Lawyers for the crypto exchange FTX, which crashed on Tuesday, painted a grim picture of the company’s finances and the prospects for clients to recover lost assets.
“Significant assets were either stolen or lost,” said James Bromley, a partner at the law firm Sullivan & Cromwell, which represents FTX, at the bankruptcy hearing in federal court in Delaware.
FTX filed for bankruptcy in early November after a surge in deposits left the company $8 billion in debt. The firm’s failure led to investigations by the Securities and Exchange Commission and the Department of Justice focusing on whether FTX improperly loaned client deposits to Alameda Research, a crypto hedge fund. Both companies were owned by Sam Bankman-Fried, a once-crypto billionaire who gave up control of the companies when he filed for bankruptcy.
Mr. Bromley said at the hearing that Mr. Bankman-Fried’s mismanagement of FTX left lawyers with limited information about the company’s financial condition.
He said the company is facing “cyberattacks” and that these assets are still missing. On the day the company filed for bankruptcy, he seemed to be talking about the sudden movement of hundreds of millions of dollars in FTX assets in unauthorized transactions.
At the hearing, Mr. Bromley gave a detailed account of FTX’s corporate history and its sudden collapse this month. Mr. Bromley said Mr. Bankman-Fried has built an expanding corporate empire, managed as his “personal fiefdom.”
But in the end, he said, “the emperor had no clothes.”
Mr Bromley was reiterating his criticism of Mr Bankman-Fried’s management, expressed in a striking court filing last week by John Jay Ray III, who took over from Mr Bankman-Fried as CEO of FTX.
A veteran of managing corporate bankruptcies, Mr. Ray previously oversaw the liquidation of the energy trading company Enron. But in filing last week, he wrote that the mess at FTX was the worst he’d ever seen in his career.
Much of Tuesday’s hearing focused on a number of legal issues that arise in the early stages of bankruptcy.
Over the weekend, FTX released a redacted list of its 50 largest creditors, revealing that these organizations or individuals owe about $3.1 billion in total. However, the company kept the names of these creditors confidential.
A key issue in the trial was whether FTX would have to publicly disclose the names of its creditors, including the hundreds of thousands of ordinary people who deposited money in the exchange. FTX’s lawyers and some of the creditors argued that revealing this information would compromise users’ privacy and make them vulnerable to hacking.
US Bankruptcy Judge John Dorsey has ruled that the information can remain confidential, at least for the time being. “Everyone in this room knows that the internet is fraught with potential dangers,” he said.
The trial attracted an unusual level of attention for a bankruptcy case, with more than 500 people watching a Zoom broadcast. During a recess, someone on call started blasting Justin Bieber’s “Sorry”.
“I heard we had some fun during the break,” Judge Dorsey said as he returned to the courtroom.
This is a developing story. Check back for updates.