FTX… a backdoor hiding the fiasco

The whole thing was an eight billion dollar accident. Or so says Sam Bankman Fried.
As FTX, the cryptocurrency exchange led by the 30-year-old, quickly collapsed over the weekend, many of its employees fled the Bahamas, the Caribbean country where the company is headquartered. Some simply abandoned their cars at the airport.
Within days, the FTX exchange went from the vanguard of the new crypto-economy, with a valuation of $32 billion and praised by celebrities and politicians, to a humiliating bankruptcy.
With details of FTX’s financial affairs and messy ledgers revealed this week by the Financial Times and others, the focus of investigations and legal battles has now turned to holes in cryptocurrency exchanges’ balance sheets — particularly the $8 billion in lost customer deposits.
The most innocent version of events that Bankman Fried can offer is that the customers’ lost money was sheer carelessness.
The MIT graduate admitted that the FTX exchange sent clients’ money to Alameda Research, a private trading firm he also controls.
Bankman Fried told the Financial Times the hole in FTX’s balance sheet was a massive transfer of funds to Alameda, but the move happened “unintentionally”. In a document shared with investors shortly before the bankruptcy filing, the funds are listed as being in a hidden account in the name of… [email protected]”.
In an interview with Fox, he described realizing that money for FTX had ended up in the trading firm, “Oh my God, people sent $8 billion to Alameda, we forgot.”
Many find this explanation impossible to believe. With prosecutors, regulators, investors and up to a million creditors all asking questions about the missing funds, some are already convinced of a more sinister version of events.
A class action lawsuit filed on behalf of US investors alleged on Wednesday that the FTX exchange was “a truly decrepit, fraudulent institution where FTX commingles client funds among its shady affiliates”.
Interviews with close associates and seven former employees, including some who were with the company until its final days, reveal that it is a chronically understaffed organization that lacks basic security measures and financial controls.
According to employees, the company was run more like a feudal court than a modern corporation. Decision-making and knowledge of the company’s affairs was limited to Bankman Fried and a few close friends in their late twenties, many of whom lived together in a luxury condo in the Bahamas. I put loyalty above all considerations.
The initial verdict from John Ray III, the veteran insolvency expert brought in to run the company, was disastrous. “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of reliable financial information as here,” said Ray, who previously helped liquidate the failed energy group Enron.
In addition to describing the company as run by “a very small group of inexperienced and inexperienced individuals”, he highlighted the potential for illegal conduct. Management failures at FTX included “the use of software to conceal misuse of client funds,” Ray wrote in the bankruptcy filing Thursday.
Bankman Fried did not respond to requests for comment for this article as of last Saturday.
Most of the company’s employees had no idea the trouble it was in until it suddenly stopped printing customer orders for withdrawals just days before its final collapse. Even employees who had worked at Bankman Fried for years were shocked.
“On the one hand, I’m sad and horrified about what’s going to happen next,” says a former employee. “But I’m glad it was exposed. I feel there was a lot of bad in the company, from the management, the structure, the company culture. I think Sam promoted loyalty.” I’ve seen many companies fail because management is about trusting whoever was in charge.”

chaotic environment
The failure of Bankman Fried was very interesting because it presented itself, more than anyone else, as the one who could make cryptocurrency mainstream.
His no-nonsense, introverted personality has charmed people from Wall Street regulators to pop star Katy Perry.
Bankman Fried’s reputation has been bolstered by heavy ad spending, from Super Bowl commercials starring Larry David to glamorous Vogue ads featuring supermodel Gisele Bundchen. Last year, FTX acquired the naming rights for the NBA team Miami Heat. He also donated heavily to the Democratic Party.
The businessman also attracted high-profile investors from BlackRock Fund and Singapore’s state-owned Tamasek Fund to Millennium Management’s Easy Englander hedge fund. He once considered buying Goldman Sachs.
But even after accepting $1.8 billion from outside investors, the company’s board consisted of only Bankman Fried and Jonathan Cheesman, FTX’s CEO, until he stepped down in October. The only outside director was a lawyer from Antigua and Barbuda, where the firm was incorporated.
Bankman Fried settled into an apartment on the 600-acre Albany complex in Nassau, which was made famous in the James Bond movie “Casino Royale,” and whose co-owners include Tiger Woods and Justin Timberlake. A resident says: “Dubai is where people go to show off their money. Albany is where people go to hide it.”
He shared the $40 million five-bedroom apartment with two general majority shareholders, chief engineering officer Nishad Singh and chief technology officer Gary Wang. At times there were as many as nine roommates, including Alameda CEO Caroline Ellison.
Both Seng and Wang were romantically involved with fellow female employees, while Ellison and Bankman-Fried had an on-and-off relationship for about eight months, according to employees.
Romantic relationships have led to allegations of nepotism. “Many people inside were not very happy with this management arrangement,” says a former employee. People outside the inner circle, even those in high-profile positions, sometimes knew about big decisions, like acquisitions, on Twitter.
Singh, Wang and Ellison could not be reached for comment.
Theoretically, FTX and Alameda were separate entities to avoid conflicts of interest. But in reality the stock exchange and the trading system were closely related. A person who regularly visited the group’s offices in Nassau said there were no ethical walls, with employees from the two companies sitting and working together in an environment he described as “chaotic”.
Bankman Fried’s inner circle was held together by longstanding personal ties, going back to math camp and MIT. But even some of those who shared these connections thought the clique of friends in the apartment was unhealthy.
Sam Trabuco, the former co-CEO of Alameda, who resigned in August, told the Financial Times in April: “It’s like a college dorm. I think it’s unhealthy.”
Trabuco admitted in an interview with the FTX Stock Exchange podcast that he worked 134 days in a row in late 2019 and early 2020, adding that he often worked for 30 to 40 days without a break. He blamed his departure on “burnout,” an experience he shared with other employees.
Bankman Fried was also known to work around the clock and sleep for several hours next to his desk. He tweeted about using drugs to regulate his days. “Stimulants when you wake up, and sleeping pills if you need them when you go to sleep,” he wrote in 2019.
Until the company’s rapid demise, the chaos and relentless work processes could easily be described as the strong leadership culture of a very fragile startup.

No protections
However, this fragile back-end structure appears to be one of the sources of the downfall of the FTX exchange.
Employees issued warnings about security and safeguards at FTX before the crisis engulfed the company.
The people said that fewer than a dozen core developers led by Bankman Fried, Sing and Wang controlled the software and had full access to the company’s systems.
“I always had the impression that basic programming was restricted to the inner circle,” said a former employee.
The bankruptcy filings state that Bankman Fried and Wang controlled “access to digital assets” at the FTX exchange and used “an insecure mass email account (…) to access private secret keys and highly sensitive data to obtain”.
Employees with previous experience at similar companies were surprised by the lack of normal checks and balances between functions like development, security and product – teams that would normally look after each other’s work.
“There was no corporate services team, no real general counsel team, no real back office, no risk management office, no clear CFO, they were all missing,” says an executive at a company that worked closely with FTX. There really is enough structure.”
Former employees said Bankman Fried resisted adding more staff or diluting the control he and senior officials wield. Leading figures in the cryptocurrency exchange urged the founder to hire more staff, share more responsibilities and reduce the company’s dependence on a few big developers.
Another former employee says, “Sam – Bankman Fried – told me he’d rather risk something failing than have someone who doesn’t fit the culture of the place.”
The bankruptcy filings state that the company’s management used software to hide the misuse of customer funds. The statement appeared to support Reuters reports that Bankman Fried and his closest associates created a “backdoor” in the company’s accounting system that allowed large transfers to cover losses at Alameda while giving other employees and the outside world a healthy balance sheet. tone.
Bankman Fried denied these reports. He blames “sloppy accounting” for leaking money to Alameda and not discovering that his empire was more in debt and at risk of bankruptcy than he realized.
“There were many things I wish I had done differently, but the biggest are represented by these two: The internal account associated with the poorly rated bank and the amount of customers withdrawing as they scramble to withdraw their funds.”

the last days
FTX non-executives claim they were unaware the company was headed for disaster until early November. “Like everyone else, I had no idea anything was wrong with our financial situation,” said a former employee.
The crisis only became apparent to many on November 8, when the FTX exchange stopped processing customer withdrawals. Without a word from Bankman Fried, the developers assured other employees that payments had stopped, and panic set in.
Hours later came news that Bankman Fried and Binance Exchange Chairman Changpeng Zhao had agreed to the larger exchange’s terms for purchasing FTX and resolving its liquidity issues. The sale to a bitter competitor had a devastating impact on the morale of FTX employees.
When the deal with Binance collapsed, Bankman Fried resisted for days, but after late-night talks with his lawyer and his father, he agreed to declare the company in Chapter 11 bankruptcy around 4:30 a.m. on November 11.
But Bankman Fried seems unable to admit defeat. In messages released by Fox, he insisted he was still trying to collect $8 billion in compensation from clients, but said he needed Wang Ou Sing “back.”
Both of them gave up the apartment. Banker Fried said Wang was “scared” and that Singh felt “ashamed and guilty” about losing customers’ money.
As unreconciled as Bankman Fried appears to have been with his failure, the staff are distraught by the rapid collapse, and the realization that their former boss has betrayed both their trust and that of customers.
“We were good people (…) and it came here. We were once an empire,” said one of the longtime employees.

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