According to Amy Castor and David Gerard
“the contagion effect of everyone who sees the whole exchange is bankrupt” – SubG on SomethingAwful
Scam banks: fried people
As it happens: Andrew Vara, the US Trustee in the FTX bankruptcy, wants to appoint an examiner to find out what happened to FTX. [Doc 176, PDF; WSJ, paywall]
John Jay Ray III, acting CEO of FTX since November 11, will do some digging himself, but the examiner is a neutral party – “although the US Trustee did not question the qualifications, competence, or good faith of Mr. Ray.” Vara said the inspectors did the digging, so Ray and his team could continue to save the business.
Vara called the financial crisis of 2008: “Like the bankruptcy case of Lehman, Washington Mutual Bank, and New Century Financial before, the case is exactly like the case that requires the appointment of an independent fiduciary to investigate and report the Debt. ‘collapse is extraordinary.
Vara thinks that the secret ingredient is crime. “Is this an unsuccessful business or a successful scam?” He listed several news reports alleging forgery by FTX management, including the top of Alameda FTX’s exclusive trading desk with FTX customer funds. He also noted many of the company’s control failures detailed in Ray’s first day statement:
The examiner can – and must – investigate substantial and serious allegations of fraud, dishonesty, incompetence, misconduct, and mismanagement by the Debtors, the circumstances surrounding the collapse of the Debtors, the actual conversion of the property of exchange customers, and whether the claims are colorable and there are causes of action to solve them losses.
Vara said that FTX must placed under examination under section 1104(c)(2) of the bankruptcy code, which mandates the appointment of an examiner when the debt exceeds $5 million in unsecured debt. But he asked the judge to order the task of the examiner even if he did not agree that it existed.
Your funds are on vacation in the sun
Some strange things happened in early November shortly after the Bahamas court issued an order placing FTX Digital into temporary liquidation:
- Some withdrawals from FTX are permitted for Bahamian residents.
- Some cryptos were seized from FTX by the Bahamian government.
- Some cryptos were hacked from FTX by unknown parties.
Local withdrawal: While the rest of the world doesn’t have access to assets on FTX, some Bahamian entities are starting to take cryptos out.
Said FTX on November 10: “According to Bahamian HQ regulations and regulators, we have started to facilitate the withdrawal of Bahamian funds. So, you may have seen some withdrawals processed by FTX recently because we are in compliance with the regulator. [Tweet, archive]
Some non-Bahamians have even started withdrawing their FTX balances by buying NFTs from their Bahamian accounts. [CNBC]
The Securities Commission of the Bahamas (SCB) says that, despite FTX’s claims, there is not This is valid for local withdrawals. [Twitter; CoinDesk]
SBF finally admitted in a recent interview with Tiffany Fong that they let locals out of cryptos because “you don’t want to be in a country where there’s a lot of anger.” [YouTube]
Bahamas Attack: Hours after Ray filed for bankruptcy on Nov. 11, creditors watched in horror as $372 million in funds were mysteriously siphoned from FTX. At least some of this “hacking” was part of the seizure of Bahamian government assets.
Ryne Miller, general counsel of FTX US, called it “unauthorized access” and said that FTX and FTX US have moved all funds to cold wallets to secure the assets. [Twitter]
SCB said on November 17 that it “took action directing the transfer of all digital assets of FTX Digital Markets Ltd. to a digital wallet controlled by the commission, for safekeeping.” [Statement, Market Watch]
Hack: After some funds are moved, various low-volume altcoins are immediately exchanged on a decentralized exchange for ETH. ZachXBT points out that there were two groups involved in the November 11-12 hack – white hat hackers and black hat hackers. [Twitter]
At FTX startup before bankruptcy, everyone takes the most liquid cryptos out first. Bahamas insiders take more liquid cryptos. Now all that is left to distribute to creditors is flotsam and jetsam. Any real dollars will be used to pay remaining employees and expensive bankruptcy professionals.
No, Mr. Bankman, I expect you to fry
The next omnibus hearings on the FTX bankruptcy will take place on December 16 and January 11. [Doc 158, PDF; Doc 159, PDF]
Sam is busy spilling his guts for the press. So Congresswoman Maxine Waters, chairman of the House Committee on Financial Services, has been invited to please do the Congressional hearing on December 13. Sam said, “When I finished studying and reviewing what happened, I felt it was my duty to come to the committee and explain.” I’m not sure it will happen on the 13th,” he tweeted, when wearing a hot dog costume. We suspect that won’t be enough. [Twitter; Twitter]
In one of the previous SBF Congress appearances, on December 8, 2021, Rep. Tom Emmer said: “Thank you, Mr. Bankman-Fried, for helping us understand the extensive guardrails FTX has in place to protect investors from fraud and manipulation.” Emmer is one of them Blockchain Eight who told the SEC to withdraw from the crypto company in March 2022, and FTX is the 10th donor equal to Emmer with $11,600 donated. Yes, just a little bit. [YouTube; Open Secrets]
Alameda lost $1 billion in trade involved MobileCoinat token from the Signal messaging app. They seem to have to cover the position of people during a huge spike in price. Don’t let anyone suggest that this involves money laundering. [FT, archive]
Farmington State Bank is a small one-branch bank in Washington state, with three employees, a very small business, and a value of $5.7 million. FTX invested $11.5 million into the bank’s holding company, FBH, which bought Farmington in 2020. FBH is led by Jean Chalopin, who regular readers will know as the chairman of Deltec Bank, the bankers of the Bahamas to Tether stablecoin. Farmington stock jumped from $ 10 million to $ 84 million in the third quarter of 2022. It is not clear how FTX is allowed to buy such shares in the bank. [NYT]
CeFi Voyager Digital Bankruptcy assets include 4,650,000 FTT and 63,750,000 SRM (Serum) tokens – FTX’s private supermarket points for traders. Like Alameda, the SBF may have no other choice but to try to save Voyager. [Fortune]
John Reed Stark went on Bloomberg TV to argue with an on-air crypto pump, who claimed that FTX was organized in the Bahamas. “FTX is not regulated.” No monitoring. There is no consumer protection. There is no net capital requirement. There is no license. “They are not regulated. Regulation means audits, inspections, checks, net capital requirements. This is a very interesting eight minutes. [Bloomberg]
Reuters writes about bankruptcy attorneys and swingeing fees. “You have to pay the gravedigger,” said Adam Levitin, a law professor at Georgetown University who specializes in bankruptcy law. “This is a complex case with many novel issues, and it is not surprising that it requires the involvement of attorneys.” [Reuters]
Media stardom
David went on the CBC morning drivetime show The Current with Matt Galloway to talk about “the alarming collapse of the FTX exchange.” The CBC also wrote the interview as news. [CBC, audio; CBC]
BBC News: Experts doubt the money will ever return. “The bad news is that the money is all gone. It’s gone. Investors should expect a dollar,” said crypto blogger and author David Gerard. [BBC]
Amy writes about FTX for Al Jazeera. [Al Jazeera]
David wrote about FTX for Foreign Policy with the US edition of the Guardian. [Foreign Policy, paywalled; Guardian]
