Polyamory, penthouses and lots of loans: inside the crazy world of FTX | Cryptocurrencies

VSOrdinary observers could be forgiven for thinking that the collapse of cryptocurrency exchange FTX is another typical story of financial mismanagement. That’s what its founder, Sam Bankman-Fried, calls it: a liquidity crisis that turned into a solvency crisis.

FTX had deposits and loans and when the depositors tried to get their money back, FTX didn’t have it to hand. Sure, the loans were in fancy digital cash, rather than stale dollars, but on the face of it, this looks like another big business failure.

Then you look closer and it becomes clear that the whole edifice is actually the corporate equivalent of three kids in trench coats pretending to be a grown man.

It’s a story that encompasses a financial black hole inside a company once valued at $32billion (£27billion), a byzantine group structure with unclear ownership lines and management with a very unconventional approach to governance and interpersonal relationships.

That chaos was exposed in exorbitant terms in a bankruptcy filing Thursday by John Ray III, who replaced Bankman-Fried as FTX’s chief executive after its Nov. 11 collapse. “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of reliable financial reporting as has happened here,” he wrote. Remember, this is the man parachuted in to oversee the collapse of energy company Enron after his fraud came to light.

“From the compromised integrity of systems and faulty regulatory oversight overseas, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.” , Ray added.

The company, he said, did not experience a simple liquidity crisis, or even a simple insolvency crisis. On Wednesday, Bankman-Fried claimed FTX.com’s “semi-liquid” assets were still worth $5.5 billion, a significant portion of the $8 billion it owes depositors. Ray gave a different valuation for these assets: $659,000. All of FTX’s holdings combined, including $1 billion in “stablecoins” and $483 million in cash, were actually worth less than $2.5 billion.

But FTX.com is only part of the business. The expanded group is made up of a sprawling network of more than 100 related companies, all shared by common ownership of Bankman-Fried and two of its co-founders, Gary Wang and Nishad Singh. No investor other than the co-founders owns more than 2% of the capital of any of the four main “silos” that make up the group: the American crypto exchange of FTX, its hedge fund Alameda, its venture capital arm and its international exchange.

A chart included in Thursday’s bankruptcy court filing mapping the Byzantine structure of FTX Group Photograph: Delaware District Court Document

Ray’s case details every way you can imagine a multi-billion dollar company run by a trio of inexperienced hedge fund grads could go wrong, and more.

The Alameda silo had $4 billion in “related party” loans, including $2 billion to Bankman-Fried’s personal company, Paper Bird, and another $1 billion to Bankman-Fried himself. . The international exchange owed money to its depositors, but did not track it in its own financial statements. The group as a whole “did not maintain centralized control of its cash flow”, did not have an accurate list of bank accounts and did not pay attention to the creditworthiness of banking partners.

It’s getting worse. No one has been able to compile a list of FTX personnel, Ray said. He had “substantial concerns” about the financial statements compiled under Bankman-Fried and said they should not be treated as reliable. The group was used to buy houses for employees; the digital assets were controlled through “an unsecured group email account”.

“Unacceptable management practices include … the use of software to conceal the misuse of client funds,” the filing adds. “Very large transfers” of assets may have taken place in the “days, weeks and months before” the bankruptcy, he continued, while on the day of the bankruptcy, “at least $372 million in transfers not permitted” took place.

On Friday, these latest unauthorized transfers were revealed to have been made at the behest of the Bahamian government, which claimed it was taking the money to ‘keep’ it, and launched a legal battle to try to wrest control. of the bankruptcy case in the United States. . In a response from FTX (pdf), the company accused the Nassau government of flouting FTX’s asset freeze that was put in place specifically to ensure funds were not misappropriated, and suggested that the country was working with Bankman-Fried, which is “effectively in the custody of Bahamian authorities”, to undermine the bankruptcy case.

Ray’s report ended with a final personal note. “Mr. Bankman-Fried, currently in the Bahamas, continues to make erratic and misleading public statements. Mr Bankman-Fried, whose connections and financial holdings in the Bahamas are still unclear to me, recently told a reporter on Twitter: ‘F*** regulators, they’re making everything worse’ and suggested the next step for him was to “win a judicial mandate”. battle against Delaware. “

The document is amazingly readable, but barely scratches the surface of FTX. Take his fourth major player, Caroline Ellison. A former girlfriend of Bankman-Fried, the 28-year-old was head of trading at Alameda before being promoted to co-manage the hedge fund in the summer of 2021, and was left in sole charge this year when her counterpart Sam Trabucco abruptly quit to spend more time with his boat.

If Bankman-Fried was the public face of FTX on Twitter, Ellison was its Tumblr equivalent. In posts on her account, since deleted, she wrote about her understanding of mainstream finance (“you’re very unlikely to lose all your money”), her ideal man (“controlling most major world governments [and having] enough strength to physically control you”), and his exploration of polyamory. “When I started my first foray into poly I thought of it as a radical break from my traditional past,” she wrote in 2020, “but tbh I’ve come to decide that the only acceptable style of poly is best characterized as something like ‘imperial chinese harem’ None of that non-hierarchical bullshit Everyone should have a ranking of their partners, people should know where they stand in the ranking and it should be vicious power struggles for ranks.

An illuminated sign saying FTX Arena outside a brightly painted sports stadium
The FTX Arena, home of the Miami Heat NBA basketball team. Photography: Marta Lavandier/AP

Hard to know where to stop. Ellison, Bankman-Fried and eight other members of the group’s inner circle shared a luxury penthouse in the Bahamas, according to a report from Coindesk which saw the inner circle dubbed a “polycule” by, among others, Elon Musk. (That penthouse has now listed for $40 million.) According to a report, an in-house psychiatrist was on hand dispensing prescription stimulants; photos of Bankman-Fried at his desk appear to show an empty box of one such drug.

In the days leading up to the company’s collapse, co-founder Wang continued to code, making changes to a private repository hosted on the GitHub coding platform. Wang was unavailable to answer questions about what the urgent programming work was.

In the days that followed, Bankman-Fried took to Twitter in an attempt to defend his reputation, which he did in part by tweeting the word “what” and the letters “HAPPENED” in nine out of 36 separate posts. hours. At the same time, he was sending direct messages to Vox reporter Kelsey Piper, giving a rather different side of the story.

Some of those direct messages include the “fuck regulators” line quoted by Ray in the filing. Others contain the clearest explanation yet of what happened – the trigger that toppled the pile of mismanagement that had been lingering for years.

FTX did not have a bank account customers could send money to; Alameda, the hedge fund, did. So they would wire the money to Alameda, and FTX would add it to their account. And, in all those years, Alameda never passed on the money. No one noticed, and the company apparently traded and lost $8 billion in customer funds that it never should have had in the first place.

“Each individual decision felt good and I didn’t realize how big their sum was until the end,” Bankman-Fried told Piper. “Sometimes life catches up with you.”

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