FTX lawyer calls this case “a different kind of animal” in the first bankruptcy hearing

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Lawyers for collapsed crypto exchange FTX said during the company’s first bankruptcy hearing on Tuesday that regulators from the Bahamas, where FTX’s headquarters were located, have agreed to consolidate proceedings in Delaware.

FTX’s lawyers, brought in by the new leadership to handle the restructuring, filed an emergency motion last week to secure the move to the US. Tuesday’s hearing was the first step in the resolution of cryptocurrency’s largest-ever bankruptcy.

“What we’re dealing with is a different kind of animal,” said FTX attorney James Bromley. “Unfortunately, the FTX accounts receivable were not particularly well managed, which is an understatement.”

As for the founder of FTX, this was an organization that was “effectively run as a personal fief of Sam Bankman-Fried,” an FTX attorney told the court.

FTX attorneys confirmed previous reports that New York’s Southern District Cyber ​​Crimes Unit has launched an investigation into the matter. FTX lawyers have also referenced cyberattacks, suggesting there were multiple attacks in addition to the $477 million hack that took place shortly after the company filed for bankruptcy on Nov. 11. In that attack, hackers extracted ether from FTX wallets.

The central challenge for the new team is to “work to bring order to disorder,” Bromley told the court. After introducing his fellow attorney, Bromley dove into what FTX has done to understand the complex swamp of data and finance left behind by FTX and Bankman-Fried, who was replaced by restructuring expert John Ray III.

Bankman-Fried exercised a degree of control over the company that “none of us have ever seen,” Bromley said, referring to the bankruptcy experts and lawyers the company hired as part of its restructuring process.

FTX was valued at $32 billion by private investors earlier this year, and Bankman-Fried pretended to be the industry’s savior during the crypto winter.

“The FTX situation is the latest and greatest failure in this space,” said Bromley. “There was actually a run on the bank, both with regard to the international stock market […] as well as the US stock market. At the same time as the run on the bench happened, there was a leadership crisis […] The FTX companies were controlled by a very small group of people led by Mr. Sam-Bankman-Fried. During the run on the bench, Mr. Fried’s leadership frayed, leading to his firing.

FTX is just beginning to implement “standard” risk and data management practices, he said. As part of the process, attorneys previously had to approve about $1 million in salary costs for existing FTX employees.

The process is designed to get as much for creditors as possible, Bromley said.

“It is essential that we first maximize the value of the assets we have, whether that means selling assets, selling businesses or restructuring businesses,” he said. “That’s all on the table.”

FTX clients had a global presence, but many were located in tax havens. The largest geographic areas represented included:

  1. Cayman Islands — 22% of registered customers.
  2. US Virgin Islands – 11% of registered customers.
  3. China — 8% of registered customers.

“We’ll be ahead of you pretty soon with an attempt to sell some of the business that we understand […] are self-sufficient and robust [with] interest from others,” Bromley added.

FTX lawyers said they have created four silos for the company’s assets and various entities. They are:

  • The WRS (West Realm Shires) silo, which controls and includes American companies.
  • The Alameda silo, which includes Alameda Research, Bankman Fried’s now-defunct hedge fund.
  • The venture silo, which invested in crypto companies and startups.
  • The dotcom silo, which includes international trade, makes up the bulk of FTX’s deposits.

Bromley said the asset recovery and protection efforts include not only crypto assets and currencies, but also “information”. The company also recruited independent directors for the first time.

“A significant number of assets have been stolen or missing,” Bromley said. In addition, “substantial funds appear to have been transferred from other silos to Alameda.”

An important aspect of the FTX crisis is around Alameda and the FTT token, a coin issued by FTX. Lawyers have gone through the history of FTX and affiliates, pointing to the creation of the FTT token in April 2019 and the creation of the Alameda entities in November 2017.

Investments were made in the crypto and technology venture space, Bromley said, but nearly $300 million was also spent on Bahamas real estate. That number is higher than previously reported, and Bromley said most of those purchases were homes and vacation properties for senior executives.

Employees have left the company en masse. As of October 2022, the main FTX parent company had 330 employees worldwide, with 127 of them in the US. Including the Australian companies and FTX Digital Markets, which had 190 employees, the global workforce was 520.

The best estimate for the workforce, according to FTX attorneys, is now “about 260.”

WATCH: Protecting customers from bad actors in the crypto space



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