FTX's first bankruptcy hearing: "A large amount" of assets stolen or lost; cash balance of $1.24 billion; creditors number in the millions

Author: Mary Liu

On Tuesday, November 22, local time, the first bankruptcy hearing for FTX was held in Delaware, USA, where the judge outlined the rise and fall of FTX, as well as the timeline of the company's collapse within just two weeks. FTX's lawyers emphasized that, in addition to implementing proper corporate controls, transparency, and investigations, asset protection and recovery are now among FTX's most important core objectives. Here are the key points:

Lawyers revealed that "a large number" of FTX assets have been stolen or lost; total cash balance amounts to $1.24 billion; creditors number in the millions. FTX advisors have been in communication with the Department of Justice and the Southern District of New York's cybercrime division, which has launched a criminal investigation into FTX. The identities of FTX's top 50 creditors are temporarily confidential; the next hearing is scheduled for December 16. The U.S. House of Representatives and Senate have requested new FTX CEO John J. Ray III to testify sometime in December about "one of the most sudden and difficult collapses in the history of American and global business."

James Bromley, a partner at the prominent law firm Sullivan & Cromwell and newly appointed legal advisor to FTX's new management, described FTX's collapse as "one of the most sudden and difficult collapses in the history of American business and global corporate entities," and characterized FTX's empire as "the personal territory of former CEO Sam Bankman-Fried (SBF)."

Earlier this year, FTX was valued at $32 billion, while SBF had once positioned himself as the "white knight" of the industry during the crypto bear market.

Lawyers stated: "The situation with FTX is the latest and largest failure in this field, with actual bank runs occurring at both its international exchange and U.S. exchanges. During the run, a leadership crisis emerged… FTX was controlled by a very small number of people, led by Sam Bankman-Fried, and there were significant issues in management that led to his resignation."

Bromley commented, "At the moment SBF handed over control, all the talent realized for the first time, 'the emperor has no clothes.'"

Bahamian liquidators agree to transfer bankruptcy case to Delaware, USA

Although FTX filed for Chapter 11 bankruptcy in Delaware on November 11, the Bahamian court-appointed liquidator subsequently filed a separate lawsuit against FTX Digital Markets in the Southern District of New York, leading to a "conflict" between the two cases. At Tuesday's hearing, lawyers stated that the Bahamian liquidator has agreed to transfer the related case filed in New York to Delaware for consolidation.

The Bahamas Securities Commission is the primary local authority investigating FTX's collapse and last week ordered the transfer of assets from FTX's crypto wallets to government-controlled wallets, though the specific amount has not been disclosed. The Bahamian liquidator has stated that all of FTX's operations were run through its local entity, so there remains a dispute over who is qualified to control the company's assets and how those assets should be distributed.

Bromley stated: "When dealing with any of these foreign entities, and regarding any potential appointed regulatory bodies or liquidators, it must be kept in mind that we are focused on one word: reciprocity."

"A large number" of FTX assets have been stolen or lost; total cash balance amounts to $1.24 billion; creditors number in the millions

A key aspect of the FTX crisis involves Alameda and the FTT token, which is the token issued by FTX. Lawyers reviewed the history of FTX and its affiliates, noting the creation of the FTT token in April 2019 and the establishment of the Alameda entity in November 2017. They stated that, in addition to the $477 million hack that occurred shortly after FTX entered bankruptcy protection, there have been multiple attacks: "A large number of assets have either been stolen or lost."

The latest bankruptcy filing shows that FTX has 36 banks and over 200 bank accounts, with a total cash balance of $1.24 billion for the FTX group, of which Alameda has the largest cash balance. However, the scope of this case appears to far exceed initial estimates, with the company's lawyer Glueckstein stating that FTX expects "millions of creditors" in bankruptcy.

Despite FTX's investments in cryptocurrency and tech venture capital, it also spent nearly $300 million on real estate in the Bahamas, mostly for residences and vacation homes purchased for executives, a figure higher than previously reported.

FTX lawyers stated that they have categorized FTX's assets and various entities into four silos:

• WRS (West Realm Shires) silo, which controls and contains assets in the U.S.

• Alameda silo, which includes the now-defunct hedge fund Alameda Research.

• Venture capital silo, which invests in crypto companies and startups.

• Dotcom silo, which includes international operations and most of FTX's deposits.

FTX operates globally, with the geographical distribution of clients disclosed by lawyers as follows:

• Cayman Islands ------ 22% of registered clients.

• U.S. Virgin Islands ------ 11% of registered clients.

• China ------ 8% of registered clients.

FTX stated that it hopes to compile a complete balance sheet detailing its total assets and liabilities by January. The new management is working around the clock, as FTX lacks proper systems to manage its cash and documents related to its internal controls. Bromley stated that asset recovery and protection efforts include not only crypto assets and currency but also "information," and the company has also introduced independent directors for the first time.

FTX's new leadership is cooperating with U.S. law enforcement and regulatory agencies

Bromley stated at the hearing that the new company leadership is cooperating with investigators from the U.S. government and regulatory agencies: "We are also in ongoing communication with the U.S. Department of Justice, including the Southern District of New York's cybercrime division, and we are in ongoing communication with the SEC and CFTC." Additionally, FTX's new CEO John Ray III and other members of the leadership team are coordinating with "various regulatory agencies around the world that are very interested in this situation."

Bromley also mentioned that the U.S. House of Representatives and Senate have requested John J. Ray III to testify sometime in December. Previously, it was reported that both the House Financial Services Committee and the Senate Agriculture Committee announced they would hold hearings next month regarding FTX's collapse, with the only public witness being CFTC Chairman Rostin Behnam.

The identities of FTX's top 50 creditors are temporarily confidential; the next hearing is scheduled for December 16

Several major cryptocurrency companies, including Genesis, Galaxy Digital, Wintermute, and crypto hedge fund Galois Capital, have voluntarily disclosed their exposure to FTX. Documents submitted by FTX over the weekend show that the company owes more than $3 billion to its top 50 creditors, with claims from the largest 10 companies exceeding $100 million. As many major creditors' names remain unknown, the market continues to worry that risks may spread further.

Delaware District Court Judge John Dorsey approved a temporary motion at Tuesday's hearing allowing FTX to temporarily withhold the identities of its creditors, with future hearings set to further discuss this issue.

The U.S. Trustee's Office (the department of the Justice Department responsible for overseeing bankruptcy proceedings) opposed part of the motion, arguing that transparency is a necessary part of the process. However, FTX's lawyers countered that it is crucial to protect FTX's customers from being involuntarily disclosed as investors, stating that the customer list is one of the company's most valuable assets and should be protected from competitors.

Dorsey also ruled that FTX should continue to pay wages to remaining employees and suppliers that it deems critical to the business. FTX's former leadership, including SBF, co-founder Gary Wang, engineering director Nishad Singh, and Alameda Research CEO Caroline Ellison, are not allowed to receive any further compensation.

The next hearing is scheduled for December 16.