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

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

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

A large portion of the total has since disappeared, they said. One source put the missing amount at around $1.7 billion. The other said the gap was between $1 billion and $2 billion.

While it is known that FTX 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 top executives last Sunday, according to the two sources. The documents provided an updated 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 senior staff.

Bahamas-based FTX filed for bankruptcy on Friday after a rush of customer withdrawals earlier this week. A bailout deal with rival exchange Binance fell through, sparking crypto’s highest-profile collapse in recent years.

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

“We didn’t transfer secretly,” he said. “We had confusing internal labeling and misread it,” he added, without elaborating.

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

FTX and Alameda did not respond to requests for comment.

In a tweet on Friday, Bankman-Fried said he was “putting together” what had happened at FTX. “I was shocked to see things unravel the way they did earlier this week,” he wrote. “I’ll be writing a fuller play-by-play post soon.”

At the heart of FTX’s problems were losses at Alameda that most FTX executives did not know about, Reuters previously reported.

Customer withdrawals had increased last Sunday after Changpeng Zhao, CEO of giant crypto exchange Binance, said Binance would sell its entire stake in FTX’s digital token, worth at least $580 million, “due to recent disclosures.” Four days before, news agency CoinDesk reported that much of Alameda’s $14.6 billion in assets was held in tokens.

That Sunday, Bankman-Fried held a meeting with several executives in the Bahamian capital of Nassau to calculate how much external 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 heads of the company’s regulatory and legal teams that revealed FTX had moved about $10 billion in client funds from FTX to Alameda, the two people said. The spreadsheets showed how much money FTX loaned to Alameda and what it was used for, they said.

The documents showed that between $1 billion and $2 billion of those funds were not counted among Alameda’s assets, the sources said. The spreadsheets did not indicate where that money was moved, and the sources said they do not know what became of it.

In a subsequent investigation, FTX’s legal and finance teams also learned that Bankman-Fried implemented what the two individuals described as a “backdoor” into FTX’s bookkeeping system, which was built using custom software.

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

In his text message to Reuters, Bankman-Fried denied having implemented 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 with knowledge of the inquiry 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 reversal for Bankman-Fried. The 30-year-old had set up FTX in 2019 and led it to become one of the largest crypto exchanges, amassing a personal fortune estimated at nearly $17 billion. FTX was valued in January at $32 billion, with investors including SoftBank and BlackRock.

The crisis has reverberated through the crypto world, and the price of major coins has plummeted. And FTX’s collapse draws comparisons with previous major business collapses.

On Friday, FTX said it had transferred 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; editing by Paritosh Bansal and Janet McBride

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