One question remains about FTX customer funds

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John Ray III, the executive running FTX through its messy bankruptcy, has filed another interim report about misuse of customer funds.

Ray’s broad conclusion is not especially surprising, but there are some fun details — and one unanswered question. First the summary:

. . . from the inception of the FTX.com exchange, the FTX Group commingled customer deposits and corporate funds, and misused them with abandon.

Right, we’ve gotten that impression from heaps of testimony and bankruptcy documents. Also:

To minimise the risk of scrutiny, the FTX Senior Executives and Ellison referred to this sham account only as “our Korean friend’s account.” The account reflected that their “Korean friend” owed the FTX.com exchange $8.9 billion.

Er, OK.

More important is the loose end(s), which showed up in a footnote in the filing, with our emphasis:

In accordance with regulations in Japan, Cyprus, and Singapore, the FTX Group did segregate customer funds in those jurisdictions. Unless otherwise noted, the findings in this report do not include these jurisdictions, and the report does not address FTX.US, as to which the Debtors’ investigation remains ongoing.

Remember, in the heady days surrounding FTX’s failure, Sam Bankman-Fried repeatedly argued that customers of FTX.US were “fine”. They were not fine.

Even if FTX.US was better managed, it didn’t provide as much protection from US law as executives might’ve hoped. While FTX.com was domiciled offshore, its transactions were still happening in US dollars. And SBF & Co still allegedly made misrepresentations to US banks to secure on-ramps and off-ramps to/from the US banking system for clients’ funds, according to the documents.

From the filing:

This section describes some of the Debtors’ ongoing analysis to attempt to trace the sources and uses of customer funds, focusing primarily on several U.S. dollar-denominated accounts that the FTX Group used to receive customer deposits and fund customer withdrawals . . . 

. . . after U.S. banks started rejecting wires involving customers to and from certain Alameda bank accounts, the FTX Group lied to a U.S. bank (“Bank-1”) to induce it to open new accounts in the name of North Dimension, which the FTX Group falsely claimed was a crypto trading firm. In fact, the FTX Senior Executives, Attorney-1 and other senior FTX Group employees secretly intended to use, and did use, the North Dimension accounts to receive customer deposits and fund customer withdrawals for FTX.com.

Attorney-1 and Bankman-Fried played leading roles in carrying out this deception. Specifically, Attorney-1 instructed an FTX Group employee to copy and paste into the application for North Dimension’s bank accounts the information that Alameda had previously submitted on its own applications to open its bank accounts.

The employee did so, and as a result, the application submitted to Bank-1 falsely represented that North Dimension “operates a cryptocurrency trading business.” In response to a due diligence questionnaire that Bank-1 required as part of the application process for trading businesses, the FTX Group further falsely described North Dimension as a proprietary and OTC trading firm with 2,000 counterparties and average monthly trading volume of $10 million . . . 

Although Attorney-1, Bankman-Fried and others also knew that they intended to use a North Dimension account to process customer deposits and withdrawals for the FTX exchanges, that information was not disclosed on the application to open the account. Further, in response to Bank-1’s question in the application, “Is the business a money services business (MSB)?” the FTX Group falsely responded “No.” But as Attorney-1 well knew, the FTX Group intended to use the North Dimension account to receive and pay funds to customers, and thus was acting as a money services business.

There’s lots more juicy detail — allegations that a junior attorney was fired after raising concerns; that political donations and Bahamas property purchases were funded with improperly commingled customer funds; and more — at the full filing, which you can find here.