Cryptocurrency exchange FTX is facing a difficult time as it battles allegations of fraud and theft.
The company is seeking approval from a U.S. bankruptcy court to auction off pieces of its business and to keep customer names secret for at least six months while it works to recover funds lost in what was allegedly a huge fraud.
FTX’s founder, Sam Bankman-Fried, was indicted on two counts of wire fraud and six conspiracy counts last month in Manhattan federal court for allegedly stealing customer deposits to pay debts from his hedge fund, Alameda Research, and lying to equity investors about FTX’s financial condition. He has pleaded not guilty.
The company is now turning to U.S. Bankruptcy Judge John Dorsey in Delaware to approve procedures for selling affiliates LedgerX, Embed, FTX Japan, and FTX Europe as a way of raising funds for customers, who have lost potentially billions of dollars.
According to FTX court filings, the four companies FTX intends to sell are relatively independent from the broader FTX group and each has its own segregated customer accounts and separate management teams.
However, the company has said it is not committed to selling any of the companies, but that it received dozens of unsolicited offers. FTX expects to generate additional bids by scheduling auctions in February and March.
The U.S. Trustee, a bankruptcy watchdog that is part of the Department of Justice, has opposed selling the affiliates before an extensive investigation can be done into the extent of the FTX fraud allegedly carried out by Bankman-Fried.
Despite the onetime billionaire acknowledging shortcomings in FTX’s risk management practices, he has said he does not believe he is criminally liable.
In addition to customer funds lost, the company’s collapse has also cost equity investors potentially billions of dollars.
Some of those investors were disclosed in a Monday court filing, including American football star Tom Brady, Brady’s former wife supermodel Gisele Bündchen, and New England Patriots owner Robert Kraft.
FTX has asked to keep its customer names secret for at least six months, over the objections of media companies such as the New York Times and the U.S. Trustee. FTX has said it may seek further extensions, subject to court review.
The company has argued that typical bankruptcy rules which require disclosures about creditors, including as many as 9.5 million customers, could expose them to scams, violate privacy laws, and allow rivals to poach them, undermining FTX’s value as it hunts for buyers.
Its official creditors’ committee and ad hoc groups of FTX customers has supported FTX’s request.
The media companies have argued that creditors should not be allowed to fight anonymously over how much money they should receive. They argue that this lack of transparency may not be in the best interest of the public and the court.
This situation highlights the risks and complexities involved in the world of cryptocurrency and serves as a reminder that investors should always do their due diligence before investing in any project.
As always, caveat emptor.