Lawyers for collapsed crypto exchange FTX said in the company’s first bankruptcy hearing on Tuesday that regulators in the Bahamas, where FTX was headquartered, agreed to consolidate the Delaware proceedings.
FTX’s lawyers, brought in by new leadership to handle the reorganization, filed an urgent filing last week to secure the move to the US. Tuesday’s hearing was the first step in resolving the largest cryptocurrency bankruptcy ever.
“We’re dealing with a different species of animal,” said FTX consultant James Bromley. “Unfortunately, FTX obligors were not particularly well managed and that is an understatement.”
In terms of FTX’s founder, this was an organization “operated effectively as the personal fiefdom of Sam Bankman-Fried,” an FTX attorney told the court.
Attorneys for FTX confirmed earlier reports that the Southern District of New York’s Cyber Crimes Unit had launched an investigation into the matter. FTX attorneys have also cited cyberattacks, noting that there were multiple attacks alongside the $477 million hack that took place shortly after the company filed for bankruptcy on Nov. 1. 11. In this attack, hackers extracted ether from FTX wallets.
The key challenge for the new team is “to bring order to the disorder,” Bromley said in court. After introducing his fellow attorneys, Bromley delved into what FTX has done to understand the complex morass of data and finance left behind by FTX and Bankman-Fried, who was replaced by restructuring expert John Ray III.
Bankman-Fried exercised a level of scrutiny over the business that “none of us have ever seen,” Bromley said, referring to the insolvency experts and lawyers the company employed as part of the restructuring process.
FTX was valued at $32 billion by retail investors earlier this year, and Bankman-Fried posed as an industry savior during the crypto winter.
“The FTX situation is the latest and greatest failure in this space,” Bromley said. “There was practically a rush to the bank, both in terms of international exchanges […] and the US stock exchange. At the same time that the run on the bench was taking place, there was a leadership crisis […] The FTX companies were controlled by a very small group of people led by Mr. Sam-Bankman-Fried. During the run on the bench, Mr. Fried’s leadership broke, and that led to resignations.”
FTX has only just begun to implement “standard” risk and data management practices, he said. As part of the process, the attorneys previously had to approve approximately $1 million in payroll expenses for existing FTX employees.
The process is designed to get as much out for creditors as possible, Bromley said.
“It’s important that we maximize the value of our assets first, whether it’s through asset sales, company sales or corporate restructuring,” he said. “All of that is on the table.”
FTX clients had a global presence, but many were based in tax havens. The largest geographic areas represented included:
- Cayman Islands – 22% of registered customers.
- US Virgin Islands – 11% of registered customers.
- China — 8% of registered customers.
“We’re going to be in front of you pretty quickly trying to sell certain deals that we understand […] are self-sufficient and robust [with] interest from others,” added Bromley.
FTX lawyers said they set up four silos for the company’s assets and various entities. They are:
- The WRS (West Realm Shires) silo that controls and encompasses US holdings.
- The Alameda silo, which includes Alameda Research, Bankman Fried’s now-defunct hedge fund.
- The venture silo investing in crypto companies and startups.
- The dot-com silo, which encompasses international business, is the bulk of FTX’s deposits.
Bromley said the asset recovery and protection efforts included not just crypto assets and currencies, but “information.” The company has hired independent directors for the first time ever.
“A significant amount of assets have either been stolen or have disappeared,” Bromley said. “In addition, significant funds appear to have been transferred to Alameda from other silos.”
A major aspect of the FTX crisis revolves around Alameda and the FTT token, a coin issued by FTX. Lawyers have gone through the history of FTX and related companies, pointing to the creation of the FTT token in April 2019 and the formation of the Alameda companies in November 2017.
Investments have been made in the crypto and technology venture space, Bromley said, but nearly $300 million has also been spent on real estate in the Bahamas. That number is higher than previously reported, and Bromley said most of those purchases are residential and vacation properties for senior executives.
Employees left the company in droves. As of October 2022, FTX’s principal parent company had 330 employees worldwide, of which 127 were in the United States. Including the Australian companies and FTX Digital Markets with 190 employees, the global workforce was 520.
According to FTX lawyers, the best estimate for the number of employees is currently “around 260”.
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