EXCLUSIVE At least $1 billion of client funds missing at failed crypto firm FTX – sources

  • FTX Founder Bankman-Fried Secretly Moved $10B in Funds to Trading Firm Alameda – Sources
  • Bankman-Fried showed spreadsheets to colleagues that revealed shift in funds to Alameda – sources
  • Spreadsheets indicating between $1 billion and $2 billion in client money are not accounted for – sources
  • Managers set up accounting “backdoor” that thwarted red flags – sources
  • Where the missing funds are is unknown – sources

New York, Nov 11 (Reuters) – At least $1 billion worth of client funds have disappeared from collapsed crypto exchange FTX, according to two people familiar with the matter.

The exchange’s founder Sam Bankman-Fried secretly transferred $10 billion in client funds from FTX to Bankman-Fried’s trading company 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 funds are being reported here for the first time.

The financial hole was revealed in records Bankman-Fried shared with other senior executives last Sunday, according to the two sources. The records provided an up-to-date account of the situation at the time, they said. Both sources held senior FTX positions 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 flurry of customer withdrawals earlier this week. A rescue deal with rival exchange Binance fell through, sparking crypto’s highest-profile collapse in recent years.

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

“We didn’t transfer in secret,” he said. “We had confusing internal labeling 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.

Bankman-Fried said in a tweet on Friday that he was “putting together” what happened at FTX. “I was shocked to see how things unraveled earlier this week,” he wrote. “I will write a more complete post about the play soon.”

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

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

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

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

Bankman-Fried showed several spreadsheets to the heads of the company’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 these funds were not accounted for among Alameda’s assets, the sources said. The spreadsheets did not indicate where this money was moved, and the sources said they did not know what happened to it.

In a subsequent investigation, FTX legal and finance teams also learned that Bankman-Fried had implemented what the two people described as a “backdoor” into FTX’s accounting system, which was built using proprietary software.

They said the “backdoor” allowed Bankman-Fried to execute orders that could alter the company’s financial records without alerting other people, including outside auditors. This setup meant that the movement of the $10 billion in funds to Alameda did not raise internal compliance or accounting red flags at FTX, they said.

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

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

FTX’s bankruptcy was a stunning turnaround 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 estimated at nearly $17 billion. FTX was valued at $32 billion in January, with investors including SoftBank and BlackRock.

The crisis sent reverberations through the crypto world, with the price of major coins plummeting. And FTX’s collapse is drawing comparisons to earlier major business collapses.

FTX said Friday it had turned over 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.

Reporting by Angus Berwick; editing by Paritosh Bansal and Janet McBride

Our Standards: The Thomson Reuters Trust Principles.

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