Exclusive: At least $1 billion of client funds missing at FTX

  • FTX founder Bankman-Fried secretly moved $10 billion in funds to Alameda trading firm – sources
  • Bankman-Fried showed colleagues spreadsheets that showed the transfer of funds to Alameda – sources
  • Not accounted for in spreadsheets that showed between $1 billion and $2 billion in client money – sources
  • Bookkeeping executives set up a “back door” that blocked red flags – sources
  • It is not known where funds are missing – sources

NEW YORK, Nov 11 (Reuters) – At least $1 billion of customer funds have disappeared from the crypto exchange FTX, according to two people with knowledge of the matter.

The exchange’s founder, Sam Bankman-Fried, secretly transferred $10 billion of customer funds from FTX to Bankman-Fried’s trading company Alameda Research, the people told Reuters.

Much of that total has since disappeared, they said. One source put the missing amount at about $1.7 billion. The other said the gap was between $1 billion and $2 billion.

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

The financial hole was revealed in records Bankman-Fried shared with other senior executives last Sunday, according to the two sources. The records gave an up-to-date account of the situation at the time, they said. Both sources held senior FTX positions until this week and said they were briefed on the company’s finances by top staff.

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FTX, based in the Bahamas, filed for bankruptcy on Friday after a rush of customer withdrawals earlier this week. A rescue market with rival exchange Binance fell, resulting in the highest crypto profile fall in recent years.

In text messages to Reuters, Bankman-Fried said he “disagreed with the characterization” of the $10 billion transfer.

“We didn’t move secretly,” he said. “We were confused by internal labeling and misread it,” he said, without elaborating.

When asked about the missing funds, Bankman-Fried replied: “???”

Neither FTX nor Alameda responded to requests for comment.

In a tweet on Friday, Bankman-Fried said he was “putting together” what happened at FTX. “I was surprised to see things unfold the way they did earlier this week,” he wrote. “Soon, I will write a more complete post on the play by play.”

At the heart of FTX’s problems were losses at Alameda that most FTX executives were unaware of, Reuters previously reported.

Customer withdrawals spiked last Sunday after Changpeng Zhao, CEO of crypto exchange giant Binance, said Binance would sell its entire stake in the FTX digital token, worth at least $580 million, “due to disclosures by later.” Four days earlier, news outlet CoinDesk reported that a large portion of Alameda’s $14.6 billion in assets was held in the token.

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That Sunday, Bankman-Fried met with several executives in the Bahamian capital of Nassau to calculate how much outside financing he needed to cover FTX’s deficit, the two people with knowledge of FTX’s finances said.

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

Bankman-Fried showed several spreadsheets to the company’s regulatory and legal team leaders that showed FTX transferred about $10 billion in client funds from FTX to Alameda, the two said. The spreadsheets showed how much money FTX loaned Alameda and what it was used for, they said.

The documents showed that between $1 billion and $2 billion of these funds were not included among Alameda’s assets, the sources said. The spreadsheets did not show where this money was transferred, and the sources said they did not know what happened.

In a subsequent investigation, FTX’s legal and financial teams also learned that Bankman-Fried had implemented what both described as a “backdoor” in FTX’s bookkeeping system, which was built using custom software.

They said the “backdoor” allowed Bankman-Fried to execute orders that could alter the company’s financial records without notifying others, including outside auditors. This arrangement meant that the movement of the $10 billion in funds to Alameda did not trigger internal compliance or accounting red flags at FTX, they said.

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In his text message to Reuters, Bankman-Fried denied implementing a “backdoor”.

The US Securities and Exchange Commission is investigating FTX.com’s handling of customer funds, as well as its crypto-lending activities, a source familiar with the inquiry told Reuters on Wednesday. The Justice Department and the Commodity Futures Trading Commission are also investigating, the source said.

The FTX bankruptcy was a major setback for Bankman-Fried. The 30-year-old founded FTX in 2019 and became one of the largest crypto exchanges, amassing a personal fortune estimated at nearly $17 billion. FTX was valued at $32 billion in January, with investors including SoftBank and BlackRock.

The crisis has sent reverberations through the crypto world, with the price of major coins plummeting. And FTX’s fallout is drawing comparisons to earlier business booms.

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

Reporting by Angus Berwick; edited by Paritosh Bansal and Janet McBride

Our Standards: The Thomson Reuters Trust Principles.

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