FTX Bankruptcy Case 230-Page Investigation Report Summary: A Criminal Enterprise Sustained by Executives and Lawyers

Original Title: 《 We read the 230-page investigation into FTX so you don't have to》

Author: Protos Staff

Translation: Shen Chao TechFlow

The examiner appointed in the FTX bankruptcy case released a report highlighting various misconduct by the company and its executives that led to its collapse. The report discusses how payments were made to whistleblowers, handling the bank's "capital issues," and when executives became aware of the FTX Group's insolvency.

Who Knew?

The report contains information about which executives and companies were aware of the accounting discrepancies before the FTX Group's collapse. Allegations state that Ryan Salame was involved in creating a retroactive payment agency agreement, instructing other FTX Group employees to misreport the use of FTX Group bank accounts to banks, misappropriating FTX Group assets to purchase real estate, restaurants, and food service companies, as well as making other purchases and investments (including private jets), and withdrawing millions from his account before FTX.com halted customer withdrawals.

The report also notes that Salame made millions of dollars in political donations using FTX Group funds.

Additionally, sailor Samuel Trabucco received significant benefits before the bankruptcy, with "the FTX Group spending over $15 million on real estate, yachts, and dock space for Trabucco during the priority period, and Trabucco made substantial withdrawals from the FTX.com exchange in September 2022."

In other communications, he expressed concerns about Alameda's balance sheet, warning that if employees understood Alameda's net asset value without a foreign trade trust fund, they would "leak."

Other executives were also investigated, including a former FTX Group employee who managed Alameda's token investments and was involved in improperly recorded related sales transactions. This employee also made significant withdrawals close to the filing date.

The report also mentioned another former FTX Group employee who became the subject of media reports for transferring $600,000 worth of FTT to a charity he co-founded. Creditors have yet to decide on actions against these individuals due to the need to prioritize other lawsuits.

Furthermore, the report detailed avoidance lawsuits filed against employees who made other withdrawals just days before the collapse.

The report further concluded that, despite Bankman-Fried's insistence, FTX US was not solvent at the time of filing. The "bank balance" spreadsheet for FTX.US totaled $138.5 million, while the "wallet balance" spreadsheet—i.e., customer balances—totaled $184.7 million.

Caroline Papadopoulos, the CFO of FTX.US, pointed out another error in the calculations: it "included [WRS] cash, which should be considered separate from FTX US." She described the apparent reconciliation as "nonsense."

Interestingly, the report concluded that the examiner did not see any evidence that Sullivan & Cromwell (S&C) knew about the FTX Group's fraudulent activities before the filing, nor did S&C ignore the warning signs that required investigation into the debtor's statements.

The report reached this conclusion despite the fact that "due to the use of Signal's auto-delete feature, it is possible—and indeed the case—that the production of these messages is incomplete and may never be completed."

Additionally, although CoinDesk's report suggested that Alameda Research's valuation of assets exceeded the entire market value, five days after the report was published, an S&C lawyer assured Voyager that the FTX Group was "rock solid," and the current issue was "Binance's foolish actions."

The lawyer claimed they only became aware of these issues the day after sending the email.

（See full article: Is Sam Bankman-Fried's crypto trading firm Alameda Research broke?）

Lawyers and Whistleblowers

The report describes the deep connections between the FTX Group and Fenwick & West (F&W), referring to it as "Law Firm-1." Allegedly, financial criminal Sam Bankman-Fried's father, Joseph Bankman, suggested hiring F&W to assist the FTX Group and recommended the company hire Daniel Friedberg and Sun Can.

The report states that F&W "served as the primary U.S. outside counsel for the FTX Group, providing advice on employment, tax, lending agreements, acquisitions, regulatory matters, government investigations, compliance and risk mitigation, equity incentives, partnership agreements, trademark enforcement, intercompany service agreements, purchase agreements, and financing."

"From 2018 to 2022, Law Firm-1 received over $22 million in legal fees from the FTX Group. In 2018, while Friedberg was a partner at Law Firm-1, Joseph Bankman encouraged Bankman-Fried to have Friedberg take on a significant role at Alameda."

Friedberg and Sun Can left Law Firm-1 to join the FTX Group in January 2020 and August 2021, respectively. Friedberg served as the Chief Compliance Officer of FTX.US and General Counsel of Alameda, while Sun served as General Counsel of FTX Trading. However, the relationship between Law Firm-1 and the FTX Group was not limited to Friedberg and Sun.

"Joseph Bankman maintained unusually close personal relationships with several lawyers at Law Firm-1, sometimes subsidizing travel and attendance at sporting events for certain lawyers."

This deep collaboration included F&W providing assistance in the following areas:

• The FTX Group issued "founder loans," which were used to transfer at least $2 billion in cash and assets between FTX Group entities and directly into the personal accounts of FTX Group leaders;

• Friedberg created a retroactive payment agency agreement between FTX Trading and Alameda;

• The leadership of the FTX Group worked to conceal the close relationship between FTX Trading and Alameda from government regulators and investors;

• The leadership of the FTX Group used unconventional settlement methods to silence credible whistleblowers;

• The FTX Group worked to downplay its relationship with the Serum Foundation and its control.

The exact details of these relationships are difficult to ascertain, partly because F&W "frequently used ephemeral messaging platforms like Signal for personal communications with FTX Group individuals, providing only 144 personal or group chat records between Law Firm-1 and FTX Group employees."

"Of these, only 18 chats still contain messages, while the rest only show that group messages once existed but have no content."

The report further indicates that F&W may have been aware of issues years before the eventual collapse, with investigations revealing that "in December 2019, Bankman-Fried admitted to members of the firm that Alameda held a large amount of FTT, which had high market value but could not be realized without a market crash."

Additionally, the report accuses F&W of "creating the Serum Foundation, using a system that allowed certain employees of the FTX Group to continue controlling the Serum Foundation and SRM tokens. Quinn Emanuel also found that individuals associated with the FTX Group utilized [F&W] to create an entity called the Incentive Ecosystem Foundation to provide incentives for the SRM ecosystem and boost the market price of SRM while concealing the entity's ties to the FTX Group."

This aligns with previous allegations that "the debtor's report states that Friedberg—Alameda's former General Counsel—commissioned the white paper for Maps and drafted significant portions of it starting in October 2020."

Friedberg has become a target of legacy lawsuits, accused of helping to pay whistleblower fees.

Furthermore, "Sun coordinated with Friedberg to avoid CFTC scrutiny, concealing information about entities with interests in FTX Trading."

The report also accuses the FTX Group of having a certain pattern in dealing with whistleblowers: "FTX Group lawyers did not properly investigate the substance of these whistleblower complaints but instead settled for substantial amounts, primarily handled by Friedberg, Sun, Miller, and Joseph Bankman."

In general, the FTX Group would resolve these issues without investigating the substance of the complaints, often using large financial settlements and a "continuing pattern" of hiring lawyers who did not provide substantive legal services. These lawyers included:

• Paying $20,762 to Orrick Herrington & Sutcliffe, primarily for legal services related to the separation of "Whistleblower-5" from FTX.

• Paying Holland & Knight $64,998, mainly for drafting a settlement agreement with the whistleblower.

• Paying Silver Miller Law $760,000, primarily for providing regulatory advice and addressing whistleblower allegations.

• Loaning $1 million to Pavel Pogodin as part of a settlement related to the withdrawal of whistleblower complaints. After this, he allegedly signed two contracts totaling $3.3 million with FTX, with investigations indicating "no evidence that Pogodin provided any legal services to the FTX Group."

• Monthly payments of $200,000 to "Law Firm-8" for five years to resolve Whistleblower-1's complaints. Allegedly, the only work produced was a three-page memorandum prepared by a non-lawyer.

Law firms were reportedly often instructed to skip due diligence on FTX Group's planned investments. For example, the law firm assisting FTX in acquiring Australia's HiveEx could receive "finder's fees" for helping FTX identify these investment targets or other assistance.

In this case, "ultimately, Law Firm-5's role expanded to include negotiating settlements to avoid negative publicity for the FTX Group. For example, in July 2021, Law Firm-5 arranged for a Cayman Islands company, 707,016 Ltd., to pay creditors of Australian crypto influencer Alex Saunders. Saunders was accused of trading on FTX.com using borrowed funds but lost the trading capital.

"To mitigate any reputational damage and avoid potential lawsuits, FTX Trading lent Saunders $13.2 million through 707,016 Ltd. to help him repay his debts. Saunders has yet to repay this loan. A partner at Law Firm-5, who was the main contact for the FTX Group at the firm, allegedly received at least $727,402 in 'finder's fees' for suggesting certain acquisition projects."

（See full article: Genesis Block Ventures entangled with FTX）

Another law firm was hired "to handle document requests related to the SEC and CFTC concerning Tether/Bitfinex relationships." Unfortunately, some documents related to market manipulation could not be found, possibly due to the use of Signal.

Some law firms did raise questions about the behavior of FTX leadership, with Skadden Arps Slate Meagher & Flom reportedly repeatedly warning about "undisclosed political donations by FTX.US."

Banking

FTX has struggled to maintain stable and transparent banking access, relying on a series of false statements to keep its banking access. These statements included failing to "properly designate all FBO accounts." Additionally, they often mixed customer and company funds in accounts.

Salame allegedly intervened to help Deltec Bank and Trust resolve "capital issues" by issuing two $50 million loans, involving Salame, Alameda, and two other companies, Deltec International Group (Deltec) and Norton Hall Ltd. (Norton Hall). Investigations concluded that these loans were intended to alleviate Deltec's capital issues while ensuring that Deltec owed favors to the FTX Group, with the related promissory note structure designed to conceal Alameda's role in the loans.

FTX and Alameda Research also collaborated with Deltec regarding Moonstone Bank. "Despite Moonstone Bank being a small regional bank with only a few million dollars in assets, the debt entity Alameda Research Ventures invested $11.5 million in Moonstone Bank's holding company, FBH Corporation. Although discussions around the Staking program did not yield results, FTX Group entity FTX Trading still deposited $50 million into Moonstone Bank accounts."

(See full article:Exclusive: Moonstone Bank explains its relationship with Alameda Research)

Poor Investments

Alameda Research and other FTX Group entities were poor investors, skipping due diligence and investing in projects with significant risks.

These investments included Embed, a securities clearing company acquired for $300 million, while the highest bid during the estate's attempt to sell was only $1 million, made by the company's founder. The report states that FTX "conducted very little due diligence."

In another case, the FTX Group spent $376 million to acquire DAAG, despite the company not being an active business, and the acquisition "did not include rights to key intellectual property." The estate found that "the company had no meaningful sellable assets, making a sale impossible."

Certain investments had other significant reasons, such as "the FTX Group nearly acquiring all economic shares of Genesis Block, but almost all shares of Genesis Block were transferred to entities controlled by Genesis Block's co-founder and CEO."

Genesis Block was found to be associated with FTX's "Korean Friend" account.

（See full article: Genesis Block: FTX in Thailand）

Modulo Capital is another investment fund with romantic ties, receiving a $500 million investment.

The report refers to Genesis Digital Assets as Venture Investment-1, which received about $1 billion, but members associated with Genesis Digital Assets allegedly "knew that the financial statements and valuation materials provided to potential investors might be inaccurate."

"It was also found that co-founders of Venture Investment-1 had been involved in criminal activities in Kazakhstan. Despite the FTX Group's due diligence process identifying these issues, the FTX Group still chose to invest."

Overall, the report reiterates that FTX was a criminal enterprise engaged in various irresponsible and improper behaviors, with numerous executives and lawyers making significant efforts to maintain FTX's operations.