The FTX Debtors, consisting of FTX and its affiliates, have disclosed the misuse of funds by previous executives. Released on June 26, the second interim report highlights the extensive commingling of funds, making the task of recovering assets an intricate and challenging process.
This release is part of an ongoing series that aims to shed light on the events and issues preceding the Chapter 11 cases of the once-leading cryptocurrency giant. It follows the first report, which detailed control failures by the previous management team in various critical areas. The FTX Debtors anticipate publishing the third report in August 2023.
According to the analysis, a staggering $8.7 billion of customer assets were misappropriated, with the majority of the funds, approximately $6.4 billion, held in fiat and stablecoins. Interestingly, FTX did not differentiate between the two in its accounting practices.
Moreover, the former FTX leadership intentionally and strategically misused and commingled customer deposits. Their actions were allegedly shielded by a senior FTX Group attorney and others. The involvement of this unidentified senior attorney was repeatedly mentioned, along with the troubling fact that this attorney fired a junior attorney who had raised objections to the deceptive practices.
Despite the efforts of forensic accountants, asset tracing and recovery experts, and blockchain analysts, tracking the significant assets of the Debtors to their sources or distinguishing between the FTX Group’s operational funds and customer deposits has proven to be an arduous task.
FTX Debtors Expose The Flows of Customer Money
The report paints a vivid picture of the extent of chaos resulting from the misappropriation of FTX customer funds. A diagram presented in the report illustrates the complex flows of money out of primary deposit accounts, showcasing how false representations and purpose misrepresentation facilitated these illicit movements.
Primary Deposit Accounts: Sources and Use of Funds pic.twitter.com/N7YHn6mRZ9
— Sunil (FTX 2.0 Champion) (@sunil_trades) June 26, 2023
As per John J. Ray III, Chief Executive Officer and Chief Restructuring Officer of the FTX Debtors, “From the inception of the FTX.com exchange, the FTX Group commingled customer deposits and corporate funds, and misused them with abandon at the direction and by the design of previous senior executives.”
Furthermore, the report mentions that the FTX senior executives, namely SBF (Sam Bankman-Fried), Gary Wang, Nishad Singh, and Alameda Research CEO Caroline Ellison, investigated how to connect customer funds with those of the company, revealing extreme misuse of customer deposits. Their estimations ranged between $8.9 billion and $10 billion, slightly higher than the FTX Debtors’ own estimate.
Meanwhile, the misappropriated funds were allegedly diverted towards political and charitable donations and the company’s investments and acquisitions, including luxury real estate.
