EXCLUSIVE: At least $1 billion in client funds missing from failed crypto firm FTX – sources

EXCLUSIVE: At least $1 billion in client funds missing from failed crypto firm FTX - sources
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  • FTX Founder Bankman-Fried Secretly Transfers $10B in Funds to Trading Firm Alameda – Sources
  • Bankman-Fried showed colleagues spreadsheets that revealed the transfer of funds to Alameda — sources
  • Spreadsheets indicated between $1 billion and $2 billion in client money – unaccounted for sources
  • Executives set up book-keeping “back doors” that set off red flags – sources
  • Where are the missing funds unknown – sources

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

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

A large portion of that total has disappeared, they said. One source put the missing amount at about $1.7 billion. Another said the gap was $1 billion to $2 billion.

While it is known that FTX transferred customer funds to Alameda, the missing funds are reported here for the first time.

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

Based in the Bahamas FTX has filed for bankruptcy Friday after a rush of customers to pick up earlier this week. A rescue agreement has been reached with rival exchange Binance, one of the crypto’s highest-profile declines in recent years.

In a text message to Reuters, Bankmann-Fried said she “disagrees with the character” of the $10 billion transfer.

He said, we did not transfer secretly. “We had confusing internal labels and read it incorrectly,” he added, without elaborating.

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

FTX and Alameda did not respond to requests for comment.

In a tweet on Friday, Bankman-Fried said he was “putting together the pieces” of what happened at FTX. “I was shocked at the way things unfolded earlier this week,” he wrote. “I will, soon, write a more complete post on the play by play.”

At the heart of FTX’s problems was the loss at Alameda, which most FTX executives did not know about. Reuters previously reported.

Changpeng Zhao, CEO of giant crypto exchange Binance, said Binance will sell its entire stake in FTX’s digital token, worth at least $580 million, “due to recent disclosures.” Four days ago, news outlet CoinDesk reported that most of Almeida’s $14.6 billion fortune was held in tokens.

That Sunday, Bankman-Fried held a meeting with several executives in Nassau, the capital of the Bahamas, to calculate how much outside funding FTX would need to cover the deficit, two people with knowledge of FTX’s finances said.

Bankmann-Fried confirmed to Reuters that the meeting had taken place.

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

The documents show that $1 billion to $2 billion of that fund is not accounted for in Alameda’s assets, sources said. The spreadsheets did not indicate where the money was transferred, and sources said they did not know what happened to it

In a subsequent investigation, FTX legal and financial teams also learned what Bankman-Fried described as a “backdoor” in FTX’s book-keeping system that Bankman-Fried implemented, which was developed using bespoke software.

They said the “backdoor” allowed Bankman-Fried to execute commands that could alter the company’s financial records without alerting other people, including external auditors. This set-up meant that the $10 billion fund did not trigger internal compliance or accounting red flags at FTX in Alameda, they said.

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

The US Securities and Exchange Commission is investigating the handling of customer funds, as well as its crypto-lending operations, a source with knowledge of the investigation told Reuters on Wednesday. The Justice Department and the Commodity Futures Trading Commission are also investigating, the source said.

FTX’s bankruptcy marked a stunning turnaround for Bankman-Fried. The 30-year-old set up FTX in 2019 and built it into one of the largest crypto exchanges, amassing an estimated personal fortune of around $17 billion. FTX was valued at $32 billion in January, with investors including SoftBank and BlackRock.

The crisis you experienced reverberations through the crypto world, major coin prices are falling. And FTX’s decline compares to previous major business downturns.

On Friday, FTX said it was controlling the company’s John J. Handed over to Ray III, the restructuring specialist who handled the liquidation of Enron Corporation – one of the largest bankruptcies in history.

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

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