Highlights From First FTX Bankruptcy Hearing: “Substantial Amount” Of FTX Assets Stolen, “Dueling” Bahamas Liquidation Comes To A Head

Today at 11am ET, the first FTX bankruptcy court hearing finally took place in Delaware bankruptcy court before Judge John Dorsey, the official start of what will be a long, complex and unprecedented chapter 11 case; this is what we have learned so far (courtesy of the WSJ and Bloomberg).

• A “substantial amount” of failed crypto exchange FTX’s assets is missing and may have been stolen as a run on customer deposits and a liquidity crunch precipitated a crisis of leadership and led the firm to collapse, FTX lawyer James Bromely said in court

• “FTX was in the control of inexperienced and unsophisticated individuals, and some or all of them were compromised individuals,” said James Bromley, counsel to FTX’s new management, at its debut appearance at the Delaware bankruptcy court after the failed exchange filed for the largest-ever crypto bankruptcy case earlier this month.

• FTX’s rapid downfall triggered an “unprecedented” bankruptcy, causing many standard procedures, such as this hearing, to be delayed.

• Information about FTX’s biggest creditors will remain redacted for now.

• The dueling liquidation proceedings will move to Delaware, where the Chapter 11 case is being heard.  Judge Dorsey said he will sign an order formally moving a Chapter 15 bankruptcy case filed by Bahamian liquidators from New York to Delaware.

• FTX expanded the number of affected customers and creditors from a “million” to millions.”

Some more details from Bromley’s initial disclosures:

• In his initial comments, Bromley recounted some of the events leading up to the company’s sudden collapse, alleging major failures against its former leadership under co-founder Sam Bankman-Fried.

• “What we have here is a worldwide, international organization, but which was run as a personal fiefdom of Sam Bankman-Fried.” Mr. Bromley said.

• FTX’s new management and advisers are implementing market-standard controls for the firm’s accounting, audit, cash management, human resources, risk management and data management systems, Bromley said. He described the fall of FTX as “one of the most abrupt and difficult collapses in the history of corporate America and the history of corporate entities around the world. ” 

• FTX is also “suffering from cyber attacks” that have occurred on the day the firm filed bankruptcy, the days following the chapter 11 filing, and still continue, Bromley said. FTX is in “constant communication” with the Justice Department and the cybercrimes unit of the (Democrat controlled) US attorneys office in New York, which has opened a criminal investigation (whatever happened to the previously reported probe that was launched by the Democrat-controlled AG of SDNY months ago – did it get bogged down in too many donations?).

In response, Judge Dorsey said he would grant a number of requested motions filed by FTX to help the company manage its bankruptcy, including the to redact for now the identities of customers with funds frozen on the exchange.

FTX management has said it may need until January to compile a complete balance sheet detailing the company’s total assets and liabilities, but some business divisions appear to be solvent. The firm has located approximately $1.4 billion in cash that it says belongs to the business, more than double the figure given in a report to the court last week. Most of that cash – $1.24 billion – is located in the Alameda subsidiary. Investment bank Perella Weinberg has been hired to explore selling any salvageable units out of bankruptcy (earlier there were reports that Tron network founder Justin Sun was eyeing some FTX assets).

FTX’s lawyer also said it has received requests from both the U.S. House and Senate to have Mr. Ray appear before Congress in December.

In an especially interesting twist, one which potentially involves SBF’s strategy on how to keep stolen assets close by at hand, Judge Dorsey says he will sign an order formally moving a Chapter 15 bankruptcy case filed by Bahamian liquidators from New York to Delaware. In response, Chris Shore who is representing the dueling Chapter 15 liquidators in the Bahamas, said “we’re going to try to work this out” with the Chapter 11 debtors.

As a reminder, court-appointed liquidators in the Bahamas previously said the local subsidiary controls private keys needed to transfer crypto in and out of the entire FTX complex, once estimated to hold around $16 billion in assets. As such, some have speculated that the Bahamas govt may be in cahoots with SBF himself to keep much of the stolen assets on the Bahamas. While this has been unconfirmed, it is notable just a few days ago, Bankman-Fried liked a Tweet in which it was suggested that the Bahamanian Securities Commission was corrupt and would help SBF keep the stolen funds.

Is @SBF_FTX telegraphing his Chapter 11 strategy via twitter pic.twitter.com/9Mw3jqUhXa

— zerohedge (@zerohedge) November 20, 2022

Here is how the WSJ explains this tension: “some FTX assets are tied up in the Bahamas, where the firm relocated last year as the country sought to become a destination for digital currency firms worldwide. Public officials there seized the digital assets of FTX’s local operations earlier this month, which the new management has characterized as an unauthorized transfer. The Securities Commission of the Bahamas, the lead local authority investigating FTX’s collapse, has confirmed that asset transfer, but said it moved the coins “for safekeeping” in accordance with local laws.”

Court-appointed liquidators in the Bahamas have said the local subsidiary controls private keys needed to transfer crypto in and out of the entire FTX complex, once estimated to hold around $16 billion in assets.

That explains why Chris Shore hinted that there “could” be conflict between the liquidators in the Bahamas and the FTX bankruptcy lawyers.

“There is a tension that is going on right now,” Shore says, referring to bankruptcy rules in the US and efforts by the Bahamas liquidators to get control of assets and information about FTX’s collapse. It is understandable why both regulators want control over the Bahamanian subs – that’s where most of the remaining money can be found, and if SBF is indeed working on collusion with local corrupt authorities, he may walk out of all this a billionaire.

In any event, how Judge Dorsey rules on the treatment of the Bahamas sub may have the biggest consequence for the outcome of this bankruptcy case.

Elsewhere in the hearing, FTX has said that it will need months to sort through claims from customers as it sifts through the bad bets at its affiliated trading firm Alameda Research, which tipped FTX into bankruptcy. It hasn’t detailed how much it owes to more than one million estimated customers.

Lawyers representing FTX are also seeking court approval to keep paying the remaining employees on the payroll, protect the money remaining inside FTX’s bank accounts and pay vendors that it deems critical to the business.