EXCLUSIVE At least $1 billion in client funds lost in failed crypto firm FTX – sources

  • FTX founder Bankman-Fried secretly transferred $10 billion in funds to the Alameda trading firm – sources
  • Bankman-Fried showed a spreadsheet to colleagues that revealed the shift of funds to Alameda – source
  • Spreadsheets indicated between $ 1 billion and $ 2 billion in client money unaccounted for – sources
  • Executives set up “back doors” that block red flags – source
  • Whereabouts of missing funds is unknown – sources

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

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

A large portion of that total has since disappeared, he said. One source put the missing amount at about $1.7 billion. Others say the gap is 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.

The financial hole was revealed in a memo that Bankman-Goreng shared with other senior executives last Sunday, according to two sources. The records provide an up-to-date account of the situation at the time, he said. 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, leading to the crypto’s highest-profile collapse in recent years.

In a text message to Reuters, Bankman-Fried said she “disagrees with the characterization” of the $10 billion transfer.

“We are not secretly moving,” he said. “We confused the 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 “putting 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 up a more detailed post on play by play.”

At the heart of FTX’s problem is the loss in Alameda that most FTX executives do not know about, Reuters has previously reported.

Customer withdrawals have surged last Sunday after Changpeng Zhao, CEO of the giant crypto exchange Binance, said Binance will sell its entire stake in FTX’s digital token, worth at least $580 million, “due to the latest revelations.” Four days earlier, news outlet CoinDesk reported that most of Alameda’s $14.6 billion assets were held in tokens.

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

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

Bankman-Fried showed several spreadsheets to the head of the company’s regulatory and legal team that revealed FTX had transferred $10 billion in client funds from FTX to Alameda, two of the people said. Spreadsheets showed how much money FTX loaned Alameda and what it was used for, he said.

Documents show that between $1 billion and $2 billion of these funds are not accounted for among Alameda’s assets, sources said. The spreadsheets do not show where the money was moved, and the source said they did not know what became of it.

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

They say the “backdoor” allowed Bankman-Fried to execute orders that could change the company’s financial records without alerting other people, including external auditors. This set-up meant that the movement of $10 billion in funds to Alameda did not trigger internal compliance or accounting red flags at FTX, he said.

In his text message to Reuters, Bankman-Fried denied implementing a “backdoor”.

The US Securities and Exchange Commission is investigating FTX.com’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 sources said.

FTX bankruptcy marked a stunning reversal for Bankman-Fried. The 30-year-old set up FTX in 2019 and turned it into 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 coins plummeting. And the collapse of FTX drew comparisons to previous major business crises.

On Friday, FTX said it has turned over control of the company to John J. Ray III, a restructuring specialist who arranged the liquidation of Enron Corp. – one of the biggest bankruptcies in history.

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

Our standards: Thomson Reuters Trust Principles.

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