Multi-Billion Dollar Fraud In FTX Failure Looks An Awful Lot Like Enron

Two people familiar with the matter say 1 billion dollars of customer funds have vanished from collapsed crypto exchange FTX.

Reuters reported that FTX founder Sam Bankman-Fried transferred $10 billion of customer funds to Alameda Research, his trading company.

Approximately $1.7 billion of that total has disappeared, one source said. Another said the missing amount was between $1 billion and $2 billion.

For the first time, FTX is reporting missing funds, despite moving customer funds to Alameda.

According to the two sources, Bankman-Fried shared records with other senior executives last Sunday that revealed the financial hole. The records provided an up-to-date account of the situation at the time, they said. They both held senior positions at FTX until this week and were briefed by the company’s top management about its finances.

Following a rush of withdrawals earlier this week, the Bahamas-based exchange filed for bankruptcy on Friday. A rescue deal with rival Binance failed, precipitating crypto’s most prominent collapse.

According to Bankman-Fried, the $10 billion transfer has been mischaracterized.

“We didn’t transfer secretly,” he said. “We misread the internal labeling,” he said without further explanation.

In response to a question about the missing funds, Bankman-Fried responded: “???”

A request for comment was not responded to by FTX or Alameda.

Bankman-Fried tweeted on Friday that he was trying to piece together what happened at FTX. “I was shocked to see how things went with this week’s events,” he said.

Reuters previously reported that FTX’s problems were caused by losses at Alameda that most executives were unaware of.

Changpeng Zhao, CEO of Binance, said last Sunday that Binance would sell its entire stake in FTX’s digital token, worth at least $580 million, due to recent revelations. According to CoinDesk, much of Alameda’s $14.6 billion in assets are held in the token, which was reported four days earlier.

According to two people with knowledge of FTX’s finances, Bankman-Fried met with several executives that Sunday to estimate the amount of outside funding he would need to cover FTX’s shortfall.

The meeting was confirmed to Reuters by Bankman-Fried.

The two people said Bankman-Fried showed the heads of the company’s regulatory and legal teams several spreadsheets that showed FTX had transferred around $10 billion in client funds to Alameda. According to them, the spreadsheets showed how much FTX loaned Alameda and what it was used for.

Approximately $1 billion to $2 billion of these funds are unaccounted for among Alameda’s assets, sources said. The spreadsheets did not indicate where the money went, and they do not know what happened to it.

The legal and finance teams of FTX learned that Bankman-Fried installed a “backdoor” into FTX’s book-keeping system, which was built using custom software.

As a result of the “backdoor,” Bankman-Fried was able to alter the company’s financial records without alerting any other party, including external auditors. They said this arrangement prevented FTX from raising any internal compliance or accounting red flags regarding the $10 billion transfer to Alameda.

Bankman-Fried denied implementing a “backdoor” in a text response to a Reuters reporter.

Sources with knowledge of the inquiry told Reuters on Wednesday that the Securities and Exchange Commission is investigating how handles customer funds and its crypto-lending activities. In addition to the Department of Justice, the Commodity Futures Trading Commission is also investigating.

A stunning reversal for Bankman-Fried, the 30-year-old set up FTX in 2019 and led it to become one of the largest crypto exchanges, accumulating a fortune estimated at nearly $17 billion. SoftBank and BlackRock were among the investors who valued FTX in January at $32 billion.

The crisis has sent ripples through the crypto world, with major coins falling in value, and FTX’s collapse drawing comparisons to previous crises.

In a twist of irony, according to FTX’s announcement on Friday, the company has turned over its control to restructuring specialist John J. Ray III, who overseen the bankruptcy of Enron Corp.