FTX faces $8.7 billion debt and accusations of misconduct, report reveals

New findings from the FTX team, probing the financial transactions of the defunct exchange, disclose that the company owed its customers a staggering $8.7 billion due to the mingling and misappropriation of their deposits.

Shockingly, senior executives began concealing these troubles as early as August 2022.

According to a report filed on Monday, approximately $6.4 billion of the owed amount consisted of fiat currency and stablecoins that were misused by the FTX.com exchange.

So far, $7 billion in liquid assets have been recovered, with the expectation of additional recoveries as the search for the company's assets continues.

"The image that the FTX Group sought to portray as the customer-focused leader of the digital age was a mirage," declared John J. Ray III, the CEO leading the effort to recover funds for creditors, in a statement.

The new report, resulting from months of analysis and forensic auditing, portrays a grim picture of company management and at least one senior lawyer knowingly misusing customer funds. They resorted to "lying to banks and auditors, executing false documents and moving the FTX Group across jurisdictions" from the US to Hong Kong and the Bahamas in a desperate attempt to facilitate their wrongdoing while evading detection.

This 33-page review represents the second report filed by Ray.

In April, the initial examination unveiled a series of improper activities that took place under the watch of founder and former CEO Sam Bankman-Fried. Bankman-Fried currently faces multiple criminal charges, with a trial scheduled for October in New York.

Presently undergoing bankruptcy proceedings in Delaware, the company is under Ray's guidance as he works to settle FTX's affairs following its collapse in November. There have been indications that the exchange's operations could be rebooted under the name FTX 2.0.

Tracing FTX transactions and funding has proven to be an "extraordinarily challenging" task, as indicated by the report.

According to Ray's report, senior executives of the company, including Caroline Ellison, the former CEO of FTX's trading affiliate Alameda Research, were aware as early as August 2022 that the firm owed over $8 billion to customers, with insufficient funds to cover the debt. Rather than disclosing the shortfall, they opted to create a fictitious customer account on FTX.com, concealing the hidden fiat currency liability. The report refers to this account, designed to evade scrutiny, as "our Korean friend's account," indicating that their "Korean friend" owed the FTX.com exchange $8.9 billion.

Moreover, the report reveals that the company routinely deceived its banking partners regarding the utilisation of accounts. A former employee of Alameda Research informed the bankruptcy team that the company "made no meaningful distinction between customer funds and Alameda funds".

The report also accuses Bankman-Fried of providing false testimony to senators during a hearing on February 9, 2022. Specifically, he misled the senators about his company's practices in safeguarding customers and their funds.