FTX bankruptcy lawyers say independent examiners will put assets at risk

The judge overseeing FTX’s bankruptcy proceedings has not yet decided whether to appoint an independent auditor after a 4-hour hearing that included testimony from FTX CEO John Ray III.

Judge John Dorisy, who is overseeing the bankruptcy proceedings, said Monday that he has asked attorneys representing FTX, the Committee of Unsecured Creditors, the US Trustee and Joint Liquidators General in the Bahamas to discuss a “consensual settlement.” The next court hearing at FTX is scheduled for Wednesday, but there are no signs yet that the judge will make a decision after that.

Ray was hired when cryptocurrency exchange FTX filed for bankruptcy and founder Sam Bankman-Fried resigned on November 11. The company, once an influential giant in the industry, is accused of merging client funds with its sister company, Alameda Research — a cryptocurrency trading firm also founded by Bankman-Fried.

Ray said during his testimony Monday that he and his team sent daily requests from state and federal investigators. Ray also testified that he did not find the examiner’s reports useful in two previous bankruptcies he oversaw, Enron and Residential Capital, adding that “the reports were somewhat contradictory in their conclusion.”

FTX’s legal team argued that the cost of an independent auditor would be significant and duplicate much of the work Ray’s team had been doing since November.

Between the day he was hired and the end of last year, Ray said he did $690,000 worth of work for the company.

But Juliet Sarkissian, the US official assigned to the case, said 18 states have expressed support for appointing an examiner. The latest is Texas, which last week entered its union with 15 other states.

FTX Attorney James Bromley argued that “allowing anyone else to enter this cybersecurity environment would jeopardize the security of everything that has been made and everything that is going to happen. With all due respect, the US Trustee Office sees this as if we had a warehouse full of sacks of potatoes. It is not We have that. We have a virtual environment full of code and even looking at that code risks doing that.”

The company has seen hundreds of millions of dollars in assets left in “unauthorized transfers” after it filed for bankruptcy. Last month, the FTX restructuring team said in a presentation that $90 million in funds stolen on November 12 were from FTX US.

FTX liquidators themselves showed signs of not knowing how to navigate the crypto assets they were tasked with calculating and recovering. In January, a blockchain analytics firm published a report showing that FTX had lost $72,000 in Bitcoin because they apparently did not understand how to pay off the Aave loan to unlock the collateral it was deposited to secure it.

“Instead of paying the debt to close the position, the liquidators chose to remove all collateral, putting the position at risk of liquidation,” the Arkham team wrote in the report. “This resulted in the liquidation of approximately 4 WBTC, $72,000 at current prices.”

Ray detailed FTX’s lack of corporate oversight, which he said in court documents amounted to a dumpster fire.

“The pre-filing environment allowed insiders to move company assets freely without liability and without tracing,” Ray said Monday. “Literally, one of the founders could walk into this environment, download half a billion dollars from the wallet and walk away from it. And there would be absolutely no accountability. It’s practically unthinkable, really, in a controlled environment.”

Later in his testimony, he recounted the hack that occurred the day he took over the company. As of November 12, assets worth $650 million had been drained from FTX wallets in unauthorized transfers.

“Someone described wallets in this AWS system as kind of like needles in a haystack of needles,” he said of trying to track down which wallets were emptied. “It really was 48 hours of what I can only describe as pure hell.”

Stay up to date with cryptocurrency news, and get daily updates in your inbox.

Leave a Reply

Your email address will not be published. Required fields are marked *