Emperor Bankman-Fried Had No Clothes

“We have probably witnessed one of the most abrupt and difficult corporate collapses in the history of corporate America,” James Bromley, a restructuring attorney at Sullivan & Cromwell, said Tuesday.

He was addressing a court in Wilmington, Delaware, where a bankruptcy judge is presiding over an especially unsettling postmortem of Sam Bankman-Fried’s recently deceased crypto Frankenstein. It was a hulking monster stitched together with luxurious 25/75 linen-cotton blend thread, generously donated by millions of customers-turned creditors and investors-turned laughingstocks.

Last week, a filing showed FTX owes its largest unsecured creditors more than $3 billion, with $1.45 billion owed to its top 10 customers. In all, Bankman-Fried’s companies may have more than a million creditors. Bankruptcy Judge John Dorsey permitted the names of top creditors to stay secret — at least for now.

The unprecedented nature of FTX’s bankruptcy scarcely needed to be emphasized further. John J. Ray III, who’s overseeing the cleanup effort, suggested it’s the single-worst failure of corporate governance he’s ever seen, which was quite something to hear from the man who liquidated Enron.

It also represents a singularly spectacular failure of due diligence on the part of venture capital firms, and what’d I’d describe as gross journalistic negligence on the part of various financial media outlets, none of which asked the right questions until CoinDesk finally happened upon a partial balance sheet for Alameda earlier this month.

The rest, as they say, is history, much like Bankman-Fried’s fortune, which is now valued at… well, nothing (figure below).

He’s worth less, that’s for sure. But I doubt he’s worthless. As noted here last week, it seems exceedingly unlikely that someone who exercised unfettered control over a money-minting business and who personally controlled billions of digital assets which could be moved to untraceable wallets (cold or hot) at any given time, is actually broke. My guess is that Bankman-Fried is still quite rich, at least in crypto terms.

On Tuesday, Bromley cited “movement of assets out of the debtors’ estates to the Bahamas,” and mentioned “cryptic comments issued by the government of the Bahamas as to the actions they have taken with respect to certain assets.” Last week, The Securities Commission of the Bahamas ordered some FTX assets transferred to government wallets.

Some jurisdictional ambiguity appeared to be resolved Tuesday, when Bromley told the court that a Chapter 15 case brought by Bahamian liquidators in the Southern District of New York was transferred to Delaware. But “tension” (as one attorney put it) between liquidators in the Bahamas and US restructuring proceedings remains.

On the whole, FTX Group apparently has around $1.2 billion in cash, including $400 million at Alameda. That’s according to a filing from Alvarez & Marsal North America. The sum is “substantially higher… than the debtors were in a position to substantiate” as of last week.

A presentation filed Tuesday as part of the first-day proceedings included a number of visuals, including the figure (below) which shows the history of FTX’s fundraising.

The “WRS” and DOTCOM” distinctions refer to two of four “silos” into which Ray divided the group for the purpose of recovering funds.

As Bankman-Fried put it last week, during a midnight Twitter chat with Vox, “a month ago I was one of the world’s greatest fundraisers.”

The presentation also included a “preliminary org chart” which is mind-boggling, and a “collapse” timeline which is very short (figure below).

Bromley called the demise of FTX “unprecedented.” It wasn’t until Bankman-Fried relinquished control that the world realized “the emperor had no clothes,” he said. (If only there were signs.)

On Monday, reports indicated that FTX was already under investigation by prosecutors in Manhattan prior to the collapse.

Bromley told the court that advisors to the new FTX team are “in constant communication” with the Justice Department and the Southern District of New York’s cyber-crimes unit which has, apparently, opened a criminal investigation.

For his part, Ray may appear before the House and Senate next month to brief lawmakers on his findings. That’ll be a circus.

On Tuesday, Bromley lamented the theft of a “substantial amount” of FTX Group’s assets. “Unfortunately, the FTX debtors were not particularly well run,” he remarked. “And that is an understatement.”