Exclusive: At Least $1 Billion of Client Funds Missing on FTX

Exclusive: At Least $1 Billion of Client Funds Missing on FTX
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  • FTX founder Bankman-Fried secretly moved $10 billion in funds to trading firm Alameda: sources
  • Bankman-Fried showed spreadsheets to colleagues that revealed changes in funds to Alameda sources
  • Spreadsheets indicated $1 billion to $2 billion in customer money unaccounted for: sources
  • Executives set up accounting ‘back door’ that thwarted red flags: sources
  • Whereabouts of missing funds unknown: sources

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

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

A large part of that total has since disappeared, they said. One source put the missing amount at around $1.7 billion. The other said the gap was between $1 billion and $2 billion.

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

The financial hole was revealed in records that Bankman-Fried shared with other top 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 positions at FTX until this week and said senior staff briefed them on the company’s finances.

based in the Bahamas FTX filed for bankruptcy on Friday after a spate of customer withdrawals earlier this week. A bailout deal with rival exchange Binance fell through, precipitating the most high-profile crash in cryptocurrencies in recent years.

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

“We didn’t secretly transfer,” he said. “We had confusing internal labeling and we misread it,” she added, without elaborating.

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

FTX and Alameda did not respond to requests for comment.

In a tweet on Friday, Bankman-Fried said she was “putting it back together” from what had happened at FTX. “I was surprised to see things unfold the way they did earlier this week,” he wrote. “I will write a more complete post about the game soon.”

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

Customer withdrawals spiked last Sunday after Changpeng Zhao, CEO of giant crypto exchange Binance, said Binance would sell its entire holding of the FTX 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 in the token.

That Sunday, Bankman-Fried met with several executives in the Bahamian capital, Nassau, to calculate how much outside financing he needed to cover FTX’s shortfall, the two people with knowledge of FTX’s finances said.

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

Bankman-Fried showed heads of the company’s regulatory and legal teams multiple spreadsheets that revealed that FTX had moved about $10 billion in funds from FTX clients to Alameda, the two people said. The spreadsheets showed how much money FTX lent Alameda and what it was used for, they said.

The documents showed that between $1 billion and $2 billion of these funds were unaccounted for among Alameda’s assets, the sources said. The spreadsheets did not indicate where this money was moved, and the sources said they do not know what happened to it.

On further examination, FTX’s legal and financial teams also learned that Bankman-Fried implemented what the two individuals described as a “back door” into FTX’s accounting system, which was created using custom software.

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

In her text message to Reuters, Bankman-Fried denied having implemented a “back door”.

The US Securities and Exchange Commission is investigating’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.

The FTX bankruptcy marked a surprising change for Bankman-Fried. The 30-year-old had established 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 in January at $32 billion, with investors including SoftBank and BlackRock.

The crisis has sent reverberations through the crypto world, with the price of major currencies plummeting. And the FTX crash is drawing comparisons to previous major trading crashes.

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

Information from Angus Berwick; edited by Paritosh Bansal and Janet McBride

Our standards: The Thomson Reuters Trust Principles.

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