In the hunt for FTX assets, lawyers find billions in cash and crypto

Two months after FTX filed for bankruptcy, lawyers for the once-high-flying cryptocurrency exchange have begun identifying and valuing its assets as they determine how much they will be able to recoup to repay lenders and customers who lost billions of dollars.

In a court filing Tuesday, lawyers for New York firm Sullivan & Cromwell — which is facing a separate controversy related to work it did for FTX before the bankruptcy — said they had found $5.5 billion in assets held in client accounts or stashed elsewhere of the company.

As the lawyers revealed more details about the nature of the assets linked to FTX, the scale of the challenge involved in resolving and recovering them became clearer. In just three years, FTX, founded by Sam Bankman-Fried, had quickly put money into a multitude of assets, from esoteric cryptocurrencies to investments in hundreds of other companies.

About $1.7 billion of the $5.5 billion is in cash on FTX’s books. Another $3.5 billion or so is in cryptocurrency assets — a pool that includes more established coins like Bitcoin, as well as other coins of more dubious value. The lawyers say that holdings of digital currencies can be turned into cash because the coins are relatively easy to trade.

The total includes $268 million in Bitcoin, as well as $245 million in so-called stablecoins, or cryptocurrencies designed to maintain a constant value of $1. But it also includes holdings worth hundreds of millions of dollars of lesser-known coins that may not hold their value long-term: There’s $529 million in FTT, a coin that FTX created, as well as $42 million of Dogecoin, the cryptocurrency invented as a joke, only to rise in price for a time.

The crypto recovered by FTX also includes an additional $1.2 billion in various digital currencies held on other exchanges — holdings the lawyers said they had “limited visibility” into. A smaller amount, worth around $300 million, is held in investment funds linked to the cryptocurrency market.

Aside from the $5.5 billion, FTX also has significant positions in 20 digital assets that the lawyers described as “illiquid tokens” that are difficult to convert into cash. It can take a long time to find out what they are worth.

Despite the significant collection of assets lawyers have identified, FTX said in a statement accompanying the filing that they found fewer digital assets than they had hoped to find, both at the main offshore exchange based in the Bahamas and its US unit. The FTX lawyers said they had shared the information earlier in the day with members of a committee representing customers, lenders and others.

When FTX collapsed in November, initial reports suggested that as much as $8 billion was missing from customer accounts, including money in some of the nine million accounts that customers opened on the exchange. The exact amount it owes lenders – including other major cryptocurrency trading firms – has not been disclosed.

As lawyers continue to dig into the finances of FTX, the final accounting of what the exchange owes, what it contains and what is recoverable will likely change. The task is complicated by the fact that FTX did not keep complete financial records. Prosecutors allege that for years Mr. Bankman-Fried treated customer deposits as money in a piggy bank that he could do with as he thought.

FTX’s lawyers have said that Mr. Bankman-Fried and two other associates took out more than $1 billion in loans from the exchange.

Prosecutors have charged that FTX regularly diverted customer deposits to fuel trading and cover losses at Alameda Research, a crypto-trading firm that Mr. Bankman-Fried owned. FTX executives also used client money to acquire lavish real estate in the Bahamas and make political donations to both Democrats and Republicans, according to federal authorities.

Mr. Bankman-Fried has pleaded not guilty to charges of fraud, money laundering and campaign finance violations. And he has denied stealing customer money.

Federal authorities have said Mr. Bankman-Fried also used billions of dollars in customer deposits to invest in hundreds of other cryptocurrency firms. Last week, FTX’s lawyers said Mr. Bankman-Fried’s businesses made at least $4.6 billion from investments in about 300 other companies, and that those funds could be recovered through litigation or negotiations. This amount does not count towards the total of 5.5 billion dollars.

It will be harder to recover — or even value — the more esoteric digital assets that FTX’s lawyers have identified among the exchange’s holdings, including serum, millions of dollars worth of Sol/Ethereum and a little-known coin called Trump Loses.

Many of these unusually named coins came into being or rose to popularity in 2020 and 2021, as the crypto market boomed. Entrepreneurs tried to capitalize on the hype by marketing new cryptocurrencies to investors looking to generate quick profits. But now many of these coins have fallen in value. In some cases, the number of coins held by FTX is so large that it would be difficult for the company to sell the digital currencies without scraping the price.

FTX also plans to raise money by selling some businesses in the Bahamas, Japan and Europe that may be viable with a capital injection. And the company plans to work with officials in the Bahamas to market the company’s real estate holdings — a total of 36 properties valued at $253 million.

But it’s unclear how much all those assets could be sold for, or how quickly. In short, FTX customers and lenders still have to prepare for a multi-year legal drama before they see a return on money, and they are likely to incur big losses, experts say.

“It is possible that creditors may be able to get digital coin or cash. It depends on what the underlying crypto is,” said Kenneth Marshall, a financial advisor who specializes in working with investors who have been victims of failed deals. including those involving crypto.- This may take a long time.

The latest revelation about FTX assets has also put a spotlight on the work of Sullivan & Cromwell, one of the world’s most prestigious corporate law firms. It not only represents FTX in the bankruptcy, but also performed legal work for the exchange before it collapsed.

On Friday, Andrew R. Vara, the United States trustee in bankruptcy, filed an objection to FTX’s decision to retain Sullivan & Cromwell, arguing that its pre-bankruptcy work poses a potential conflict of interest. The trustee has also argued that an independent examiner should be appointed to investigate matters.

The law firm’s bankruptcy work doesn’t come cheap: Billing rates for Sullivan & Cromwell partners range from $1,575 to $2,165 an hour, according to a previous lawsuit.

A representative for Sullivan & Cromwell pointed to a court filing Tuesday that said the law firm had “worked tirelessly” to recover assets for the company. In a related lawsuit, a lawyer for the firm, Andrew Dietderich, defended the firm’s past work for FTX and its ability to conduct an investigation into the events surrounding the stock exchange’s collapse.

Mr. Dietderich took issue with Mr. Bankman-Fried’s earlier claim that he was pressured to bankrupt the company. He said in the filing that Mr. Bankman-Fried approached the restructuring lawyer John J. Ray III to replace him as chief executive after consulting with his father and three other lawyers.