What does the 230-page investigation report on the FTX bankruptcy case say?

1 months ago
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The report reiterates that FTX is a criminal enterprise that has engaged in a variety of irresponsible and inappropriate behavior.

Original author: Protos Staff

Original translation: TechFlow

What does the 230-page investigation report on the FTX bankruptcy case say?

The examiner appointed in the FTX bankruptcy case has released a report highlighting various bad practices by the company and its executives that led to its collapse. The report covers how whistleblowers were paid, the handling of the bank’s “capital issues,” and when various executives knew that the FTX Group entity was insolvent.

Who knows?

The report contains information about which executives and companies knew about the accounting flaws before FTX Group collapsed. The allegations allege that Ryan Salame participated in creating a backdated payment agency agreement, directed other FTX Group employees to misrepresent to banks the purpose of FTX Group bank accounts, misappropriated FTX Group assets to purchase real estate, restaurants and food service companies, and make other purchases and investments (including private jets), and withdrew millions of dollars from FTX.com accounts before it stopped customer withdrawals.

The report also states that Salame made millions of dollars in political donations using FTX Group funds.

In addition, seaman Samuel Trabucco received a large amount of benefits before bankruptcy, FTX Group spent more than $15 million to purchase real estate, yachts and marina berths for Trabucco during the priority period, and Trabucco made a large withdrawal from the FTX.com exchange in September 2022.

In other communications, he expressed concern about Alamedas balance sheet, warning that employees would exit if they learned about Alamedas net worth without FETF.

Other executives are also being investigated, including a former FTX Group employee who managed Alameda’s token investments and participated in related sales transactions that were not properly recorded. The employee also made large withdrawals close to the filing date.

The report also mentions another former FTX Group employee who has been the subject of media reports for transferring $600,000 in FTT to a charity he co-founded. Creditors have not yet decided to take action against these individuals due to the need to prioritize other litigation.

Additionally, the report details recusation lawsuits filed against employees who made other withdrawals in the days leading up to the collapse.

The report further concluded that, despite Bankman-Fried’s insistence, FTX US was not solvent on the filing date. FTX.US’s “Bank Balances” spreadsheet totaled $138.5 million, while its “Wallet Balances” spreadsheet — meaning customer balances — totaled $184.7 million.

Caroline Papadopoulos, head of finance at FTX.US , said the calculation was wrong for another reason: It “includes [WRS] cash, which should be considered separate from FTX US.” She described the apparent reconciliation as “nonsense.”

Interestingly, the report concluded that the examiners saw no evidence that Sullivan Cromwell (SC) knew about FTX Group’s fraud prior to the filing, or that SC ignored red flags that required investigation of the debtor’s representations.

The report reached this conclusion, although “due to the use of Signal’s auto-delete feature, it is possible — and true — that these messages were produced incompletely or could never have been completed.”

Furthermore, despite the CoinDesk report suggesting that Alameda Research valued the asset at more than the entire market cap, five days after the report was published, an SC lawyer assured Voyager that FTX Group was “rock solid” and that the current problem was “Binance’s stupidity.”

The lawyers claimed they only became aware of the issues the day after the email was sent.

What does the 230-page investigation report on the FTX bankruptcy case say?

(For more information, see: Is Sam Bankman-Fried’s Crypto Trading Firm Alameda Research Bankrupt?)

Lawyers and Whistleblowers

The report describes FTX Group’s deep ties to Fenwick West (FW), referred to in the report as “Law Firm-1.” Joseph Bankman, the father of financial criminal Sam Bankman-Fried, allegedly suggested hiring FW to help FTX Group and recommended the company recruit Daniel Friedberg and Can Sun.

The report states that FW “serves as the primary U.S. outside counsel for FTX Group, providing advice on employment, tax, lending agreements, acquisitions, regulatory matters, government investigations, compliance and risk mitigation, equity incentives, collaboration agreements, trademark enforcement, intercompany service agreements, purchase agreements, and financings.”

“Between 2018 and 2022, Law Firm-1 received more than $22 million in legal fees from FTX Group. In 2018, while Friedberg was a partner at Law Firm-1, Joseph Bankman encouraged Bankman-Fried to give Friedberg a key role at Alameda.”

Friedberg and Can Sun left Law Firm-1 to join FTX Group in January 2020 and August 2021, respectively. Friedberg serves as Chief Compliance Officer of FTX.US and General Counsel of Alameda, while Sun serves as General Counsel of FTX Trading. However, Law Firm-1s relationship with FTX Group is not limited to Friedberg and Sun.

“Joseph Bankman maintained unusually close personal relationships with multiple attorneys at Law Firm-1 and at times provided subsidies for certain attorneys to travel and attend sporting events.”

This deep partnership includes FW helping with:

  • FTX Group issued “founders loans” that were used to transfer at least $2 billion in cash and assets between FTX Group entities and directly into the personal accounts of FTX Group leaders;

  • Friedberg created the backdated payment proxy agreement between FTX Trading and Alameda;

  • FTX Group leadership worked to conceal the close relationship between FTX Trading and Alameda from government regulators and investors;

  • FTX Group leadership used unconventional settlements to silence credible whistleblowers;

  • FTX Group has worked to downplay its relationship with the Serum Foundation and its control.

The exact details of these relationships are difficult to discern with any accuracy, in part because FW “frequently communicated with individuals at FTX Group using ephemeral messaging platforms such as Signal, and has only provided records of 144 individual or group chats between the law firm-1 and FTX Group employees to date.”

Only 18 of those chats still contained messages, the rest simply showed that a group message had existed but without the content.

The report further suggests that FW may have been aware of problems years before its eventual collapse, finding that Bankman-Fried admitted to members of the firm in December 2019 that Alameda held a large number of FTTs that had a high market value but could not be realized without a market crash.

Additionally, the report alleges that FW “created the Serum Foundation, using a system that allowed certain FTX Group employees to continue to control the Serum Foundation and the SRM token. Quinn Emanuel also found that individuals associated with the FTX Group used [FW] to create an entity called the Incentive Ecosystem Foundation to provide incentives for the SRM ecosystem and increase the market price of SRM, while hiding the entity’s connection to the FTX Group.”

This is consistent with previous allegations that “the Debtors report that Friedberg — Alameda’s former general counsel — commissioned Maps’ white paper and drafted significant portions of it in October 2020.”

Friedberg has become the target of a lawsuit by the estate, alleging he helped pay for a whistleblower.

Furthermore, “Sun coordinated with Friedberg to avoid CFTC scrutiny by concealing information about FTX Trading’s entities of interest.”

The report also alleges a pattern of treatment of whistleblowers by FTX Group: “Failure by FTX Group counsel to properly investigate the substance of these whistleblower complaints resulted in settlements for substantial amounts, with these settlements primarily being handled by Friedberg, Sun, Miller, and Joseph Bankman.”

Generally, FTX Group resolves these complaints without investigating the substance of the complaints, often using large financial settlements and a “continuing model” of hiring attorneys who provide no substantive legal services. These attorneys include:

  • $20,762 to Orrick Herrington Sutcliffe for legal services related to Whistleblower-5’s separation from FTX.

  • A fee of $64, 998 was paid to Holland Knight, primarily for drafting a settlement agreement with the whistleblower.

  • $760, 000 in fees to Silver Miller Law, primarily for regulatory affairs advice and whistleblower allegations.

  • After loaning Pavel Pogodin $1 million as part of a settlement related to the withdrawal of a whistleblower complaint, he allegedly entered into two contracts with FTX totaling $3.3 million, the investigation noted that “there is no evidence that Pogodin ever provided any legal services to the FTX Group.”

  • Paying Law Firm-8 $200,000 per month for five years to resolve the complaint of Whistleblower-1. The only work allegedly produced was a three-page memo prepared by a non-lawyer.

Law firms were allegedly often instructed to skip due diligence on FTX Group’s planned investments. For example, the law firms that helped FTX acquire Australia’s HiveEx could earn “referral fees” for helping FTX find these investment targets or for other assistance to FTX.

In such cases, “ultimately, Law Firm-5’s role expanded to include negotiating settlements to avoid negative publicity for FTX Group. For example, in July 2021, Law Firm-5 arranged for a Cayman Islands company, 707, 016 Ltd., to pay creditors of Australian crypto influencer Alex Saunders. Saunders was accused of using borrowed funds to trade on FTX.com, but he lost those trading funds.

To mitigate any reputational damage and avoid potential litigation, FTX Trading lent Saunders $13.2 million through 707,016 Ltd. to help Saunders repay debts. Saunders has not repaid the loan. A partner at Law Firm-5, the primary contact for FTX Group at the firm, personally received at least $727,402 in referral fees for advising on certain acquisitions.

What does the 230-page investigation report on the FTX bankruptcy case say?

(For more details, see: Genesis Block Ventures and FTX are entangled)

Another law firm was hired to “handle responses to document requests from the SEC and CFTC regarding the Tether/Bitfinex relationship.” Unfortunately, perhaps due to the use of Signal, some documents related to market manipulation could not be found.

Some law firms did raise questions about the conduct of FTX leadership, with Skadden Arps Slate Meagher Flom allegedly issuing repeated warnings about “undisclosed political contributions by FTX.US.”


FTX has struggled to maintain stable and public banking access, relying on a series of false statements to maintain its banking access. These statements included failing to properly designate all FBO accounts. In addition, they frequently commingled customer and company funds in their accounts.

Salame allegedly stepped in to help Deltec Bank and Trust solve its “capital problems” by issuing two $50 million loans involving Salame, Alameda, and two other companies, Deltec International Group (Deltec) and Norton Hall Ltd. (Norton Hall). The investigation concluded that the loans were intended to alleviate Deltec’s capital problems while ensuring that Deltec owed FTX Group a favor, and that the related promissory notes were structured to conceal Alameda’s role in the loans.

FTX and Alameda Research also worked with Deltec on Moonstone Bank. “Debt entity Alameda Research Ventures invested $11.5 million in Moonstone Bank’s holding company, FBH Corporation, despite Moonstone Bank being a small regional bank with only a few million dollars in assets. While discussions around the staking program were unfruitful, FTX Group entity FTX Trading deposited $50 million in a Moonstone Bank account.”

What does the 230-page investigation report on the FTX bankruptcy case say?

(For more details, please see: Exclusive: Moonstone Bank explains its relationship with Alameda Research)

Bad Investment

Alameda Research and the rest of the FTX group are terrible investors, skipping due diligence and throwing money into projects that carry huge risks.

Those investments included Embed, a securities clearing company acquired for $300 million, while when the estate tried to sell, the highest bid was just $1 million, made by the company’s founder. The report said FTX “conducted minimal due diligence.”

In another case, FTX Group spent $376 million to acquire DAAG, even though the company was not an active business and the acquisition “did not include rights to key intellectual property.” The estate found that “a sale was not possible because the company did not have any meaningful saleable assets.”

Some investments have other significant reasons, such as “FTX Group acquired substantially all of the economic shares of Genesis Block, but substantially all of Genesis Block’s shares were transferred to entities controlled by Genesis Block’s co-founder and CEO.”

Genesis Block was found to be associated with FTX’s “Korean Friend” account.

What does the 230-page investigation report on the FTX bankruptcy case say?

(For details, please see: Genesis Block: FTX in Thailand)

Modulo Capital, another investment fund with a romantic connection, received $500 million in investment.

Genesis Digital Assets, referred to in the report as Venture Investment-1, received approximately $1 billion, but members associated with Genesis Digital Assets allegedly “knew that the company’s financial statements and valuation materials provided to potential investors may have contained inaccuracies.”

“It was also discovered that the co-founder of Venture Investment-1 had been involved in criminal conduct in Kazakhstan. Despite these issues being identified during FTX Group’s due diligence process, FTX Group chose to invest.”

Overall, the report reiterates that FTX is a criminal enterprise that engages in a variety of irresponsible and improper behavior, and that numerous executives and lawyers have worked extremely hard to keep FTX operating.

Original article, author:深潮TechFlow。Reprint/Content Collaboration/For Reporting, Please Contact report@odaily.email;Illegal reprinting must be punished by law.

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