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FTX was run as a ‘personal fiefdom’, faced hacks, missing assets – lawyers

NEW YORK/LONDON, Nov 22 (Reuters) – FTX was run as a “personal fiefdom” of former CEO Sam Bankman-Fried, lawyers for the collapsed crypto exchange said in its first bankruptcy hearing then that they detailed ongoing challenges such as hacks and missing assets.

In the most publicized crypto explosion to date, FTX filed for protection in the United States after traders withdrew $6 billion from the platform in three days and rival exchange Binance abandoned a bailout deal. The collapse left around 1 million creditors facing losses totaling billions of dollars. Read more

A lawyer for FTX told a bankruptcy hearing on Tuesday that the company now intends to sell healthy business units, but has been subject to cyberattacks and has “substantial” assets missing. .

FTX announced on Saturday that it has launched a strategic review of its global assets and is preparing for the sale or reorganization of certain businesses. FTX said on Tuesday it was receiving interest from potential buyers for its assets and would conduct a process to reorganize or sell them.

The hearing was held in United States Bankruptcy Court in Wilmington, Delaware, and was streamed live to approximately 1,500 viewers on YouTube and Zoom.

A lawyer also said the company had been run as a “personal fiefdom” of Bankman-Fried with $300 million spent on real estate such as homes and vacation properties for senior executives. FTX, led since filing for bankruptcy by new CEO John Ray, accused Bankman-Fried of working with Bahamian regulators to “undermine” the U.S. bankruptcy case and move assets overseas.

Bankman-Fried did not immediately respond to an email seeking comment.

Reuters reported earlier that Bankman-Fried’s FTX, his parents and top executives of the failed cryptocurrency exchange bought at least 19 properties worth nearly $121 million in the Bahamas in past two years, according to official property records. Read more

The lawyers also said an investigation should take place into Binance’s sale of FTX in July 2021. Binance bought a stake in FTX in 2019.

Separately, a filing late Monday by Ed Mosley of Alvarez & Marsal, an advisory firm advising FTX, showed FTX’s cash balance of $1.24 billion as of Sunday’s date was “significantly higher.” than previously thought.

It includes around $400 million in accounts linked to Alameda Research, the crypto trading firm owned by Bankman-Fried, and $172 million in the Japanese arm of FTX.

Reuters reported that Bankman-Fried had secretly used $10 billion in client funds to support its business activity, and that at least $1 billion of those deposits had gone missing.

DISCLOSURE DEBATE

During the hearing, FTX representatives argued that client names should be kept secret because disclosing them could destabilize the crypto market and open clients up to hacks. FTX also argued that its client list is a valuable asset and that disclosing it could harm future sales efforts or allow rivals to poach its user base.

A judge said those names could remain secret until a future court hearing.

FTX lawyers also described an uneasy truce with court-appointed liquidators overseeing the liquidation of FTX’s Bahamas unit, FTX Digital Markets.

The two parties reached an initial agreement to coordinate their US-based insolvency proceedings before Judge John Dorsey, avoiding the possibility of conflicting rulings from two different US bankruptcy judges. But the two sides reported that they still had broader disagreements over how to coordinate the recovery and preservation of assets held by various FTX affiliates.

Bankman-Fried, FTX and the Bahamas liquidators did not immediately respond to requests for comment.

FEARS OF CONTAGION

FTX’s fall from grace has sent shivers through the crypto world, pushing bitcoin to its lowest level in about two years and sparking contagion fears among other companies already reeling from this crypto market meltdown. year.

Major US crypto lender Genesis said on Monday it was trying to avoid bankruptcy, days after the collapse of FTX forced it to suspend client redemptions.

“Our goal is to resolve the current situation in a consensual manner without the need to file for bankruptcy,” a spokesperson for Genesis said in a statement emailed to Reuters, adding that it continued to have conversations with creditors.

Bloomberg news reportciting sources, had said Genesis was struggling to raise fresh funds for its loan unit.

The Wall Street Journal reported, citing sources, that Genesis had approached Binance looking for an investment but the crypto exchange decided against it, fearing a conflict of interest. Genesis has also approached private equity firm Apollo Global Management (APO.N) for capital assistance, the WSJ said.

Apollo did not immediately respond to a request for comment from Reuters on the WSJ report, while Binance declined to comment.

Crypto exchange Gemini, which runs a crypto lending product in partnership with Genesis, tweeted on Monday that it continues to work with the company to allow its users to redeem funds from its return-generating “Earn” program. .

Gemini said on its blog last week that there was no impact to its other products and services after Genesis suspended withdrawals.

Since the FTX implosion, some crypto players are turning to decentralized exchanges called “DEXs” where investors trade between peers on the blockchain.

Overall daily DEX trading volumes jumped to their highest level since May on Nov. 10 as FTX imploded, according to data from DeFi market tracker Llama, but have since pared their gains.

Reporting by Dietrich Knauth in New York and Tom Wilson in London; additional reporting by Manya Saini, Rishabh Jaiswal, Juby Babu and Lavanya Sushil Ahire in Bengaluru; Editing by Megan Davies, Alexander Smith and Nick Zieminski

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