Exclusive: FTX has at least $1 billion in client funds

Exclusive: FTX has at least $1 billion in client funds
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  • Bankman-Fried, founder of FTX, secretly transferred $10 billion to the Alameda trading firm.
  • Bankman-Fried showed colleagues spreadsheets showing the funds had shifted to Alameda, sources said
  • $1 billion to $2 billion in client money is not listed in the tables – sources
  • Executives set up accounting ‘backdoor’ to prevent red flags – sources
  • It is not known where the missing funds are – sources

NEW YORK, Nov 11 (Reuters) – At least $1 billion in client funds disappeared from collapsed cryptocurrency exchange FTX, according to two people familiar with the matter.

The exchange’s founder, Sam Bankman-Fried, secretly transferred $10 billion of client funds from FTX to Bankman-Fried’s trading company, Alameda Research, the people told Reuters.

According to them, a large part of this amount has since disappeared. One source puts the missing amount at around $1.7 billion. Another said that the difference is between 1-2 billion dollars.

While FTX is known to have transferred client funds to Alameda, the missing funds are being reported here for the first time.

The funding gap was revealed in memos Bankman-Fried shared with other top executives last Sunday, according to two sources. They noted that the records provide an up-to-date account of the situation at the time. Both sources held senior FTX positions until this week and said they were briefed on the company’s finances by senior staff.

Located in the Bahamas FTX declared bankruptcy on Friday after a rush of withdrawals from customers earlier this week. A bailout deal with rival exchange Binance failed, sparking the cryptocurrency’s highest-profile crash in years.

In text messages to Reuters, Bankman-Fried said he “did not agree with the characterization” of the $10 billion transfer.

“We did not make a secret transfer. “We confused the internal labeling and misread it,” he said, without adding.

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

FTX and Alameda did not respond to requests for comment.

In a tweet Friday, Bankman-Fried said he was “putting together” what happened at FTX. “I was shocked to see it all unfold the way it did earlier this week,” he said. “I will write a fuller post on the play soon.”

At the root of FTX’s problems were losses in Alameda that most FTX leaders were unaware of. Reuters reported on this earlier🇧🇷

Last Sunday, the customer backlash increased after Changpeng Zhao, CEO of the giant cryptocurrency exchange Binance, said that Binance would sell its entire stake in FTX’s digital token, worth at least $580 million “according to recent disclosures.” Four days ago, news outlet CoinDesk reported that most of Alameda’s $14.6 billion in assets are in the token.

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

Bankman-Fried confirmed to Reuters that the meeting took place.

Bankman-Fried showed executives from the company’s regulatory and legal teams several charts that revealed FTX had transferred about $10 billion in client funds from FTX to Alameda, two of the people said. The spreadsheets showed how much FTX lent Alameda and what it was used for.

Sources said the documents show that between $1 billion and $2 billion of that money was not counted among Alameda’s assets. The tables did not indicate where the money was transferred, and the sources said they did not know what it was.

During a subsequent investigation, FTX’s legal and financial teams also learned that Bankman-Fried implemented what two people described as a “backdoor” in an accounting system built using FTX’s custom software.

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

In a text message to Reuters, Bankman-Fried denied the use of a “backdoor”.

It is the US Securities and Exchange Commission Investigates’s handling of customer funds, as well as crypto-lending activities, a source with knowledge of the inquiry 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 reversal for Bankman-Fried. The 30-year-old founded FTX in 2019 and built it into one of the largest cryptocurrency exchanges, amassing a personal fortune worth nearly $17 billion. FTX was valued at $32 billion in January with investors including SoftBank and BlackRock.

The crisis was felt echoes in the crypto world, the price of the major coins drops dramatically. And the collapse of FTX draws comparisons with previous major business collapses.

On Friday, FTX said it was handing over control of the company to John J. Ray III, the restructuring specialist who helped break up Enron Corp., one of the biggest banks in history.

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

Our standards: Thomson Reuters Trust Principles.

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