FTX Massive Crypto Fraud Just Got Worse

FTX Massive Crypto Fraud Just Got Worse

At least $1 billion of client funds are missing at failed crypto brokerage firm FTX, some sources say it could be as much as $2 billion but the exact numbers are not known yet as the investigation and bankruptcy proceeds.

There were many bad signs and people questioning the FTX business model and even questioning whether it was a big Ponzi scheme before it unraveled. The first trouble began when they had $5 billion in withdrawals on Sunday, their largest withdrawal day ever.

The FTX problem became more apparent as what was perceived as a potential liquidity crunch quickly evolved into a crises. They were thought to have the assets to back their liabilities in their crypto wallets but it devolved into the assets not being worth what they thought they were. There also was not enough buyers to sell their crypto holdings to as many of them were altcoins with a small market for potential buyers.

Binance sold their holdings in the FTX native FTT token leading to its price collapse and pushing FTX into insolvency with that hit to their balance sheet. Binance initially proposed a bailout and acquisition but after doing their due diligence with a nonbinding deal they turned down the deal and left FTX in a position to be forced into bankruptcy. [1]

“In the beginning, our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help,” Binance said in a statement. Zhao tweeted that it was a “sad day”. [2]

The Binance research and rejection of the deal destroyed the FTX credibility leading to FTX having to stop withdrawals after a run on the broker by customers to get their cryptocurrencies and assets out. The demand for the money in accounts lead to FTX becoming insolvent and exposing the potential that it was a fraud.

FTX founder Sam Bankman-Fried’s assets plunged from $16 Billion to zero in days. He resigned as FTX’s CEO as it files for bankruptcy. SBF’s net worth went from $26 billion at his peak in March to $0 after the implosion of FTX.[3]

The current Sam Bankman-Fried net worth is $0.

FTX trading’s liabilities dwarfed liquid assets. FTX held $900 million in liquid assets against $9 billion of liabilities the day before Friday’s bankruptcy filing, the Financial Times reported Saturday, citing investment materials the newspaper had seen.[4]

FTX Chief Executive Sam Bankman-Fried said in investor meetings last week that Alameda owes FTX about $10 billion, people familiar with the matter said. FTX extended loans to Alameda using money that customers had deposited on the exchange for trading purposes, a decision that Mr. Bankman-Fried described as a poor judgment call. FTX had $16 billion in customer assets, sources said, so FTX lent more than half of its customer funds to its sister company Alameda.[5]

Mixing client money with a company’s portfolio and trading account is both theft and fraud. Client capital is suppose to be held in their own account and away from company funds.

When they needed the capital for client withdrawal requests they did not have it, forcing them to suspend withdrawals. They later started allowing withdrawals again but then stopped. Now as FTX files for bankruptcy the funds are locked as it goes to court to see what can be salvaged and returned to investors.

Other past endeavors by Bankman-Fried that may have led to this crises included loans to or moves to acquire faltering crypto lender BlockFi, lender Voyager Digital and the Skybridge Capital hedge fund. Also its trading arm Alameda Research also led a funding round for the Aptos blockchain as investment funds were declining. [6]

It turns out SBF was not the modern day crypto version of J.P. Morgan bailing out other crytpo brokers but making FTX even more weak from a capital and liquidity standpoint through helping other firms.

FTX legal and finance teams also learned that SBF implemented what two people described as a “backdoor” in FTX’s bookkeeping system, which was built using bespoke software. CNN sources said the “backdoor” allowed SBF to execute commands that could alter the company’s financial records without alerting other people, including external auditors. This set-up meant that the movement of the $10 billion in funds to Alameda did not trigger internal compliance or accounting red flags at FTX. [7]

To prop up his other company Alameda, which held almost $15 billion in assets, SBF also transferred billions in FTX funds, backed by assets that included FTT and stock shares in Robinhood. [8]

The majority of its loans and buying power were backed by their own FTT token that they issue their self. This was their primary asset on the balance sheet. This was a huge undiversified risk.

The collapse of FTX was triggered by many factors:

  • The massive $5 billion in withdrawal fund requests by customers, Sunday.
  • Its relationship with Alameda and the losses they accrued after mixing client funds that destroyed their liquidity for withdrawals.
  • Binance selling their FTT token holdings setting off its crash.
  • The loss of confidence in FTX after Binance declined to acquire it after due diligence.
  • The FTT token was the primary asset on its balance sheet and it crashed from $26 to under $2.
  • It appears now that FTX was just a Ponzi Scheme but all the details have not come out yet.

Finally after all this situation unfolded over $600 million was siphoned from FTX’s crypto wallets late Friday. FTX stated in its Telegram channel that it had been compromised, telling users not to install any new upgrades and to delete all FTX apps.

“FTX has been hacked. FTX apps are malware. Delete them. Chat is open. Don’t go on FTX site as it might download Trojans,” wrote an account administrator in the FTX Support Telegram chat. The message was pinned by FTX General Counsel Ryne Miller.[9]

On November 18th Reuters reported that The Securities Commission of The Bahamas said it had seized digital assets of FTX’s Bahamas unit, an action that the collapsed crypto exchange’s U.S.-based leadership initially believed to be a “hack.”

Many new details have emerged over the past week:

Sam Bankman-Fried personally took $300 million out of the $420 million raised in FTX’s 2021 funding round, WSJ reports.

In a court filing, FTX’s lawyers said there were already more than 100,000 claims against the company and estimated that figure could grow.

FTX relocated to the Bahamas from Hong Kong in 2021, and is said to have created a luxurious lifestyle for employees of the company. FTX spent over $100,000 per week on catering for its headquarters, along with millions of dollars on housing for executives in exclusive beachside housing, according to former employees reports. It provided fleets of cars—including BMWs, Toyotas and Hondas for employee use according to sources. 

FTX also spent a huge amount of money with advertising, paying YouTube influencers, big celebrities for paid endorsements like Tom Brady, Larry David, and Kevin O’Leary and even buying the naming rights to the Miami Heat’s arena. They had a tremendous cash burn rate with that level of spending.

Here is a full list of all the celebrities being sued for promoting FTX and named in the lawsuit. The defendants below were named in the suits for “controlled, promoted, assisted in [or] actively participated.”

  • Tom Brady
  • Stepen Curry
  • Shaquille O’Neal
  • Udonis Haslem
  • David Ortiz
  • Trevor Lawrence
  • Shohei Ohtani
  • Naomi Osaka
  • Larry David
  • Kevin O’Leary

How much did FTX pay Miami?

FTX signed a $135 million, 19-year deal to rename the Miami arena in June 2021. FTX owes Miami $16.5 million for the arena sponsorship cancellation. [10] [11]

Why can’t I withdraw money from FTX?

All FTX accounts have been frozen for withdrawals as they have officially filed for Chapter 11 bankruptcy. The company will need to be investigated and audited for assets versus liabilities. A judge will later decide how to best divide up the remaining FTX assets between investors, debt holders, vendors, contract holders, account holders, and debt collectors.

FTX sex cult?

Finally, there were rumors that a FTX sex tape was going to be leaked on 11/18/2022 but that appears to have been only a rumor.

This story is still not over and will make a great movie one day. It’s terrible how many customers lost money to a broker they trusted.

FTX Massive Crypto Fraud Just Got Worse

FTX Massive Crypto Fraud Just Got Worse
Image created by Holly Burns