Lawyers for the collapsed cryptocurrency exchange FTX on Tuesday painted a grim picture of the firm’s finances and the odds of recovering assets that customers lost.
“A substantial amount of assets have either been stolen or are missing,” James Bromley, a partner at the law firm Sullivan & Cromwell who is representing FTX, said at a bankruptcy hearing in federal court in Delaware.
FTX filed for bankruptcy in early November after a run on deposits left the company owing $8 billion. The firm’s failure has sparked investigations by the Securities and Exchange Commission and the Justice Department, focused on whether FTX improperly lent customer deposits to Alameda Research, a crypto hedge fund. Both companies were owned by Sam Bankman-Fried, a onetime crypto billionaire who gave up control of the companies at the time of the bankruptcy filing.
Bankman-Fried’s poor management of FTX has left lawyers with limited information about the firm’s finances, Bromley said at the hearing.
He said that the company had faced cyberattacks and that assets were still missing. He appeared to be referring to the sudden movement of hundreds of millions of dollars in FTX assets in unauthorized transactions on the day the company filed for bankruptcy.
At the hearing, Bromley presented a detailed account of FTX’s corporate history and its abrupt collapse this month. Bankman-Fried had established a sprawling corporate empire, which was run as his “personal fiefdom,” Bromley said.
But in the end, he said, “the emperor had no clothes.”
Bromley was echoing criticism of Bankman-Fried’s management that was articulated last week in a stunning court filing by John Jay Ray III, who took over from Bankman-Fried as FTX’s chief executive.
A veteran of managing corporate collapses, Ray previously oversaw the unwinding of the energy trading firm Enron. But in the filing last week, he wrote that the mess at FTX was the worst he had seen.
Much of the hearing Tuesday focused on a series of legal issues that have come up in the early stages of the bankruptcy.
Over the weekend, FTX disclosed a redacted list of its top 50 creditors, revealing that those entities or individuals were owed a combined total of about $3.1 billion. But the company kept the names of those creditors confidential.
A key issue at the hearing was whether FTX would have to publicly disclose the names of its creditors, including hundreds of thousands of ordinary people who deposited money in the exchange. Lawyers for FTX and some of the creditors argued that disclosing that information would endanger users’ privacy and make them vulnerable to hacking.
US Bankruptcy Judge John Dorsey ruled that the information could stay private, at least for now.
“Everyone in this room knows the Internet is wrought with potential dangers,” he said.
The hearing attracted an unusual level of attention for a bankruptcy proceeding, with more than 500 people watching a Zoom broadcast. During a recess, one person on the call started blasting the Justin Bieber song “Sorry.”
“I heard we had some entertainment while we were on break,” Dorsey said as he returned to the courtroom.