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Speaker 1: This is Bloomberg Law with June Bresso from Bloomberg Radio.

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Speaker 1: We have, you know, a few billion honor balance sheet

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Speaker 1: right now. We are profitable and we're in a relatively

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Speaker 1: strong place from a financial perspective. That was Sam Bankman Freed,

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Speaker 1: the one time crypto king, in July, talking about f

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Speaker 1: t X being a profitable business. Now we're watching the

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Speaker 1: epic unraveling of the cryptocurrency exchange free falling into bankruptcy

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Speaker 1: and exposing shocking secrets. So far, the bankruptcy has revealed

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Speaker 1: a chaotically run web of intertwined companies, nine billion dollars

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Speaker 1: in liabilities it couldn't pay, the apparent misuse of customer funds,

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Speaker 1: and billions of dollars in loans to Bankman Freed and

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Speaker 1: his top executives. And those are just a few of

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Speaker 1: the revelations. Joining me is bankruptcy attorney Jonathan Janson, a

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Speaker 1: partner at Greenberg Gloucesgow. John Ray, who was appointed to

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Speaker 1: oversee ft X as its CEO during the bankruptcy proceedings,

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Speaker 1: has worked on major bankruptcy cases, including and Ron, and

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Speaker 1: he said, never in my career have I seen such

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Speaker 1: a complete failure of corporate controls and such a complete

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Speaker 1: absence of trustworthy financial information as occurred here. What does

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Speaker 1: that tell you? It sounds unbelievably dire for the many

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Speaker 1: customers and users out there. None of the financial information

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Speaker 1: is reliable. It's not even clear which of the hundred

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Speaker 1: plus entities are responsible for what and who owns what assets,

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Speaker 1: if any. And you know the fact that John Ray

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Speaker 1: was involved with then Ron, and he's making this type

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Speaker 1: of statement, it's pre alarming, pre alarming. Ray said that

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Speaker 1: a disparate group of supervisors approved disbursements by responding with

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Speaker 1: personalized emojis, and that corporate funds were used to purchase

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Speaker 1: homes and items for advisors and employees. Is that mismanagement

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Speaker 1: or is that something beyond mismanagement? Is that fraud? Oh,

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Speaker 1: it's mismanagement. It is a clear breach of their fiduciary

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Speaker 1: obligations and duties to the company. And it's hard to

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Speaker 1: say it was unknowing despite the inexperience of these individuals.

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Speaker 1: I mean, they were heading up a multibillion dollar enterprise

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Speaker 1: and certainly had the wherewithal to have proper advisors in place.

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Speaker 1: I assume they did. And this seems to me to

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Speaker 1: be blatant fraud and misconduct, and it's actionable. There was

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Speaker 1: a billion dollar loan to bank Man Freed, two point

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Speaker 1: three billion to paper Bird and entity majority owned by

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Speaker 1: Bankman Freed, about half a billion to the head of

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Speaker 1: engineering at f t X, among other loans bank Man Freed.

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Speaker 1: Is that a form of embezzlement? I mean, we don't

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Speaker 1: know exactly the circumstances under which these transfers occurred, but

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Speaker 1: it's hard to conclude anything other than that it's set

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Speaker 1: at the end of the day. However, you may dress

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Speaker 1: it up. You know, sometimes transactions may be papered in

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Speaker 1: a certain way to give an appearance that it's not

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Speaker 1: as improper as otherwise would be regarded. But yes, I

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Speaker 1: think the clear answer is there was an embezzlement at

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Speaker 1: a large scale. It appears there was some sort of

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Speaker 1: backdoor relationship between f t X and Alameda and bank Man.

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Speaker 1: Freed reportedly transferred ten billion dollars of customer funds from

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Speaker 1: f t X to Alameda in early November. Does that

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Speaker 1: transfer now seems suspicious? It looks incredibly suspicious. It looks

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Speaker 1: and it appears to be pretty clear that he was

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Speaker 1: using customer and user assets to prop up what was,

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Speaker 1: you know, his quant hedge fund, which was experiencing severe

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Speaker 1: loss as many of need is essentially, you know, using

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Speaker 1: other people's money to prop up a hedge fund that

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Speaker 1: was clearly troubled and insolvent and cascading into the disaster

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Speaker 1: we now see. This seems sudden. Do companies normally go

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Speaker 1: bankrupt on such short notice? Well, and short notice, I

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Speaker 1: guess it depends short notice to whom um But in

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Speaker 1: this particular case, as it relates to fp X, everything

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Speaker 1: happened very quickly, you know, in the course of a

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Speaker 1: week or two, and it is a little bit unusual

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Speaker 1: that there wasn't some sort of sense that there was

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Speaker 1: this decline happening and that there would be a need

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Speaker 1: for a bankruptcy filing it It did happen rather quickly.

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Speaker 1: It's not as uncommon in the crypto space, just given

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Speaker 1: the volatility of the market and frankly the pace in

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Speaker 1: which things seem to happen. So I think in general

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Speaker 1: the answer is no. You know, things aren't usually happened

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Speaker 1: this quickly without any sort of notice on the one hand.

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Speaker 1: On the other hand, in this industry, I think it

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Speaker 1: is less uncommon. I understand this is what's known in

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Speaker 1: the industry as a free fall bankruptcy. Yes, and so

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Speaker 1: what the free fall bankruptcy is getting at is typically

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Speaker 1: a company, particularly accompany the size of ft X, would

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Speaker 1: want to file a bankruptcy in an organized and methodical

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Speaker 1: fashion where they thought about what they're going to need

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Speaker 1: immediately upon the bankruptcy filing to facilitate a smooth transition

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Speaker 1: into bankruptcy. And so often in a bankruptcy that is

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Speaker 1: not a free fall, there will be you know, six seven, ten,

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Speaker 1: and in this case, perhaps it could have been even

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Speaker 1: more what are called first day motions. And these are

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Speaker 1: motions that are since we filed on the first day,

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Speaker 1: they're referred to as first day motions. And the idea

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Speaker 1: is that giving some of the limitations into the bankruptcy code,

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Speaker 1: extraordinary relief is needed immediately to sort of smooth to

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Speaker 1: allow for a smooth transition into bankruptcy. For instance, upon

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Speaker 1: a bankruptcy filing, a company can't pay any debt that

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Speaker 1: is a pre bankruptcy debt. There's exceptions that can be

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Speaker 1: made into context of a first day motion. Let's say,

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Speaker 1: for instance, the company is in the middle of a

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Speaker 1: payroll cycle. Well, the last thing you want is for

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Speaker 1: a company to file bankruptcy and therefore to be no

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Speaker 1: provision immediately for assuring that employees that may have accrued

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Speaker 1: wages prior to the filing in the middle of the

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Speaker 1: payroll period aren't going to have their payroll honored in

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Speaker 1: the ordinary course. So a first day motion might provide

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Speaker 1: for a request of the bankruptcy court to allow for

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Speaker 1: the we need to continue in the ordinary course to

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Speaker 1: make payroll. So in this case, in the case of

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Speaker 1: f t X, the free fall bankruptcy is associated with

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Speaker 1: the fact that this is a rather large company and

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Speaker 1: on the day they filed, they simply filed a petition

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Speaker 1: with no other pleatings or other paperwork for any sort

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Speaker 1: of relief, and for that matter, no pleatings or any

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Speaker 1: filings that would tell anybody what's going on with the

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Speaker 1: company's financials and what problems led to the company's bankruptcy filing,

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Speaker 1: and what issues are the front and center, at least

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Speaker 1: immediately now that the company is in bankruptcy. So the

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Speaker 1: free fall concept suggests that this was done at the

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Speaker 1: last minute without much planning, and it's very unusual for

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Speaker 1: a large company to find itself in a free fall

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Speaker 1: bankruptcy because usually there's enough time and planning that takes

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Speaker 1: place to prevent that from happening. Do we know what

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Speaker 1: caused the bankruptcy? There was an effort on the part

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Speaker 1: of I guess we'll call them SPS to support Alameter Research,

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Speaker 1: which was a hedge fund but sister company of the

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Speaker 1: exchange f t X, and the transfer of that ten

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Speaker 1: billion dollars clearly left a hole in the liquid assets

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Speaker 1: of f t X that customers presumably you know, would

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Speaker 1: want to withdraw or have a basis to withdraw, and

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Speaker 1: it wasn't going to be there anymore. The bankruptcy and

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Speaker 1: the issues surrounding the liquidity enlargements had to do with

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Speaker 1: reporting initially by coin death, suggesting that the companies in

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Speaker 1: this case Alameter Research, most of its assets were in

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Speaker 1: f t X generated or an f t X coin.

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Speaker 1: The f t t and that token, if you will,

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Speaker 1: really is a token which value is tied to providing

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Speaker 1: customers of f t X with discounts on trade. So

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Speaker 1: there isn't a lot of intrinsic value associated with that token,

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Speaker 1: and there was a lot of the token in Alameter Research,

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Speaker 1: which called into question the value of the hedge fund,

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Speaker 1: which led to the need for it to be supported

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Speaker 1: by customer assets, which were transferred by sbs in part

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Speaker 1: to bolster the strength of the fund. And the reason

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Speaker 1: why the fund was under pressure was due in part

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Speaker 1: to the coin death revelation that that's where Alometer Research

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Speaker 1: was largely holding. And then you begin to peel the

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Speaker 1: onion back a little bit and realize that there's no

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Speaker 1: liquidity because this stuff doesn't really have an intrinsic value,

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Speaker 1: and so it sort of created a run on the bank,

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Speaker 1: particularly when Finance, which had made an investment in f

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Speaker 1: t X, was basically liquidating its position as fd X

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Speaker 1: and Finance were parting ways. So it created pressure on

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Speaker 1: f t X and it's token, and that news hit

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Speaker 1: and customers became concerned, and there was increasing efforts on

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Speaker 1: the part of the customer based in f t X

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Speaker 1: to withdraw their assets from ft X, which is sort

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Speaker 1: of the classic run on the bank, if you will,

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Speaker 1: And knowing that f t X didn't have the wherewithal

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Speaker 1: withwid assets to honor those customer withdrawals, it had to

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Speaker 1: stop that process, which inevitably led to the need to

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Speaker 1: file for a bankruptcy. Does that transfer now seems suspicious?

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Speaker 1: It looks incredibly suspicious. It looks and it appears to

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Speaker 1: be pretty clear that he was using customer and user

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Speaker 1: assets to prop up what was, you know, his quant

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Speaker 1: hedge fund, which was experiencing severe loss as many of

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Speaker 1: these essentially, you know, using other people's money to prop

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Speaker 1: up a hedge fund that was clearly troubled and insolvent

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Speaker 1: and cascading into the disaster we now see. The crypto

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Speaker 1: exchange was as a privately held company, which means it

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Speaker 1: doesn't have to share its financial statements with the public.

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Speaker 1: Do you think that led to the problems that we're

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Speaker 1: seeing today, Well, there's no question that the fact that

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Speaker 1: these exchanges are not subject to clear regulations and rules

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Speaker 1: is a big problem and is certainly a contributing factor

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Speaker 1: to what was able to be accomplished by ft X

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Speaker 1: in terms of transfer and funds undetected by auditors. Frankly

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Speaker 1: to Alameda, if there was a more robust regulatory environment

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Speaker 1: and rules in place, with the regulatory oversight, we wouldn't

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Speaker 1: necessarily have as big of a problem as we have today.

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Speaker 1: So yes, does Ray have a grasp of the balance sheet.

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Speaker 1: John Ray made it pretty clear in the paper work

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Speaker 1: that was filed that that none of the accounting is

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Speaker 1: really reliable at this point, and even accounting for assets

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Speaker 1: games such as bank accounts, he doesn't even have a

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Speaker 1: proper list of the bank accounts where the money is,

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Speaker 1: so we really don't have any sense of the asset

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Speaker 1: values that maybe there went alone the liabilities. This is

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Speaker 1: a Chapter eleven bankruptcy reorganization. What does it look as

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Speaker 1: if ft X can be or is this going to

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Speaker 1: turn out more likely to be a liquidation? And its core,

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Speaker 1: this is going to be a liquidation just given the

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Speaker 1: damage to the brand and the fact that there doesn't

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Speaker 1: appear to be a real asset value beyond other people's money.

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Speaker 1: At its core, it's going to be a liquidation. There's

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Speaker 1: a number of entities, many of which are not actually

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Speaker 1: in bankruptcy right now, subsidiaries of some of these debtors

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Speaker 1: that may ultimately be businesses that can be sold. And

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Speaker 1: how likely is it that customers will get any of

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Speaker 1: their money back? I think there is hope that customers

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Speaker 1: will get some money back, It will be not for

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Speaker 1: quite some time, and customers will be likely to get

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Speaker 1: pennies on the dollar, and maybe pennies is a little

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Speaker 1: too bleak, but customers will not get most of their

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Speaker 1: deposits and assets back from this exchange. And the question

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Speaker 1: really is how successful Mr Ray and the other newly

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Speaker 1: appointed directors are in terms of bringing value and asset

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Speaker 1: transfers back into the bankruptcy estates to enhance recoveries for

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Speaker 1: customers and creditors. Thanks Jonathan. That's Jonathan Jansen, a partner

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Speaker 1: at Greenberg Gloucesker. And that's it for this edition of

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Speaker 1: ten pm Wall Street Time. I'm June Grosso, and you're

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