The long-awaited report from Robert J. Cleary, the independent examiner overseeing the FTX bankruptcy, has brought to light a host of concerning details about the collapse of the cryptocurrency exchange and the subsequent Chapter 11 proceedings. Cleary, a former federal prosecutor known for his role in the Unabomber case, presented his comprehensive findings last week, offering a thorough examination of the intricate financial and operational missteps at FTX.
Cleary’s 210-page report notably exonerated Sullivan & Cromwell, the law firm representing FTX in its bankruptcy, which had been a major focus of his inquiry. However, the report’s revelations extend far beyond the actions of the legal team.
Whistleblower Settlements Exceed $25 Million
One of the most startling disclosures was FTX’s expenditure of over $25 million in settlements to seven whistleblowers. These payments were made to individuals who accused the exchange of various forms of misconduct. Most of these whistleblowers were either employees of FTX or its affiliate, Alameda Research, and were not named in the report. The exception was Pavel Pogodin, a now-deceased attorney who had sued FTX in 2019 for alleged bitcoin market manipulation.
Details of these payoffs were also highlighted in a lawsuit FTX filed against Daniel Friedberg, the former chief regulatory officer, accusing him of orchestrating these settlements to cover up fraud. Friedberg has denied these allegations.
Lavish Spending on Executives
The examiner’s report also highlighted extravagant spending on executives. Over $15 million was spent on real estate, a yacht, and a marina slip for Sam Trabucco, the former co-CEO of Alameda Research. Furthermore, Trabucco made significant withdrawals from FTX in September 2022, just two months before the company’s bankruptcy filing. Despite these revelations, Trabucco’s lawyer did not respond to requests for comment, and Trabucco has remained out of the public eye since the collapse of FTX.
Insolvency of FTX’s U.S. Operations
Contrary to claims by FTX founder Sam Bankman-Fried, the report confirmed that FTX’s U.S. arm was insolvent when it entered bankruptcy on November 11, 2022. The U.S. unit had a $141 million deficit, far worse than previously understood. The report also indicated that FTX.US had faced financial shortfalls long before November 2022, which were covered by transferring funds from other FTX entities. Cleary recommended further investigation into FTX’s U.S. operations, citing significant public interest and the potential for uncovering additional misconduct.
Legal Oversight and Ethical Concerns
Ryne Miller, general counsel for FTX.US and a former partner at Sullivan & Cromwell, was found unaware of Alameda’s misuse of FTX customer funds. Nevertheless, he knew about an exemption that Alameda had from FTX’s automatic liquidation rules. The examiner found evidence that Miller, or Sullivan & Cromwell under his direction, informed U.S. authorities about the financial discrepancies at FTX.US before the bankruptcy filing. A Signal message reviewed by the examiner showed Miller telling FTX executives about his intention to report the issue to regulators, to which Bankman-Fried did not object.
Involvement of Fenwick & West
The report also scrutinized the role of Fenwick & West, FTX’s primary U.S. outside counsel. The firm was involved in various matters closely linked to FTX’s mismanagement, including acquisitions, government investigations, and compliance issues. Fenwick lawyers participated in issuing “founder loans” to insiders and in efforts to conceal the close relationship between FTX and Alameda from regulators. Despite these involvements, the examiner did not find any wrongdoing by Fenwick. The firm defended its actions, stating it provided routine legal services that were misused by Bankman-Fried to further his fraudulent activities. Fenwick received approximately $22 million in legal fees from FTX.
As the FTX bankruptcy case continues to unfold, Cleary’s report underscores the extensive mismanagement and ethical breaches within the company. These revelations not only highlight the complexities of the bankruptcy process but also raise critical questions about corporate governance and oversight in the burgeoning cryptocurrency industry.