By Angus Berwick
NEW YORK (Reuters) – At least $1 billion in client funds has disappeared from collapsed crypto exchange FTX, according to two people familiar with the matter.
Sam Bankman-Fried, the exchange’s founder, secretly transferred $10 billion in client funds from FTX to Bankman-Fried’s trading firm, Alameda Research, the people told Reuters.
A large part of that total has disappeared, they said. One source puts the missing amount at around $1.7 billion. Another said the gap between $1 billion and $2 billion.
Although it is known that FTX transferred customer funds to Alameda, the missing funds are reported here for the first time.
According to two sources, the financial loophole was revealed in memos Bankman-Fried shared with other senior executives last Sunday. They said the records provided 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 top staff.
Bahamas-based FTX filed for bankruptcy on Friday after a rush of customer withdrawals earlier this week. A rescue deal with rival exchange Binance failed, sparking the crypto’s steepest decline in recent years.
In text messages to Reuters, Bankmann-Fried said she “does not accept the characterization” of the $10 billion transfer.
He said we did not transfer secretly. “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.
In a tweet on Friday, Bankman-Fried said she was “pieceing together” what happened at FTX. “I was shocked to see things unfold the way they did earlier this week,” he wrote. “I will, soon, write a complete play-by-play post.”
Reuters previously reported that most FTX executives were unaware that the losses in Alameda were at the heart of FTX’s problems.
The customer withdrawal increased last Sunday after Changpeng Zhao, CEO of crypto exchange giant Binance, said Binance would sell its entire stake in FTX’s digital token, worth at least $580 million, “due to recent revelations.” Four days ago, news agency CoinDesk reported that most of Alameda’s $14.6 billion in assets was in the token.
That Sunday, Bankman-Fried held a meeting with several executives at Nasa, the capital of the Bahamas, to calculate how much outside funding he would need to cover FTX’s shortfall, two people familiar with 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 firm’s regulatory and legal teams that revealed FTX had moved about $10 billion in customer funds from FTX to Alameda, both said. Spreadsheets show how much money FTX gave Alameda and what it was used for.
The documents show that between $1 billion and $2 billion of these funds are not accounted for in Alameda’s assets, the sources said. The spreadsheets do not indicate where the money was moved, and it is not known what happened to it, the sources said.
In a subsequent examination, FTX’s legal and financial teams also learned that Bankman-Fried implemented what the two men described as a “backdoor” into FTX’s underwriting system, created using bespoke software.
The “backdoor” allowed the execution of commands that could alter the company’s financial records without alerting others, including external auditors. They said the organization’s move of $10 billion in funds to Alameda did not trigger internal compliance or accounting red flags at FTX.
In a text message to Reuters, Bankmann-Fried denied that a “backdoor” was being implemented.
The US Securities and Exchange Commission is investigating FTX.com’s handling of customer funds and 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 marked a stunning reversal for Bankmann-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 has sent shockwaves through the crypto world, sending prices of major currencies plummeting. And FTX’s decline compares favorably with previous major business declines.
On Friday, FTX took control of John J. Transferred to Ray III, he became the restructuring expert who handled the liquidation of Enron Corp. – one of the largest bankruptcies in history.
(Reporting by Angus Berwick; Editing by Paridosh Bansal and Janet McBride)
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