Exclusive: At least $1 billion in customer money missing in FTX

  • FTX Founder Fred Bankman Secretly Transferred $10 Billion of Funds to Trading Company Alameda – Sources
  • Bankman-Fried Shows Spreadsheets to Colleagues That Revealed Shift in Funds to Alameda – Sources
  • Spreadsheets indicated that between $1 billion and $2 billion of customer funds were not accounted for – sources
  • Executives set up ‘back door’ for record keeping that thwarted red flags – sources
  • The whereabouts of the missing funds are unknown – sources

NEW YORK (Reuters) – At least $1 billion in client funds has vanished from collapsed crypto exchange FTX, two people familiar with the matter said.

The two sources told Reuters that founder of the exchange, Sam Bankman Fred, secretly transferred $10 billion in client funds from FTX to Bankman Fried’s Alameda Research trading company.

A large proportion of that total has since disappeared, they said. One source estimated the missing amount at $1.7 billion. The other said the gap ranged between $1 billion and $2 billion.

While FTX is known to have moved client funds to Alameda, the missing funds were reported here for the first time.

The financial loophole in the records that Bankman-Fried filed with other top executives last Sunday was revealed, according to the two sources. They said the records provided an updated description of the situation at the time. Both sources held senior positions at FTX until this week, and said they had been briefed on the company’s finances by senior employees.

Bahamas-based FTX filed for bankruptcy on Friday after a rush of customer withdrawals earlier this week. A rescue deal with rival exchange Binance failed, precipitating the collapse of the most popular cryptocurrency in recent years.

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In text messages to Reuters, Bankman-Fried said he “did not agree with the description” of the $10 billion transfer.

“We didn’t tell a secret,” he said. “We got confused in the internal designation and misread it,” he added, without going into details.

Asked about the missing money, Bankmann-Fried replied: “????”

FTX and Alameda did not respond to requests for comment.

In a tweet on Friday, Bankman-Fried said he was “pooling” what happened in FTX. “I was shocked to see things unfold the way they did earlier this week,” he wrote. “I will be writing, soon, a more complete post on the play by play.”

Losses at Alameda were at the core of FTX’s problems that most FTX executives were unaware of, Reuters previously reported.

Customer withdrawals soared last Sunday after Changpeng Zhao, CEO of crypto exchange giant Binance, said Binance would sell its entire stake in the FTX token, worth at least $580 million, “due to recent discoveries.” Four days ago, news outlet CoinDesk reported that much of Alameda’s $14.6 billion in assets were held in the token.

On Sunday, Bankman-Fried held a meeting with several executives in the Bahamian capital Nassau to calculate how much outside funding he needs to cover the FTX shortage, the two people familiar with FTX finances said.

Bankman-Fried confirmed to Reuters that the meeting took place.

Bankman-Fried showed several spreadsheets to the heads of the company’s regulatory and legal teams that revealed that FTX had moved about $10 billion in client money from FTX to Alameda, the two people said. They said the spreadsheets show how much money FTX loaned Alameda and what it was used for.

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The sources said that the documents showed that between one and two billion dollars of this money was not counted in Alameda’s assets. The data tables did not indicate where the money was transferred, and the sources said they did not know what happened to it.

In a subsequent examination, FTX’s legal and financial teams also learned that Bankman-Fried implemented what the two people described as a “back door” into FTX’s bookkeeping system, which was built using bespoke software.

They said the “back door” allowed Benkman Fried to carry out orders that could alter the company’s financial records without alerting others, including outside auditors. That setup, they said, meant that the $10 billion transfer of funds to Alameda did not lead to internal compliance or accounting red flags at FTX.

In his text message to Reuters, Bankman-Fried denied the implementation of a “back door”.

A source familiar with the investigation told Reuters on Wednesday that the US Securities and Exchange Commission is investigating FTX.com’s handling of client funds, as well as its cryptocurrency lending activities. The source said the Justice Department and the Commodity Futures Trading Commission are also investigating.

The FTX bankruptcy was a stunning reversal for Bankman-Fried. The 30-year-old created FTX in 2019 and led it to become one of the largest cryptocurrency exchanges, accumulating a personal fortune estimated at $17 billion. FTX in January was valued at $32 billion, with investors including SoftBank and BlackRock.

The crisis has echoed in the cryptocurrency world, with the major currencies dropping in price. The FTX crash leads to comparisons with previous major trade crashes.

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FTX said Friday it had handed control of the company over to John J. Ray III, a restructuring specialist who handled the liquidation of Enron Corp — one of the largest bankruptcies in history.

(Reporting by Angus Berwick). Editing by Baritush Bansal and Janet McBride

Our criteria: Thomson Reuters Trust Principles.

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