FTX Bankruptcy: A Deep Dive into the Second Interim Report by CEO John J. Ray III
On June 26, 2023,John J. Ray III, the CEO appointed to oversee the FTX bankruptcy, filed a second interim report. The report provides a detailed account of alleged misappropriation of customer funds, the commingling of corporate and customer assets, and the deceptive practices employed by the FTX Group. The report reveals that the FTX Group, under the leadership of co-founder and CEO Sam Bankman-Fried, allegedly misrepresented its commitment to customer protection and regulatory compliance in the crypto industry.
Misrepresentation and Misappropriation:
According to the report, the FTX Group, which portrayed itself as a customer-focused leader in the digital asset industry, is accused of misusing customer deposits and corporate funds for speculative trading, venture investments, and the purchase of luxury properties. The report alleges that the FTX Group intentionally commingled customer and corporate funds and used them for their own benefit. The report estimates that approximately $8.7 billion in customer-deposited assets were misappropriated from the FTX.com exchange.
False Claims and Deceptive Practices:
The report further states that despite public claims by the FTX Group that it championed customer protection and regulatory compliance, the FTX Group made false statements to banks and auditors, executed false documents, and moved the company from jurisdiction to jurisdiction to avoid detection of their wrongdoing.
A. Political Donations
The report reveals that the FTX Group made political donations exceeding $100 million, funded through alleged "loans" from the FTX Group. These funds were often allegedly transferred from FTX Group bank accounts that contained a mix of customer and corporate funds. Singh has already pleaded guilty to charges of conspiring to make unlawful political contributions and defrauding the Federal Elections Commission (FEC). Bankman-Fried has been charged with the same crimes.
B. Charitable Donations
The report also alleges that Bankman-Fried and other FTX Group executives made donations to individuals and non-profit organizations from accounts holding commingled funds. In February 2021, Bankman-Fried announced the establishment of the FTX Foundation, also known as FTX Philanthropy, which was supposed to make grants for various altruistic endeavors. The FTX Group publicly committed to contributing at least "1% of FTX’s revenue from fees" to the FTX Foundation. However, the report alleges that the FTX Foundation was financed in part with commingled customer funds.
C. Venture Investments and Acquisitions
The report also claims that the FTX Senior Executives allegedly used commingled customer funds for venture investments and acquisitions. The reports notes that , Bankman-Fried allegedly decided to invest in a new cryptocurrency hedge fund, Modulo Capital, Inc. ("Modulo"), which was started by two of his associates. Between June and November 2022, the FTX Group transferred approximately $450 million to Modulo. These funds were transferred from an account that had allegedly received customer deposits.
D. Luxury Real Estate in the Bahamas
The report further claims that the FTX Group, under the direction of Bankman-Fried and other executives, allegedly spent over $243 million on luxury real estate in the Bahamas. These properties were purchased for FTX Group employees and their friends and family. The funds used for these purchases allegedly came from accounts that held a mix of customer and corporate funds.
E. Creation of the Sham Payment Agent Agreement
The report further claims that with the participation of Bankman-Fried, Attorney-1 allegedly also created and directed the creation of sham agreements that purported to legitimize certain improper transfers and arrangements of the FTX Group, and that facilitated the FTX Group’s commingling and misuse of assets and other misconduct. As an example, from January to April 2021, the report claims that Attorney-1 conceived of, drafted and backdated—by nearly two years—a sham inter-company agreement for the sole purpose of providing it to an external auditor that had been retained to prepare an audited financial statement of FTX.
FTX Trading Ltd. informed its auditor that, pursuant to the agreement, Alameda “provides cash management services to FTX.” A member of FTX Trading Ltd.’s external accounting team who was closely involved in the audit explained in an e-mail to the FTX Group’s external counsel working on the IPO that pursuant to this “cash management agreement,” Alameda “manages the fiat aspects for customers.” She explained, because “we have been using Alameda as our payment processor, we have not recorded the customer fiat nor their crypto balances on our books as an asset or liability.”
After Attorney-1 caused the outside auditor to be provided with the Payment Agent Agreement, theoutside auditor prepared an audited financial statement of FTX Trading Ltd. that inaccurately and misleadingly characterized FTX Trading Ltd.’s relationship with Alameda, and did not record any fiat currency of FTX.comcustomers. While the IPO was not ultimately consummated, the FTX Group proceeded to share the false and misleading audited financials with potential investors in connection with its $400 million Series C financing that closed in January 2022. Report
This blog post was prepared with the assistance of ChatGPT-4 AI. Nothing in this post should be considered legal advice or the creation of an attorney-client relationship. This blog is strictly for informational purposes only.