Speaker 1: This is Bloomberg Law with June Bresso from Bloomberg Radio.
Speaker 1: We have, you know, a few billion honor balance sheet
Speaker 1: right now. We are profitable and we're in a relatively
Speaker 1: strong place from a financial perspective. That was Sam Bankman Freed,
Speaker 1: the one time crypto king, in July, talking about f
Speaker 1: t X being a profitable business. Now we're watching the
Speaker 1: epic unraveling of the cryptocurrency exchange free falling into bankruptcy
Speaker 1: and exposing shocking secrets. So far, the bankruptcy has revealed
Speaker 1: a chaotically run web of intertwined companies, nine billion dollars
Speaker 1: in liabilities it couldn't pay, the apparent misuse of customer funds,
Speaker 1: and billions of dollars in loans to Bankman Freed and
Speaker 1: his top executives. And those are just a few of
Speaker 1: the revelations. Joining me is bankruptcy attorney Jonathan Janson, a
Speaker 1: partner at Greenberg Gloucesgow. John Ray, who was appointed to
Speaker 1: oversee ft X as its CEO during the bankruptcy proceedings,
Speaker 1: has worked on major bankruptcy cases, including and Ron, and
Speaker 1: he said, never in my career have I seen such
Speaker 1: a complete failure of corporate controls and such a complete
Speaker 1: absence of trustworthy financial information as occurred here. What does
Speaker 1: that tell you? It sounds unbelievably dire for the many
Speaker 1: customers and users out there. None of the financial information
Speaker 1: is reliable. It's not even clear which of the hundred
Speaker 1: plus entities are responsible for what and who owns what assets,
Speaker 1: if any. And you know the fact that John Ray
Speaker 1: was involved with then Ron, and he's making this type
Speaker 1: of statement, it's pre alarming, pre alarming. Ray said that
Speaker 1: a disparate group of supervisors approved disbursements by responding with
Speaker 1: personalized emojis, and that corporate funds were used to purchase
Speaker 1: homes and items for advisors and employees. Is that mismanagement
Speaker 1: or is that something beyond mismanagement? Is that fraud? Oh,
Speaker 1: it's mismanagement. It is a clear breach of their fiduciary
Speaker 1: obligations and duties to the company. And it's hard to
Speaker 1: say it was unknowing despite the inexperience of these individuals.
Speaker 1: I mean, they were heading up a multibillion dollar enterprise
Speaker 1: and certainly had the wherewithal to have proper advisors in place.
Speaker 1: I assume they did. And this seems to me to
Speaker 1: be blatant fraud and misconduct, and it's actionable. There was
Speaker 1: a billion dollar loan to bank Man Freed, two point
Speaker 1: three billion to paper Bird and entity majority owned by
Speaker 1: Bankman Freed, about half a billion to the head of
Speaker 1: engineering at f t X, among other loans bank Man Freed.
Speaker 1: Is that a form of embezzlement? I mean, we don't
Speaker 1: know exactly the circumstances under which these transfers occurred, but
Speaker 1: it's hard to conclude anything other than that it's set
Speaker 1: at the end of the day. However, you may dress
Speaker 1: it up. You know, sometimes transactions may be papered in
Speaker 1: a certain way to give an appearance that it's not
Speaker 1: as improper as otherwise would be regarded. But yes, I
Speaker 1: think the clear answer is there was an embezzlement at
Speaker 1: a large scale. It appears there was some sort of
Speaker 1: backdoor relationship between f t X and Alameda and bank Man.
Speaker 1: Freed reportedly transferred ten billion dollars of customer funds from
Speaker 1: f t X to Alameda in early November. Does that
Speaker 1: transfer now seems suspicious? It looks incredibly suspicious. It looks
Speaker 1: and it appears to be pretty clear that he was
Speaker 1: using customer and user assets to prop up what was,
Speaker 1: you know, his quant hedge fund, which was experiencing severe
Speaker 1: loss as many of need is essentially, you know, using
Speaker 1: other people's money to prop up a hedge fund that
Speaker 1: was clearly troubled and insolvent and cascading into the disaster
Speaker 1: we now see. This seems sudden. Do companies normally go
Speaker 1: bankrupt on such short notice? Well, and short notice, I
Speaker 1: guess it depends short notice to whom um But in
Speaker 1: this particular case, as it relates to fp X, everything
Speaker 1: happened very quickly, you know, in the course of a
Speaker 1: week or two, and it is a little bit unusual
Speaker 1: that there wasn't some sort of sense that there was
Speaker 1: this decline happening and that there would be a need
Speaker 1: for a bankruptcy filing it It did happen rather quickly.
Speaker 1: It's not as uncommon in the crypto space, just given
Speaker 1: the volatility of the market and frankly the pace in
Speaker 1: which things seem to happen. So I think in general
Speaker 1: the answer is no. You know, things aren't usually happened
Speaker 1: this quickly without any sort of notice on the one hand.
Speaker 1: On the other hand, in this industry, I think it
Speaker 1: is less uncommon. I understand this is what's known in
Speaker 1: the industry as a free fall bankruptcy. Yes, and so
Speaker 1: what the free fall bankruptcy is getting at is typically
Speaker 1: a company, particularly accompany the size of ft X, would
Speaker 1: want to file a bankruptcy in an organized and methodical
Speaker 1: fashion where they thought about what they're going to need
Speaker 1: immediately upon the bankruptcy filing to facilitate a smooth transition
Speaker 1: into bankruptcy. And so often in a bankruptcy that is
Speaker 1: not a free fall, there will be you know, six seven, ten,
Speaker 1: and in this case, perhaps it could have been even
Speaker 1: more what are called first day motions. And these are
Speaker 1: motions that are since we filed on the first day,
Speaker 1: they're referred to as first day motions. And the idea
Speaker 1: is that giving some of the limitations into the bankruptcy code,
Speaker 1: extraordinary relief is needed immediately to sort of smooth to
Speaker 1: allow for a smooth transition into bankruptcy. For instance, upon
Speaker 1: a bankruptcy filing, a company can't pay any debt that
Speaker 1: is a pre bankruptcy debt. There's exceptions that can be
Speaker 1: made into context of a first day motion. Let's say,
Speaker 1: for instance, the company is in the middle of a
Speaker 1: payroll cycle. Well, the last thing you want is for
Speaker 1: a company to file bankruptcy and therefore to be no
Speaker 1: provision immediately for assuring that employees that may have accrued
Speaker 1: wages prior to the filing in the middle of the
Speaker 1: payroll period aren't going to have their payroll honored in
Speaker 1: the ordinary course. So a first day motion might provide
Speaker 1: for a request of the bankruptcy court to allow for
Speaker 1: the we need to continue in the ordinary course to
Speaker 1: make payroll. So in this case, in the case of
Speaker 1: f t X, the free fall bankruptcy is associated with
Speaker 1: the fact that this is a rather large company and
Speaker 1: on the day they filed, they simply filed a petition
Speaker 1: with no other pleatings or other paperwork for any sort
Speaker 1: of relief, and for that matter, no pleatings or any
Speaker 1: filings that would tell anybody what's going on with the
Speaker 1: company's financials and what problems led to the company's bankruptcy filing,
Speaker 1: and what issues are the front and center, at least
Speaker 1: immediately now that the company is in bankruptcy. So the
Speaker 1: free fall concept suggests that this was done at the
Speaker 1: last minute without much planning, and it's very unusual for
Speaker 1: a large company to find itself in a free fall
Speaker 1: bankruptcy because usually there's enough time and planning that takes
Speaker 1: place to prevent that from happening. Do we know what
Speaker 1: caused the bankruptcy? There was an effort on the part
Speaker 1: of I guess we'll call them SPS to support Alameter Research,
Speaker 1: which was a hedge fund but sister company of the
Speaker 1: exchange f t X, and the transfer of that ten
Speaker 1: billion dollars clearly left a hole in the liquid assets
Speaker 1: of f t X that customers presumably you know, would
Speaker 1: want to withdraw or have a basis to withdraw, and
Speaker 1: it wasn't going to be there anymore. The bankruptcy and
Speaker 1: the issues surrounding the liquidity enlargements had to do with
Speaker 1: reporting initially by coin death, suggesting that the companies in
Speaker 1: this case Alameter Research, most of its assets were in
Speaker 1: f t X generated or an f t X coin.
Speaker 1: The f t t and that token, if you will,
Speaker 1: really is a token which value is tied to providing
Speaker 1: customers of f t X with discounts on trade. So
Speaker 1: there isn't a lot of intrinsic value associated with that token,
Speaker 1: and there was a lot of the token in Alameter Research,
Speaker 1: which called into question the value of the hedge fund,
Speaker 1: which led to the need for it to be supported
Speaker 1: by customer assets, which were transferred by sbs in part
Speaker 1: to bolster the strength of the fund. And the reason
Speaker 1: why the fund was under pressure was due in part
Speaker 1: to the coin death revelation that that's where Alometer Research
Speaker 1: was largely holding. And then you begin to peel the
Speaker 1: onion back a little bit and realize that there's no
Speaker 1: liquidity because this stuff doesn't really have an intrinsic value,
Speaker 1: and so it sort of created a run on the bank,
Speaker 1: particularly when Finance, which had made an investment in f
Speaker 1: t X, was basically liquidating its position as fd X
Speaker 1: and Finance were parting ways. So it created pressure on
Speaker 1: f t X and it's token, and that news hit
Speaker 1: and customers became concerned, and there was increasing efforts on
Speaker 1: the part of the customer based in f t X
Speaker 1: to withdraw their assets from ft X, which is sort
Speaker 1: of the classic run on the bank, if you will,
Speaker 1: And knowing that f t X didn't have the wherewithal
Speaker 1: withwid assets to honor those customer withdrawals, it had to
Speaker 1: stop that process, which inevitably led to the need to
Speaker 1: file for a bankruptcy. Does that transfer now seems suspicious?
Speaker 1: It looks incredibly suspicious. It looks and it appears to
Speaker 1: be pretty clear that he was using customer and user
Speaker 1: assets to prop up what was, you know, his quant
Speaker 1: hedge fund, which was experiencing severe loss as many of
Speaker 1: these essentially, you know, using other people's money to prop
Speaker 1: up a hedge fund that was clearly troubled and insolvent
Speaker 1: and cascading into the disaster we now see. The crypto
Speaker 1: exchange was as a privately held company, which means it
Speaker 1: doesn't have to share its financial statements with the public.
Speaker 1: Do you think that led to the problems that we're
Speaker 1: seeing today, Well, there's no question that the fact that
Speaker 1: these exchanges are not subject to clear regulations and rules
Speaker 1: is a big problem and is certainly a contributing factor
Speaker 1: to what was able to be accomplished by ft X
Speaker 1: in terms of transfer and funds undetected by auditors. Frankly
Speaker 1: to Alameda, if there was a more robust regulatory environment
Speaker 1: and rules in place, with the regulatory oversight, we wouldn't
Speaker 1: necessarily have as big of a problem as we have today.
Speaker 1: So yes, does Ray have a grasp of the balance sheet.
Speaker 1: John Ray made it pretty clear in the paper work
Speaker 1: that was filed that that none of the accounting is
Speaker 1: really reliable at this point, and even accounting for assets
Speaker 1: games such as bank accounts, he doesn't even have a
Speaker 1: proper list of the bank accounts where the money is,
Speaker 1: so we really don't have any sense of the asset
Speaker 1: values that maybe there went alone the liabilities. This is
Speaker 1: a Chapter eleven bankruptcy reorganization. What does it look as
Speaker 1: if ft X can be or is this going to
Speaker 1: turn out more likely to be a liquidation? And its core,
Speaker 1: this is going to be a liquidation just given the
Speaker 1: damage to the brand and the fact that there doesn't
Speaker 1: appear to be a real asset value beyond other people's money.
Speaker 1: At its core, it's going to be a liquidation. There's
Speaker 1: a number of entities, many of which are not actually
Speaker 1: in bankruptcy right now, subsidiaries of some of these debtors
Speaker 1: that may ultimately be businesses that can be sold. And
Speaker 1: how likely is it that customers will get any of
Speaker 1: their money back? I think there is hope that customers
Speaker 1: will get some money back, It will be not for
Speaker 1: quite some time, and customers will be likely to get
Speaker 1: pennies on the dollar, and maybe pennies is a little
Speaker 1: too bleak, but customers will not get most of their
Speaker 1: deposits and assets back from this exchange. And the question
Speaker 1: really is how successful Mr Ray and the other newly
Speaker 1: appointed directors are in terms of bringing value and asset
Speaker 1: transfers back into the bankruptcy estates to enhance recoveries for
Speaker 1: customers and creditors. Thanks Jonathan. That's Jonathan Jansen, a partner
Speaker 1: at Greenberg Gloucesker. And that's it for this edition of
Speaker 1: the Bloomberg Law Show. Remember you can always get the
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