A face of the regime of Sam Bankman-Fried, the founder of FTX, was revealed on November 22 during the firm’s first hearing in Delaware bankruptcy court.
The 30-year-old former trader was virtually considered an “emperor” among his employees: This is the image used by an FTX lawyer to describe what happened after Bankman-Fried filed for Chapter 11 bankruptcy on his crypto empire made up of FTX and Alameda Research.
Everyone realized for the “first time the emperor had no clothes,” James Bromley, co-head of the restructuring practice at law firm Sullivan & Cromwell, told Judge John Dorsey.
Bromley also said the downfall of FTX was “probably” one of the “most abrupt and difficult corporate collapses in the history of corporate America.”
The firm ran out of cash when its customers rushed to withdraw their money by selling the cryptocurrencies they had previously purchased on the platform. FTX was using the client cryptocurrencies as collateral to borrow money which in turn it had transferred to Alameda Research, a trading platform with which it shares several links. Alameda used this money to invest in crypto businesses and also for trading operations.
You can read the FTX collapse timeline here.
John Ray, FTX’s new CEO in charge of restructuring, had already scathingly criticized Bankman-Fried and his two associates — Zixiao “Gary” Wang and Nishad Singh — on November 17, explaining that they had failed on every level.
Bankman-Fried received a personal loan of $1 billion from Alameda, according to Ray,. The firm also gave a $543 million personal loan to Singh, and $55 million to Ryan Salame, the co-CEO of FTX Digital Markets, one of FTX’s affiliates.
“In the Bahamas, I understand that corporate funds of the FTX group were used to purchase homes and other personal items for employees and advisors,” Ray said. “I understand that there does not appear to be documentation for certain of these transactions as loans, and that certain real estate was recorded in the personal name of these employees and advisors on the records of the Bahamas.”
Bankman-Fried lives in the Bahamas.
Ray further indicated that, to be reimbursed for business expenses, employees only had to submit the request by chat and a supervisor would immediately approve with a personalized emoji.
“The debtors did not have the type of disbursement controls that I believe are appropriate for a business enterprise,” Ray wrote. “For example, employees of the FTX Group submitted payment requests through an on-line ‘chat’ platform where a disparate group of supervisors approved disbursements by responding with personalized emojis.”
The conclusion of this veteran restructuring was final:
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” Ray wrote in a 30-page document filed with the United States Bankruptcy Court for the District of Delaware.
“From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”