The Biggest Takeaways From the Latest FTX Interim Report (#150 - 2 July 2023)

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This week the FTX liquidators released their second interim report, packed with several baffling takeaways. If you don’t have time to read the 35+ page report, here are the key takeaways you need to know.?

• FTX was allegedly commingling customer assets with corporate funds from inception. And FTX did not commingle customer funds by accident. “Commingling and misuse occurred at their direction, and by their design.” Showing such intent (the "mens rea" in legal jargon) will be necessary for any criminal action.

• When FTX decided to leave Hong Kong for the Bahamas, FTX offered a “former Bahamas government official” acting as an attorney a $1 million bonus if he could get FTX a license in less than ten weeks. That attorney got the license in 6 weeks.
• FTX ensured that the terms of services of FTX Trading Ltd. did not guarantee that customer assets would be segregated (unlike the terms of service for FTX Japan). When customers inquired whether their assets were segregated, senior FTX employees would often lie.
• As of August 2022, FTX executives knew that there was an $8 billion + hole that FTX owed to customers. This is a new detail that was not known before. To cover it up, they created a fake account on FTX to reflect the hidden liability. The fake account was referred to as “our Korean friend’s account” to minimize scrutiny risk.? The “Korean friend” owed FTX $8.9 billion… From a legal perspective, this is important to show that management had clear knowledge.
• FTX lied to banks to open accounts and even provided a fake register of members and managers to make a shell company look like a real operating company. They explicitly lied to banks, telling them those accounts would not be used for customer deposits and withdrawals.

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• When a junior lawyer internally raised questions about operational and control deficiencies, he was fired the same day by a senior attorney at FTX.
• Fake back-dated agreements were drafted to explain why Alameda held cash for FTX. Whilst a fake “Cash Management Agreement” was initially drafted, FTX opted for a “Payment Agent Agreement,” where Alameda was portrayed as simply processing payments at the direction of FTX. These agreements were all fake but were relied upon by the auditors to complete their audited financial statements (on which external investors for the $400 million Series C relied in turn).
• SBF and FTX’s management made over $100 million in political donations. In many cases, the funds came directly from customer deposit accounts. These political donations were marked as loans, although there is no evidence these were intended to be paid back to FTX (obviously).
• FTX executives also made numerous “charitable” donations (often directly from customer accounts). These included $300,000 to write a book on “how to figure out what human utility function is” and $400,000 to make YouTube videos on “rationalist and effective altruism material.”

• SBF and FTX spent over $240 million in luxury real estate in the Bahamas. They purchased over 30 properties, including that $30 million, six-bedroom, 11,500 sqft penthouse where SBF lived.

• According to the liquidators, FTX misappropriated around $8.7 billion of customer assets (of which $6.4 billion are cash or stablecoins). Whilst around $7 billion of liquid assets have already been recovered, work is going on to recover more.

The full interim report is available to read here for anyone interested.?

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A couple of personal observations:

Unlike the first report, liquidators here went to great lengths to show that the commingling of customer funds was not an accident.

This is important for any future criminal action, as the “mens rea” (the intent) is critical in addition to the “actus reus” (the act).

The liquidators also go to great lengths to show the fraudulent actions of a “Senior FTX Group Attorney” referred to as “Attorney-1” in the legal documents.

The liquidators actually took action against that attorney the same week.?I will publish a separate analysis of that legal action in the coming days so stay tuned.

On a (relatively) more positive note, this report shows that liquidators are making progress on tracing back FTX assets.

Let’s not forget that FTX claims are selling on the secondary market now at around 35c on the dollar, which shows some cautious optimism.

However, let’s not forget that customers are generally entitled to the cash amount of their claim (not the crypto). Since the FTX bankruptcy, the price of Bitcoin, for example, has gone from $18,000 to over $30,000, which may inflate the recovered amounts.

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Henri Arslanian

*Please note that this newsletter reflects Henri’s personal views and not those of any organisation he is involved with. This newsletter is for educational purposes only and none of its content should be construed as investment or financial advice of any kind.?

Who is Henri?

Henri Arslanian is the co-founder and managing partner of Nine Blocks Capital Management, an institutional-grade hedge fund focused exclusively on digital assets, with a market-neutral crypto fund focused on generating alpha from inefficiencies in crypto markets using relative value, arbitrage, and quantitative strategies.?

Henri was previously a partner and global crypto leader at PwC. In that role, he advised many of the world’s leading crypto exchanges, investors, financial institutions, and tech firms on their crypto initiatives and numerous governments, regulators, and central banks on crypto regulatory and policy matters.

With over 500,000 LinkedIn followers, Henri is a TEDx and global keynote speaker, a best-selling published author, and is regularly featured in global media, including Bloomberg, CNBC, CNN, BBC, The Wall Street Journal, The Economist, and the Financial Times.?

Henri was named by LinkedIn as one of the 2022 global Top Voices in Finance and is the host of the CryptoCapsules? social media video series as well as The Future of Money podcast and newsletter.