee also made large withdrawals closer to the filing date.
The report also names another former FTX Group employee who was the subject of media coverage for transferring $600,000 in $FTT to a charity he co-founded. Creditors have not yet decided to take action against these individuals as other lawsuits need to be prioritized.
Additionally, the report details avoidance lawsuits filed against employees who made other cash withdrawals in the days leading up to the collapse.
The report further concluded that, despite Sam Bankman-Fried’s insistence, FTX.US was not solvent as of the filing date. FTX.US’s “Bank Balance” spreadsheet totals $138.5 million, while its “Wallet Balance” spreadsheet – which is customer balances – totals $184.7 million.
FTX.US treasurer Caroline Papadopoulos noted that the calculation was wrong for another reason: It included [WRS] cash, which should be considered separate from FTX.US. She described the apparent reconciliation as "nonsense".
Interestingly, the report concluded that the examiner saw no evidence that Sullivan & Cromwell (S&C) knew of FTX Group’s fraud before the application, or that S&C ignored red flags that required an investigation into the debtor’s statements.
The report concludes this despite the fact that it was possible - and indeed was the case - that the production of these messages was incomplete and may never have been completed due to the use of Signal's automatic deletion feature.
Additionally, despite the CoinDesk report suggesting Alameda Research valued the asset at more than the entire market cap, five days after the report was published, an S&C lawyer assured Voyager that FTX Group was “rock solid” and that the current problem was “Binance’s stupidity.”
Lawyers claim they were not made aware of the issues until the day after the email was sent.
Image source: Deep Wave TechFlow (For details of the article, see: Is Sam Bankman-Fried’s cryptocurrency trading company Alameda Research bankrupt? )
Lawyers and Whistleblowers
The report describes FTX Group's deep ties to Fenwick & West (F&W), which it refers to as "Law Firm-1". Joseph Bankman, the father of financial criminal Sam Bankman-Fried, allegedly recommended hiring F&W to help the FTX Group and advised the company to recruit Daniel Friedberg and Can Sun.
The report states that F&W "serves as primary U.S. outside counsel to FTX Group on employment, tax, loan agreements, acquisitions, regulatory matters, government investigations, compliance and risk mitigation, equity incentives, partnership agreements, trademark enforcement, intercompany service agreements, purchases Advice on agreements and financing.”
Law Firm-1 received more than $22 million in attorney fees from FTX Group between 2018 and 2022. In 2018, when Friedberg was a partner at law firm -1, Joseph Bankman encouraged Bankman-Fried to give Friedberg a key role at Alameda.
Friedberg and Can Sun left the law firm -1 in January 2020 and August 2021, respectively, to join FTX Group. Friedberg serves as chief compliance officer for FTX.US and general counsel for Alameda, while Sun serves as general counsel for FTX Trading. Law Firm -1's relationship with FTX Group extends beyond Friedberg and Sun, however.
Joseph Bankman maintained unusually close personal relationships with various attorneys at Law Firm -1, and at times certain attorneys provided stipends for travel and attendance at sporting events.
This deep partnership includes F&W’s assistance with:
FTX Group issued “Founders Loans” that were used to transfer at least $2 billion in cash and assets between FTX Group entities and directly into the personal accounts of FTX Group leaders;
Friedberg created the backdated payment agency agreement between FTX Trading and Alameda;
FTX Group leadership’s efforts to conceal the close relationship between FTX Trading and Alameda from government regulators and investors;
FTX Group leadership used unconventional settlements to silence credible whistleblowers;
FTX Group has worked hard to downplay its relationship with the Serum Foundation and its control.
The exact details of these relationships are difficult to discern with precision, in part because F&W often uses ephemeral messaging platforms such as Signal to communicate with FTX Group individuals, and has so far provided only 144 records of individual or group chats between law firm-1 and FTX Group employees.
Only 18 of these chats still contain messages, the rest just show that the group message once existed, but has no content.
The report further suggests that F&W may have been aware of problems years before it ultimately collapsed. The investigation found that in December 2019, Bankman-Fried admitted to members of the firm that Alameda held large amounts of $FTT that had a high market value but could not realize that value without crashing the market.
Additionally, the report alleges that F&W created the Serum Foundation and employed a system that allowed certain employees of the FTX Group to continue to control the Serum Foundation and $SRM tokens. Quinn Emanuel also discovered that people related to the FTX Group used [F&W] to create an entity called the Incentive Ecosystem Foundation to provide incentives for the $SRM ecosystem and increase the market price of $SRM, while hiding the entity's connection with the FTX Group .
This is consistent with previous allegations that the debtors reported that Friedberg — Alameda’s former general counsel — commissioned Maps’ white paper and drafted significant portions of it in October 2020.
Friedberg has become the target of a lawsuit from the estate, accusing him of helping pay whistleblowers.
In addition, Sun coordinated with Friedberg to avoid CFTC scrutiny and conceal information about FTX Trading's entities of interest.
The report also alleges that FTX Group had a pattern of treating whistleblowers: FTX Group lawyers failed to properly investigate the substance of these whistleblower complaints and instead settled for substantial sums, with these settlements being handled primarily by Friedberg, Sun, Miller, and Joseph Bankman.
Typically, FTX Group resolves these issues without investigating the merits of the complaints, often using large financial settlements and an "ongoing model" of hiring attorneys who do not provide substantive legal services. These lawyers include:
$20,762 to Orrick Herrington & Sutcliffe for legal services related to the separation of Whistleblower-5 from FTX.
Pay $64,998 in fees to Holland & Knight, primarily for drafting settlement agreement with whistleblower.
$760,000 in fees to Silver Miller Law, primarily for regulatory affairs advice and whistleblower charges.
Loaned $1 million to Pavel Pogodin as part of a settlement related to the dismissal of a whistleblower complaint. Following this, he allegedly signed two contracts with FTX totaling $3.3 million, and the investigation noted that there was no evidence that Pogodin had provided any legal services to the FTX Group.
Pay "Law Firm -8" $200,000 per month for five years to resolve Whistleblower -1's complaint. The only work allegedly produced was a three-page memo prepared by a non-attorney.
Law firms were allegedly frequently instructed to skip due diligence on planned investments in FTX Group. For example, the law firm that helped FTX acquire Australia's HiveEx could receive "introduction fees" from helping FTX find these investment targets or otherwise assist FTX.
In this case, the law firm -5's role ultimately expanded to include negotiating a settlement to avoid negative publicity for FTX Group. For example, in July 2021, Law Firm-5 arranged for a Cayman Islands company, 707,016 Ltd., to pay the creditors of Australian crypto KOL Alex Saunders. Saunders is accused of using borrowed funds to trade on FTX.com, which he lost.
To mitigate any reputational harm and avoid potential litigation, FTX Trading lent Saunders $13.2 million through 707,016 Ltd. to help Saunders repay his debts. Saunders has yet to repay the loan. A partner at law firm -5, FTX Group's primary contact at the firm, personally received at least $727,402 in "referral fees" for advising on certain acquisitions.
Image source: Shenchao TechFlow (For details of the article, see: Genesis Block Ventures and FTX are entangled)
Another law firm has been hired to handle responses to document requests from the SEC and CFTC regarding the Tether/Bitfinex relationship. Unfortunately, some documents related to market manipulation could not be found, possibly due to the use of Signal.
Some law firms did raise questions about the conduct of FTX leadership, with Skadden Arps Slate Meagher & Flom allegedly repeatedly warning about "undisclosed political donations to FTX.US."
bank
FTX has struggled to maintain stable and open banking access, relying on a series of misrepresentations to maintain its banking access. Those statements included a failure to "properly designate all FBO accounts." Additionally, they often mix client and company funds in their accounts.
Salame allegedly stepped in to help Deltec Bank and Trust resolve "capital issues" by issuing two $50 million loans involving Salame, Alameda and two other companies, Deltec International Group (Deltec) and Norton Hall Ltd. (Norton Hall). The investigation concluded that the loans were intended to alleviate Deltec's capital problems while ensuring that Deltec would therefore owe FTX Group a favor, and that the associated promissory notes were structured to conceal Alameda's role in the loans.
FTX and Alameda Research are also working with Deltec on Moonstone Bank. Debt entity Alameda Research Ventures invested $11.5 million in Moonstone Bank's holding company, FBH Corporation, even though Moonstone Bank is a small regional bank with only a few million in assets. While discussions surrounding the staking plan did not come to fruition, FTX Group entity FTX Trading deposited $50 million in a Moonstone Bank account.
Image source: Shenchao TechFlow (For details of the article, see: Exclusive: Moonstone Bank explains its relationship with Alameda Research)
bad investment
Alameda Research and other FTX groups are terrible investors, skipping due diligence and pouring money into projects with huge risks.
Those investments included Embed, a securities clearing firm acquired for $300 million, but when the estate tried to sell, the highest bid was just $1 million, put in by the company's founder. FTX "conducted minimal due diligence," the report said.
In another case, FTX Group spent $376 million to acquire DAAG, even though the company was not an active business and the acquisition "did not include rights to key intellectual property." The estate found that a sale could not proceed as the company did not have any meaningful salable assets.
Some investments have other important reasons, such as FTX Group acquiring nearly all of Genesis Block's financial stake, but nearly all of Genesis Block's shares being transferred to entities controlled by Genesis Block's co-founder and CEO.
Genesis Block was found to be associated with FTX’s “Korean Friend” account.
Image source: Shen Chao TechFlow (For details of the article, see: Genesis Block: FTX in Thailand)
Modulo Capital, another investment fund with a romantic connection, received $500 million in investments.
Genesis Digital Assets, known in the report as Venture Investment-1, received about $1 billion, but members associated with Genesis Digital Assets allegedly knew there might be inaccuracies in the company's financial statements and valuation materials provided to potential investors .
It was also discovered that the co-founder of Venture Investment-1 had been involved in criminal conduct in Kazakhstan. Despite the issues identified by FTX Group's due diligence process, FTX Group chose to invest.
Overall, the report reiterates that FTX was a criminal enterprise that engaged in a variety of irresponsible and inappropriate conduct, and that numerous senior executives and attorneys worked extremely hard to keep FTX afloat.
[Disclaimer] There are risks in the market, so investment needs to be cautious. This article does not constitute investment advice, and users should consider whether any opinions, views or conclusions contained in this article are appropriate for their particular circumstances. Invest accordingly and do so at your own risk.
This article is reproduced with permission from: "TechFlow"
Original author: Protos Staff
