Secrets Revealed in FTX Freefall Into Bankruptcy

and exposing shocking secrets. So far, the bankruptcy has revealed a chaotically run web of intertwined companies, nine billion dollars in liabilities it couldn't pay, the apparent misuse of customer funds, and billions of dollars in loans to Bankman Freed and his top executives. And those are just a few of the revelations. Joining me is bankruptcy attorney Jonathan Janson, a

partner at Greenberg Gloucesgow. John Ray, who was appointed to oversee ft X as its CEO during the bankruptcy proceedings, has worked on major bankruptcy cases, including and Ron, and he said, never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. What does that tell you? It sounds unbelievably dire for the many customers and users out there. None of the financial information

is reliable. It's not even clear which of the hundred plus entities are responsible for what and who owns what assets, if any. And you know the fact that John Ray was involved with then Ron, and he's making this type of statement, it's pre alarming, pre alarming. Ray said that a disparate group of supervisors approved disbursements by responding with personalized emojis, and that corporate funds were used to purchase homes and items for advisors and employees. Is that mismanagement

or is that something beyond mismanagement? Is that fraud? Oh, it's mismanagement. It is a clear breach of their fiduciary obligations and duties to the company. And it's hard to say it was unknowing despite the inexperience of these individuals. I mean, they were heading up a multibillion dollar enterprise and certainly had the wherewithal to have proper advisors in place. I assume they did. And this seems to me to

be blatant fraud and misconduct, and it's actionable. There was a billion dollar loan to bank Man Freed, two point three billion to paper Bird and entity majority owned by Bankman Freed, about half a billion to the head of engineering at f t X, among other loans bank Man Freed. Is that a form of embezzlement? I mean, we don't know exactly the circumstances under which these transfers occurred, but it's hard to conclude anything other than that it's set

at the end of the day. However, you may dress it up. You know, sometimes transactions may be papered in a certain way to give an appearance that it's not as improper as otherwise would be regarded. But yes, I think the clear answer is there was an embezzlement at a large scale. It appears there was some sort of backdoor relationship between f t X and Alameda and bank Man. Freed reportedly transferred ten billion dollars of customer funds from f t X to Alameda in early November. Does that

transfer now seems suspicious? It looks incredibly suspicious. It looks and it appears to be pretty clear that he was using customer and user assets to prop up what was, you know, his quant hedge fund, which was experiencing severe loss as many of need is essentially, you know, using other people's money to prop up a hedge fund that was clearly troubled and insolvent and cascading into the disaster we now see. This seems sudden. Do companies normally go

bankrupt on such short notice? Well, and short notice, I guess it depends short notice to whom um But in this particular case, as it relates to fp X, everything happened very quickly, you know, in the course of a week or two, and it is a little bit unusual that there wasn't some sort of sense that there was this decline happening and that there would be a need for a bankruptcy filing it It did happen rather quickly.

It's not as uncommon in the crypto space, just given the volatility of the market and frankly the pace in which things seem to happen. So I think in general the answer is no. You know, things aren't usually happened this quickly without any sort of notice on the one hand. On the other hand, in this industry, I think it is less uncommon. I understand this is what's known in

the industry as a free fall bankruptcy. Yes, and so what the free fall bankruptcy is getting at is typically a company, particularly accompany the size of ft X, would want to file a bankruptcy in an organized and methodical fashion where they thought about what they're going to need immediately upon the bankruptcy filing to facilitate a smooth transition

into bankruptcy. And so often in a bankruptcy that is not a free fall, there will be you know, six seven, ten, and in this case, perhaps it could have been even more what are called first day motions. And these are motions that are since we filed on the first day, they're referred to as first day motions. And the idea is that giving some of the limitations into the bankruptcy code, extraordinary relief is needed immediately to sort of smooth to

allow for a smooth transition into bankruptcy. For instance, upon a bankruptcy filing, a company can't pay any debt that is a pre bankruptcy debt. There's exceptions that can be made into context of a first day motion. Let's say, for instance, the company is in the middle of a

payroll cycle. Well, the last thing you want is for a company to file bankruptcy and therefore to be no provision immediately for assuring that employees that may have accrued wages prior to the filing in the middle of the payroll period aren't going to have their payroll honored in the ordinary course. So a first day motion might provide for a request of the bankruptcy court to allow for the we need to continue in the ordinary course to

make payroll. So in this case, in the case of f t X, the free fall bankruptcy is associated with the fact that this is a rather large company and on the day they filed, they simply filed a petition with no other pleatings or other paperwork for any sort of relief, and for that matter, no pleatings or any filings that would tell anybody what's going on with the company's financials and what problems led to the company's bankruptcy filing, and what issues are the front and center, at least

immediately now that the company is in bankruptcy. So the free fall concept suggests that this was done at the last minute without much planning, and it's very unusual for a large company to find itself in a free fall bankruptcy because usually there's enough time and planning that takes place to prevent that from happening. Do we know what

caused the bankruptcy? There was an effort on the part of I guess we'll call them SPS to support Alameter Research, which was a hedge fund but sister company of the exchange f t X, and the transfer of that ten billion dollars clearly left a hole in the liquid assets of f t X that customers presumably you know, would want to withdraw or have a basis to withdraw, and

it wasn't going to be there anymore. The bankruptcy and the issues surrounding the liquidity enlargements had to do with reporting initially by coin death, suggesting that the companies in this case Alameter Research, most of its assets were in f t X generated or an f t X coin. The f t t and that token, if you will, really is a token which value is tied to providing

customers of f t X with discounts on trade. So there isn't a lot of intrinsic value associated with that token, and there was a lot of the token in Alameter Research, which called into question the value of the hedge fund, which led to the need for it to be supported by customer assets, which were transferred by sbs in part to bolster the strength of the fund. And the reason why the fund was under pressure was due in part to the coin death revelation that that's where Alometer Research

was largely holding. And then you begin to peel the onion back a little bit and realize that there's no liquidity because this stuff doesn't really have an intrinsic value, and so it sort of created a run on the bank, particularly when Finance, which had made an investment in f t X, was basically liquidating its position as fd X

and Finance were parting ways. So it created pressure on f t X and it's token, and that news hit and customers became concerned, and there was increasing efforts on the part of the customer based in f t X to withdraw their assets from ft X, which is sort of the classic run on the bank, if you will, And knowing that f t X didn't have the wherewithal withwid assets to honor those customer withdrawals, it had to stop that process, which inevitably led to the need to

file for a bankruptcy. Does that transfer now seems suspicious? It looks incredibly suspicious. It looks and it appears to be pretty clear that he was using customer and user assets to prop up what was, you know, his quant hedge fund, which was experiencing severe loss as many of these essentially, you know, using other people's money to prop up a hedge fund that was clearly troubled and insolvent

and cascading into the disaster we now see. The crypto exchange was as a privately held company, which means it doesn't have to share its financial statements with the public. Do you think that led to the problems that we're seeing today, Well, there's no question that the fact that these exchanges are not subject to clear regulations and rules is a big problem and is certainly a contributing factor to what was able to be accomplished by ft X

in terms of transfer and funds undetected by auditors. Frankly to Alameda, if there was a more robust regulatory environment and rules in place, with the regulatory oversight, we wouldn't necessarily have as big of a problem as we have today. So yes, does Ray have a grasp of the balance sheet.

John Ray made it pretty clear in the paper work that was filed that that none of the accounting is really reliable at this point, and even accounting for assets games such as bank accounts, he doesn't even have a proper list of the bank accounts where the money is, so we really don't have any sense of the asset values that maybe there went alone the liabilities. This is a Chapter eleven bankruptcy reorganization. What does it look as if ft X can be or is this going to

turn out more likely to be a liquidation? And its core, this is going to be a liquidation just given the damage to the brand and the fact that there doesn't appear to be a real asset value beyond other people's money. At its core, it's going to be a liquidation. There's a number of entities, many of which are not actually in bankruptcy right now, subsidiaries of some of these debtors that may ultimately be businesses that can be sold. And how likely is it that customers will get any of

their money back? I think there is hope that customers will get some money back, It will be not for quite some time, and customers will be likely to get pennies on the dollar, and maybe pennies is a little too bleak, but customers will not get most of their

deposits and assets back from this exchange. And the question really is how successful Mr Ray and the other newly appointed directors are in terms of bringing value and asset transfers back into the bankruptcy estates to enhance recoveries for customers and creditors. Thanks Jonathan. That's Jonathan Jansen, a partner at Greenberg Gloucesker. And that's it for this edition of the Bloomberg Law Show. Remember you can always get the

latest legal news on our Bloomberg Law Podcast. You can find them on Apple Podcasts, Spotify and at www dot Bloomberg dot com, slash podcast, slash Law, and remember to tune into The Bloomberg Law Show every week night at ten pm Wall Street Time. I'm June Grosso, and you're listening to Bloomberg