FTX News: Up to $2 billion in client funds missing

The people told Reuters that exchange founder Sam Bankman-Fried secretly transferred $10 billion in customer funds from FTX to Alameda Research, Bankman-Fried’s trading firm.

A substantial portion of that total has disappeared, he said. One source put the missing amount at around $1.7 billion. Another said the difference was between $1 billion and $2 billion.

While it is known that FTX has moved client funds to Alameda, missing funds are the first to be reported here.

Last Sunday, Bankman-Fried had uncovered financial holes in records shared with other senior executives, according to two sources. He said the record provided an updated account of the situation at that time. Both sources held senior FTX positions until this week and said they were briefed on the company’s finances by top employees.

Bahamas-based FTX filed for bankruptcy on Friday after a rush of withdrawals from customers earlier this week. A hedge deal with rival exchange Binance fell through, accelerating the crypto’s highest-profile collapse in recent years.

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

“We didn’t transfer secretly,” he said. “We had confused the internal labeling and misread it,” he elaborated.

When asked about the missing funds, Bankman-Fried replied: “???”

FTX and Almeida did not respond to requests for comment.

In a tweet on Friday, Banksman-Fried said he was “stitching together” what had happened at FTX. “I was shocked to see the way things turned out earlier this week,” he wrote. “I’ll be writing another full post on play by play soon.”

At the heart of FTX’s problems was the loss in Alameda, which most FTX executives were not aware of, Reuters previously reported.

Last Sunday, after Changpeng Zhao, CEO of giant crypto exchange Binance, saw an increase in customer withdrawals, Binance will sell its entire stake in FTX’s digital token worth at least $580 million, “due to recent revelations.” Four days ago, news outlet CoinDesk reported that the majority of Alameda’s $14.6 billion in assets was in tokens.

That Sunday, Bankman-Fried held a meeting with several executives in Nassau, the capital of the Bahamas, to calculate how much outside funding she would need to cover the FTX shortfall, according to two people with knowledge of FTX’s finances. he said.

Bankman-Fried confirmed to Reuters that the meeting had taken place.

Bankman-Fried showed the heads of the company’s regulatory and legal teams several spreadsheets that showed FTX diverted some $10 billion in client funds from FTX to Alameda, the two people said. He said the spreadsheets showed how much money FTX gave to Alameda and what it was used for.

The sources said the documents showed that between $1 billion and $2 billion of these funds were not accounted for in Alameda’s wealth. The spreadsheets did not reveal where the money was taken, and the sources said they did not know what happened to it.

Upon subsequent examination, the FTX legal and finance teams also learned that Bankman-Fried implemented what two people described as “backdoors” into FTX’s book-keeping system, which was built using bespoke software.

He said the “backdoor” allowed Bankman-Fried to execute orders that could alter a company’s financial records without alerting others, including outside auditors. This set-up means that the movement of $10 billion in funds to Alameda did not trigger internal compliance or accounting red flags at FTX, he said.

In his text message to Reuters, Bankman-Fried declined to invoke the “backdoor”.

A source familiar with the investigation told Reuters on Wednesday that the US Securities and Exchange Commission is probing customer funds of FTX.com as well as its crypto-lending activities. The Justice Department and the Commodity Futures Trading Commission are also investigating, the source said.

The bankruptcy of FTX marked a surprising reversal for Bankman-Fried. The 30-year-old founded FTX in 2019 and led it to become one of the largest crypto exchanges, amassing a personal fortune of around $17 billion. FTX was valued at $32 billion in January, with investors including SoftBank and BlackRock.

The crisis has sent resonance through the crypto world, with the prices of major coins plummeting. And the fall of FTX is drawing comparisons to an earlier major trading downturn.

On Friday, FTX said it had transferred control of the company to John J. Ray III, the restructuring specialist who handled the liquidation of Enron Corp. – one of the largest bankruptcies in history.

This story has been published without modification from a wire agency feed. Only the title has been changed.