Summary of the 230-page FTX Bankruptcy Investigation Report: A Criminal Enterprise Kept Alive by Management and Lawyers Through Recklessness and Misconduct
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Summary of the 230-page FTX Bankruptcy Investigation Report: A Criminal Enterprise Kept Alive by Management and Lawyers Through Recklessness and Misconduct
The report reaffirms that FTX was a criminal enterprise engaged in various irresponsible and improper conduct.
Navigating Web3 tides with focused insightsAuthor: Protos Staff
Translation: TechFlow
The examiner appointed in the FTX bankruptcy case has released a report highlighting various misconducts by the company and its executives that led to its collapse. The report covers topics such as payments to whistleblowers, handling of banks’ “capital issues,” and when executives became aware that FTX Group entities were insolvent.
Who Knew?
The report contains information about which executives and companies knew of accounting gaps before the FTX Group collapsed. It alleges that Ryan Salame participated in creating backdated payment agent agreements, instructed other FTX Group employees to misrepresent the purpose of FTX Group bank accounts to banks, misappropriated FTX Group assets to purchase real estate, restaurants, food service companies, and other purchases and investments—including a private jet—and withdrew millions of dollars from his accounts shortly before FTX.com halted customer withdrawals.
The report also notes that Salame made millions of dollars in political donations using FTX Group funds.
Additionally, sailor Samuel Trabucco received significant benefits prior to bankruptcy: “FTX Group spent over $15 million on real estate, yachts, and marina slips for Trabucco during the preference period, and Trabucco conducted substantial withdrawals from the FTX.com exchange in September 2022.”
In other communications, he expressed concerns about Alameda’s balance sheet, warning that employees would “walk out” if they learned Alameda’s net asset value without the foreign trade trust fund.
Other executives were also investigated, including a former FTX Group employee who managed Alameda’s token investments and was involved in related sales transactions that were not properly recorded. This employee also made large withdrawals close to the petition date.
The report also mentions another former FTX Group employee who became the subject of media coverage for transferring $600,000 worth of FTT to a charity he co-founded. Creditors have not yet decided whether to take action against these individuals due to the need to prioritize other litigation.
Moreover, the report details avoidance lawsuits brought against employees who made other withdrawals in the days leading up to the collapse.
The report further concludes that despite Bankman-Fried’s assertions, FTX US was not solvent on the petition date. FTX.US’s “bank balance” spreadsheet totaled $138.5 million, while the “wallet balance” spreadsheet—i.e., customer balances—totaled $184.7 million.
Caroline Papadopoulos, financial controller at FTX.US, pointed out an additional error in the calculation: it “included [WRS] cash, which should be considered separate from FTX US.” She described the apparent reconciliation as “nonsense.”
Interestingly, the report concludes that the examiner found no evidence that Sullivan & Cromwell (S&C) knew of FTX Group’s fraud prior to the petition or that S&C ignored red flags requiring investigation into debtor statements.
The report reaches this conclusion despite noting that “due to the use of Signal’s auto-delete feature, message production may—and indeed did—remain incomplete, and may never be completed.”
Furthermore, although CoinDesk’s report suggested Alameda Research valued its assets above the entire market cap, five days after publication, an S&C lawyer assured Voyager that the FTX Group was “rock solid” and the current issue was “Binance being stupid.”
The lawyers claimed they only learned of these issues the day after sending that email.
(Read more: Was Sam Bankman-Fried’s Crypto Trading Firm Alameda Research Broke?)
Lawyers and Whistleblowers
The report describes deep ties between the FTX Group and Fenwick & West (F&W), referred to in the report as “Law Firm-1.” It claims Joseph Bankman, father of convicted fraudster Sam Bankman-Fried, recommended hiring F&W to assist the FTX Group and advised the company to hire Daniel Friedberg and Can Sun.
The report states F&W “served as primary U.S. outside counsel to the FTX Group, providing advice on employment, tax, lending agreements, acquisitions, regulatory matters, government investigations, compliance and risk mitigation, equity incentives, collaboration agreements, trademark enforcement, intercompany services agreements, purchase agreements, and financings.”
“Between 2018 and 2022, Law Firm-1 received over $22 million in legal fees from the FTX Group. In 2018, when Friedberg was a partner at Law Firm-1, Joseph Bankman encouraged Bankman-Fried to give Friedberg a major role at Alameda.”
Friedberg and Can Sun left Law Firm-1 to join the FTX Group in January 2020 and August 2021, respectively. Friedberg served as Chief Compliance Officer at FTX.US and General Counsel at Alameda, while Sun became General Counsel at FTX Trading. However, Law Firm-1’s relationship with the FTX Group extended beyond Friedberg and Sun.
“Joseph Bankman maintained unusually close personal relationships with multiple lawyers at Law Firm-1, sometimes subsidizing travel and attendance at sporting events for certain lawyers.”
This close collaboration included F&W assisting with:
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the issuance of “founder loans” by the FTX Group, which were used to transfer at least $2 billion in cash and assets among FTX Group entities and directly into personal accounts of FTX Group leaders;
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Friedberg creating backdated payment agent agreements between FTX Trading and Alameda;
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efforts by FTX Group leadership to conceal the close relationship between FTX Trading and Alameda from government regulators and investors;
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unconventional settlements used by FTX Group leadership to silence credible whistleblowers;
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FTX Group efforts to downplay its relationship with and control over the Serum Foundation.
The exact details of these relationships are difficult to determine accurately, partly because F&W “frequently communicated with individuals at the FTX Group via ephemeral messaging platforms like Signal and has so far produced only 144 individual or group chat logs between Law Firm-1 and FTX Group employees.”
“Of these, only 18 chats still contain messages; the rest merely indicate that group messages once existed but have no content.”
The report further suggests F&W may have been aware of problems years before the final collapse, finding that “in December 2019, Bankman-Fried admitted to members of the firm that Alameda held a large amount of FTT with high market value, but that value could not be realized without crashing the market.”
Additionally, the report accuses F&W of “creating the Serum Foundation using a structure that allowed certain FTX Group employees to continue controlling the Serum Foundation and SRM tokens.” Quinn Emanuel also found that FTX Group affiliates used [F&W] to create an entity called Incentive Ecosystem Foundation to provide incentives for the SRM ecosystem and boost the market price of SRM while hiding its connection to the FTX Group.
This aligns with previous allegations that “debtors reported Friedberg—the former General Counsel of Alameda—commissioned Maps’ whitepaper and drafted significant portions of it in October 2020.”
Friedberg has since become a target of estate litigation, accused of helping pay whistleblower hush money.
Moreover, “Sun coordinated with Friedberg to avoid CFTC scrutiny and conceal information about beneficial owners of FTX Trading.”
The report also alleges a pattern in how the FTX Group handled whistleblowers: “Rather than properly investigating the substance of whistleblower complaints, FTX Group lawyers settled them for substantial sums, primarily handled by Friedberg, Sun, Miller, and Joseph Bankman.”
Generally, the FTX Group resolved these issues without investigating the substance of the complaints, often using large financial settlements and a “continuing pattern” of hiring lawyers who provided little substantive legal work. These lawyers included:
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$20,762 paid to Orrick Herrington & Sutcliffe, primarily for legal services related to the separation of “Whistleblower-5” from FTX.
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$64,998 paid to Holland & Knight, mainly for drafting settlement agreements with whistleblowers.
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$760,000 paid to Silver Miller Law, primarily for regulatory advice and whistleblower allegations.
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$1 million loaned to Pavel Pogodin as part of a settlement related to withdrawing a whistleblower complaint. Afterward, he allegedly entered into two contracts totaling $3.3 million with FTX, though the investigation found “no evidence that Pogodin ever provided any legal services to the FTX Group.”
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$200,000 per month paid to “Law Firm-8” for five years to resolve Whistleblower-1’s complaint. Allegedly, the only work produced was a three-page memo prepared by a non-lawyer.
Law firms were allegedly frequently instructed to skip due diligence on FTX Group’s planned investments. For example, law firms helping FTX acquire Australia’s HiveEx could receive “finder’s fees” for helping FTX identify these investment targets or otherwise assist FTX.
In one case, “ultimately, Law Firm-5’s role expanded to include negotiating settlements to avoid negative publicity for the FTX Group. For instance, in July 2021, Law Firm-5 arranged a Cayman Islands company, 707,016 Ltd., to pay creditors of Australian crypto influencer Alex Saunders. Saunders was accused of using borrowed funds to trade on FTX.com, but lost those trading funds.
“To mitigate reputational damage and avoid potential lawsuits, FTX Trading lent Saunders $13.2 million through 707,016 Ltd. to help him repay debts. Saunders has not repaid this loan. A partner at Law Firm-5, the main contact for the FTX Group at the firm, personally received at least $727,402 in ‘finder’s fees’ for recommending certain acquisition deals.”
(Read more: Genesis Block Ventures Was Entangled With FTX)
Another law firm was hired “to handle responses to document requests regarding Tether/Bitfinex relationships with the SEC and CFTC.” Unfortunately, possibly due to the use of Signal, some documents related to market manipulation could not be located.
Some law firms did raise questions about FTX leadership’s conduct; Skadden Arps Slate Meagher & Flom reportedly repeatedly warned about “undisclosed political contributions by FTX.US.”
Banks
FTX consistently struggled to maintain stable and transparent banking access, relying on a series of false statements to preserve its banking relationships. These included failing to “properly designate all FBO accounts.” Additionally, they frequently commingled customer and corporate funds in accounts.
Salame allegedly intervened to help Deltec Bank and Trust address “capital issues” by arranging two $50 million loans involving Salame, Alameda, and two other companies: Deltec International Group (Deltec) and Norton Hall Ltd. (Norton Hall). The investigation concluded these loans were designed to alleviate Deltec’s capital problems while ensuring Deltec owed FTX Group a favor, with the promissory note structure crafted to conceal Alameda’s role in the loans.
FTX and Alameda Research also collaborated with Deltec regarding Moonstone Bank. “Although Moonstone Bank is a small regional bank with only a few million dollars in assets, the debtor entity Alameda Research Ventures invested $11.5 million in FBH Corporation, the holding company of Moonstone Bank. While discussions around a staking program yielded no results, FTX Group entity FTX Trading still deposited $50 million into a Moonstone Bank account.”
(Read more: Exclusive: Moonstone Bank Explains Ties With Alameda Research)
Bad Investments
Alameda Research and other FTX Group entities were poor investors, skipping due diligence and funneling money into high-risk projects.
These investments included Embed, a securities clearing firm acquired for $300 million, which, when the estate attempted to sell it, received a maximum bid of just $1 million—from the company’s founder. The report states FTX “conducted minimal due diligence.”
In another case, the FTX Group spent $376 million acquiring DAAG, despite the company not being an active business and the acquisition “not including rights to key intellectual property.” The estate found “because the company had no meaningful saleable assets, a sale could not proceed.”
Some investments had other ulterior motives, such as “the FTX Group nearly acquired all the economic shares of Genesis Block, but almost all of Genesis Block’s shares were transferred into entities controlled by the co-founder and CEO of Genesis Block.”
Genesis Block was found linked to FTX’s “Korean Friend” account.
(Read more: Genesis Block: FTX In Thailand)
Modulo Capital was another investment fund with romantic connections, receiving a $500 million investment.
Genesis Digital Assets, referred to in the report as Venture Investment-1, received approximately $1 billion, but members associated with Genesis Digital Assets allegedly “knew that the company’s financial statements and valuation materials provided to prospective investors might be inaccurate.”
“It was also discovered that a co-founder of Venture Investment-1 had been involved in criminal activities in Kazakhstan. Although the FTX Group’s due diligence process identified these issues, the FTX Group chose to invest anyway.”
Overall, the report reaffirms that FTX was a criminal enterprise engaged in various irresponsible and improper behaviors, with numerous executives and lawyers making extensive efforts to keep FTX operational.
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