The Tribune

• $219.5m cash ownership tangled by ‘commingling’

• Bahamian entity’s 2.4m clients in 230 ‘jurisdictions’

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

FTX’s Bahamian liquidators are probing whether $7.7bn was withdrawn from its local subsidiary via “legitimate” transactions as they yesterday revealed virtually all countries are represented in its 2.4m-strong client base.

Brian Simms KC, the Lennox Paton senior partner, and PricewaterhouseCoopers (PwC) accountants Kevin Cambridge and Peter Greaves, in their first interim report to the Supreme Court said they are having difficulty untangling FTX Digital Markets assets from those owned by clients because of the crypto exchange’s habit of “commingling” funds.

The trio, in particular, said they are examining whether $5.6bn worth of transactions between FTX Digital Markets and other entities in the group, and a further $2.1bn transferred to related parties, were improper or conducted for legal, appropriate reasons.

And, pointing to the shambles that passed for corporate governance under FTX co-founder, Sam Bankman-Fried, and his close associates, they added that “limited controls” meant they were currently unable to determine how much of the $219.5m cash held in various FTX Digital Markets bank accounts belonged to the Bahamian subsidiary as opposed to its investor clients.

Giving an insight into the scale of FTX’s collapse, which is likely to keep global attention focused on The Bahamas, Mr Simms and the PwC accountants wrote: “Based on limited information available to the joint provisional liquidators to date, they believe that FTX Digital may have over 2.4m customers, including 10,500 institutional customers, in over 230 jurisdictions worldwide” as befits the world’s former third-largest crypto currency exchange.

The “230 jurisdictions” cited is more than the 195 sovereign countries in the world today, although the latter figure does not include the likes of Taiwan, the Cook Islands, Niue and dependent territories, such as the Cayman Islands, British Virgin Islands (BVI) and Turks & Caicos. Many FTX clients are likely to have held their accounts and investments through entities domiciled in the likes of the Cayman Islands and British Virgin Islands.

This, though, highlights the truly global reach of FTX’s collapse which has left almost no part of the world untouched. It also exposes the depth of work ahead of the Bahamian provisional liquidators, especially in probing whether some $7.7bn in total outflows from the local subsidiary were genuine.

“The joint provisional liquidators have also identified over $5.6bn in inter-company transfers from FTX Digital custodial accounts to FTX Trading, and $2.1bn in related party transfers from FTX Digital custodial accounts to Alameda. It is possible, however, that these transfers could relate to legitimate withdrawals from the FTX international platform,” the trio revealed.

Alameda Research was Mr Bankman-Fried’s private hedge fund/trading vehicle that played a central role in the FTX group’s collapse. After its speculative, risky bets and investments failed to produce the anticipated returns, and with lenders starting to demand repayment, it is understood that Mr Bankman-Fried and his inner circle increasingly began to use FTX client monies without their knowledge or permission to repay these loan facilities.

The Bahamian provisional liquidators said that, in the aftermath of their early November appointment, they had quickly sought to gain control of FTX Digital Markets’ bank accounts, cash and “tangible assets”. This, though, was not without its challenges.

“The joint provisional liquidators have confirmed that FTX Digital held accounts with multiple banks, and that the balance of those accounts, translated to US dollars at the prevailing exchange rates, were approximately $219.5m,” their Supreme Court report reveals.

“Requests have been made to the relevant banks to remit the balances held to accounts controlled by the joint provisional liquidators and, as at the date of this report, sums totalling $21.5m have been realised by the joint provisional liquidators with a further $54.5m pending transfer to the control of the joint provisional liquidators.”

To-date, that means the Bahamian provisional liquidators have gained control of just under 10 percent of FTX Digital Markets’ cash held at financial institutions. Of the sum recovered to-date, the vast majority - some $21.2m - was handed over by BISX-listed Fidelity Bank (Bahamas), which is understood to have provided Bahamian dollar account facilities to enable the crypto exchange to pay its local bills. The other $300,000 came from Deltec Bank & Trust.

Of the “pending” $54.5m, some $10m is “retained in a restricted account relating to regulatory capital” at Fidelity Bank (Bahamas). That is understood to have been deposited at the Securities Commission’s request to fulfill requirements for FTX Digital Markets to provide regulatory capital. The other $44.5m is due to be handed over by two financial institutions “it is not appropriate” for the provisional liquidators to identify.

The trio confirmed that the remaining $143.2m, out of the $219.5m, was seized from FTX Digital Markets’ US bank accounts by the US Justice Department. “The joint provisional liquidators are currently seeking the release of these funds into their control,” they reported. “The joint provisional liquidators have met with the Department of Justice and continue to discuss and consider the options available to them to recover these funds, which they consider to be property of the FTX Digital estate.”

Then there is the problem of distinguishing who owns which funds. “Of the total of $219.5m identified by the joint provisional liquidators as monies held in FTX Digital’s accounts, around $137m is labelled as ‘FBO’ (for the benefit of) funds, [meaning] monies that should be held for the benefit of FTX Digital customers,” the Bahamian provisional liquidators revealed.

“However, upon review of the flow of funds, it appears that there were limited controls and governance in place to segregate customer fiat balances held by FTX Digital. It appears that client monies have been commingled such that it may not be possible to clearly identify sums that constitute client monies as opposed to general corporate funds.

“The joint provisional liquidators are investigating the position with counsel to conclude on the status of these monies, which the joint provisional liquidators understand will likely require an application for directions from the Supreme Court.” They also added that the question of who owns the assets on the crypto exchange’s international platform - clients, FTX Digital Markets or the FTX entities in Chapter 11 protection in Delaware - has yet to be determined.

Mr Simms and the PwC duo also revealed they presently only control “a small amount” of FTX-related digital assets, although they have asked Tether to transfer to their possession $46.7m worth of stablecoin-backed assets that were frozen following the crypto exchange’s collapse.

Some $323m worth of digital assets were removed from FTX’s international platform via hackers, while the Securities Commission of The Bahamas has custody of a further $426m that it secured to prevent them from being stolen. The hacked funds, as well as the $100m payout to a purported 1,500 “Bahamian” clients that violated the asset freeze imposed in the early days of the provisional liquidation, are among the key investigation targets.

“The joint provisional liquidators have undertaken preliminary investigative work on the frequent transactions with addresses and wallets that appear to have Alameda as a counterparty, by way of blockchain review and interviews with employees of FTX Digital,” their report added.

“From these preliminary investigations, the joint provisional liquidators have ascertained the following: Alameda appeared to provide liquidity to FTX Digital, in order to facilitate customer withdrawals, on a frequent basis and there have been indications of round-trip fund flows over the course of 2022 between addresses identified in the public domain as belonging to Alameda and FTX International.”

The joint provisional liquidators’ report ultimately confirms they are in the early stages of probing FTX Digital Markets’ collapse, pursuing and seizing assets on behalf of clients/creditors, and unraveling the many riddles left behind by the crypto exchange’s co-founder, Mr Bankman-Fried, and his inner circle.

Progress during the initial weeks following the trio’s appointment was hindered after FTX’s US chief, John Ray, and his team cut-off their access to the Bahamian subsidiary’s cloud-stored records and financial statements amid a near two-month battle as to who should lead, and have control, over the crypto exchange’s restructuring, sale and or winding-up.

The subsequent co-operation agreement between the Bahamian provisional liquidators and Mr Ray, for which both are seeking Supreme Court and Delaware Bankruptcy Court approval, respectively, should now give Mr Simms and his PwC colleagues access to the necessary data and accounting records to accelerate their probe.