Lawyers for the once-mighty crypto-exchange FTX described a company riddled with dysfunction and mismanagement during a court hearing on Tuesday, as they sought to explain how the sprawling empire founded by Sam Bankman-Fried was brought to its knees in a matter of days.
"We have witnessed one of the most abrupt and difficult collapses in the history of corporate America," said James Bromley, an attorney representing the company.
Last month, FTX was one of the most popular cryptocurrency exchanges in the world. Today, it is figuring out how to sell off assets, pay customers and satisfy creditors as part of a large and complex bankruptcy filing. And its new management team, brought in right before the exchange filed for Chapter 11, is just beginning to understand the magnitude of the mess they inherited.
Here's what we learned during the first court hearing in the bankruptcy process:
Customers' money is M.I.A.
Bromley confirmed what many of FTX's millions of customers have feared. He said his team has determined "a substantial amount of assets have either been stolen, or are missing."
FTX presented itself as a safe way for everyday people to invest in the confusing and opaque world of cryptocurrencies, and those people now have little understanding of what happened to their funds.
In court, Bromley and his colleagues offered scant details on what is unaccounted for, and no explanation of what "missing" means.
The company's new CEO, John J. Ray III, has hired a cybersecurity consultancy to track down the funds, according to a court filing.
FTX — a massive digital enterprise — has bad data and intentionally destroyed internal messages
As Ray and his team started to gather information, they immediately recognized glaring problems with FTX's data.
There are major holes in the information, and they are trying to distinguish fact from fiction.
Or, as Bromley said about FTX: "The debtors have unreliable books and records."
According to the company's lawyers, they have no reason to believe financial statements were ever audited. That means that no trained professionals from outside the company and its dozens of affiliates ever looked over FTX's books objectively, to ensure investors received truthful information. So, the new management has retained an outside accounting firm to review FTX's financial information.
Ray and his team also allege critical correspondence is missing. They say Bankman-Fried communicated with colleagues on apps that delete messages automatically.
Estimates that FTX was worth $32 billion may be too low
It has been previously reported that, in January 2022, FTX was valued at $32 billion.
But the FTX lawyers said that just ten months ago, the company was valued at a whopping $40 billion. NPR has been unable to independently verify that valuation.
FTX's legal team outlined how much money the company has gotten from investors since it was founded in 2019, and in its most recent funding round, it raised an additional $400 million for its U.S. business, and $500 million for its larger international operations.
It wasn't just a "run on the bank" that led to FTX's collapse
"There was effectively a run on the bank," Bromley said, "and a leadership crisis."
After Bankman-Fried's rival, Binance CEO Changpeng Zhao, announced his plans to offload a substantial amount of a cryptocurrency FTX created, other investors panicked.
FTX couldn't meet the demand for withdrawals, and lawyers said that, in that moment of crisis, it became evident there were serious issues with FTX's management.
The company "had a lack of corporate controls at a level that none of us in the profession that have looked at it so far have ever seen," Bromley said.
Everyone is worried about hackers, and there are major disputes brewing about how to handle customer data
FTX has been, and continues to be, the target of cyber attacks, and that is complicating its lawyers' work.
Since Ray took over the company's operations on Nov. 11, he and his team have "struggled to get access to customer data due to ongoing security risks," according to Brian Glueckstein, another lawyer representing FTX.
There was also disagreement among lawyers for the company and its creditors, and the U.S. trustee monitoring the proceedings, over customer data.
FTX has millions of customers, which Glueckstein called "the lifeblood of the company."
He argued its customer database is valuable — "important to any reorganization or sale to maximize value to all stakeholders" — and for that reason, that information shouldn't be made public.
FTX also asked Judge John Dorsey to allow the company to submit redacted lists of its largest creditors, citing concerns about their privacy and safety.
But Ben Hackman, an attorney representing the U.S. trustee, argued against that, suggesting that information should be made available, with only a few exceptions, in the interest of greater transparency.