The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Cash assets held by FTX’s Bahamian subsidiary were “materially depleted” to the extent they shrank by 76 percent - or more than three-quarters - in the five weeks immediately prior to the crypto exchange’s implosion.

FTX Digital Markets’ provisional liquidators, in their first interim report to the Supreme Court, revealed they have to-date located $219.5m in bank-deposited cash in The Bahamas and abroad compared to the $927.9m shown in the company’s management accounts at October 5, 2022. That represents a negative $708.4m swing.

That date was just over five weeks’ prior to FTX Digital Markets’ being placed into provisional liquidation, and Brian Simms KC, the Lennox Paton senior partner, and PricewaterhouseCoopers (PwC) accountants Kevin Cambridge and Peter Greaves, confirmed that cash assets belonging both to the Bahamian subsidiary and its investors/clients have been “materially depleted” prior to their November 10, 2022, appointment.

The trio’s report also revealed that no financial statements, either audited or prepared, were available for FTX Digital Markets for its 2021 financial year despite the company having to meet mandatory deadlines for their filing with the regulators. The crypto exchange did not employ top-tier accounting firms, either to prepare the statements or audit them, and the provisional liquidators found record-keeping was as shambolic as FTX’s corporate governance.

“FTX Digital used QuickBooks to maintain its accounting records and outsourced financial statement preparation to Robert Lee & Associates based in the US. Prager Metis was the appointed auditor, but at the date of the winding-up petition no statutory financial statements had been prepared or audited for the year ended December 31, 2021,” the Bahamian provisional liquidators revealed.

Tribune Business reported yesterday how the trio found “limited controls and governance” that resulted in client monies being commingled with those that belonged to FTX Digital Markets. “FTX Digital had limited accounting functions in The Bahamas. An initial review indicates that it did not keep detailed records of which funds were client monies versus corporate monies. Furthermore, many large balances were moved between various FBO (for benefit of)” accounts,” they said.

“The joint provisional liquidators identified that there appeared to be limited segregation of IT infrastructure and company data repositories. Key systems such as the IT infrastructure that ran the FTX.com and FTX.us platforms, as well as company record keeping systems, were shared by employees of many FTX Group (and in some cases Alameda) entities.

“Of these, most key systems were not directly owned or controlled by FTX Digital at the time of the appointment. Many subscriptions to these cloud-based software services remained in the name of entities that existed prior to FTX Digital’s incorporation and were not formally transitioned in name.”

FTX Digital Markets’ last set of management accounts, for October 5, 2022, showed some $108.9m in cash assets as belonging to the company and a further $819m due to clients/investors via the FBO accounts. However, this cash pile had dwindled to just $219.5m as shown by the provisional liquidators in their summary of the estate’s assets.

“The most up-to-date available balance sheet for FTX Digital, as at the appointment of the joint provisional liquidators, was dated October 5, 2022,” the report to the Supreme Court said. “This showed a positive net asset position, with total assets of $396.4m (made up almost entirely of cash ($108.9m) and receivables ($276.2m)) and total liabilities of $297.6m, comprising almost exclusively inter-company payables ($296.4m).”

The joint provisional liquidators said they understood the $296.4m represents a sum advanced to the Bahamian subsidiary by FTX Trading so that it had funding following its incorporation. At end-January, the trio only had a net $19.5m in bank accounts they control, representing funds recovered from Fidelity Bank (Bahamas) and Deltec Bank & Trust.

“The joint provisional liquidators note that FTX Digital’s balance sheet did not include digital assets, and investigation will be required once platform data is available to establish whether assets and liabilities categorised and allocated between FTX Group entities appropriately represented the realities of how the group operated,” the Bahamian liquidation trio added.

Presently, FTX Digital Markets’ estate includes $219.5m in cash and a further $276.2m in accounts receivables owing to it. The bulk of the latter is $256.3m due from FTX Property Holdings, as the liquidators are alleging that the latter received sums advanced by the Bahamian subsidiary to finance its high-end real estate acquisition spree on New Providence. A further $5.8m in assets have been located, of which $2.4m is the crypto exchange’s vehicle fleet.

“FTX Digital owned and operated a fleet of cars in The Bahamas, which was made available to its employees for their sole use. The joint provisional liquidators have taken steps to identify, locate and secure these vehicles. Office furniture and equipment consists of IT and furniture either in the Veridian Corporate Centre (at the FTX campus) or in off-site storage,” the Supreme Court report added.

However, in the absence of still-to-be-recovered digital assets, the $500m-plus in assets identified so far is already dwarfed by some $1.15bn in collective liabilities owed to clients and other entities in the FTX group. And customer claims have yet to be determined, with FTX Digital Markets’ record-keeping - or lack of it - preventing the joint provisional liquidators from putting together a proper statement of affairs.

The trio added that around $278m was spent on FTX’s lavish Bahamian property purchases, with the 52 identified to-date having a combined worth of $255.4m. The additional $23m is likely to be related to closing costs such as government taxes, attorney and realtor fees.

“Most of the properties are titled in the name of FTX Property, but were funded directly by FTX Digital and recorded on FTX Digital’s balance sheet as an inter-company receivable,” the report added.

“The joint provisional liquidators identified several property titles which appear to be in the name of individual employees or relatives of Sam Bankman-Fried, despite FTX Digital providing the funding. It is understood that certain employees may have received employee loans or benefits in kind, which assisted with the purchase of residential property.”

Revealing that they have had to “manually collect and reconstruct” a large amount of FTX Digital Markets’ records, the trio of liquidators added: “The joint provisional liquidators will review and determine the prospects of claims against directors and officers for misfeasance, and the extent to which there are claims against third parties for negligence, breach of fiduciary duty or other causes of action......

“Ordinarily, it might be expected that a provisional liquidation outcome would be concluded within six months of a petition date. However, given the complexity of the case and the need to review and implement the matters outlined, in addition to the value and volume of the likely creditor claims, the joint provisional liquidators’ recommendation to the Supreme Court is an extension of the provisional liquidation for a further six months in order to be able to determine and progress key matters.”