FTX's new CEO claims company lied to banks for years about misuse of customer funds

FTX senior leaders lied to banks as far back as 2020 about the commingling and misuse of customer deposits, according to a report released Monday by CEO John J. Ray III.

The defunct cryptocurrency exchange — which once serviced more than 1 million users — claimed to be "the vanguard of customer protection efforts in the crypto industry." However, Ray's report alleged this public-facing fidelity to investors was a "mirage," and that FTX co-founder and ex-CEO Sam Bankman-Fried, along with other senior executives, mixed customer deposits with corporate funds and "misused them with abandon." 

"Bankman-Fried, along with FTX.com's co-founder, Gary Wang, and Director of Engineering, Nishad Singh (the ‘FTX Senior Executives’), and others at their direction, used commingled customer and corporate funds for speculative trading, venture investments, and the purchase of many luxury properties, as well as for political and other donations designed to enhance their own power and influence," the report stated. 

At the time of FTX's collapse, the exchange owed customers nearly $8.7 billion, the report said. 

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Ray alleged that an unnamed lawyer and Bankman-Fried lied to banks and auditors, executed false documents and moved the company from jurisdiction to jurisdiction "in a continual effort to enable and avoid detection of their wrongdoing." 

The Wall Street Journal identified the attorney as Daniel Friedberg, FTX's former chief regulatory officer. Friedberg has been cooperating with investigators and claims to have had no knowledge of the misuse of FTX customer deposits, the Journal reported.

Representatives for Bankman-Fried did not immediately respond to a request for comment. 

Bankman-Fried, 31, faces 13 federal charges related to the collapse of FTX and defrauding of its customers. He has pleaded not guilty. 

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The FTX founder capitalized on a rise in bitcoin and other digital assets to accumulate an estimated net worth of $26 billion and became an influential political and philanthropic donor before FTX declared bankruptcy in November.

The cryptocurrency exchange collapsed after a rush of customer withdrawals following reports that it had merged assets with Alameda Research, Bankman-Fried's crypto-focused hedge fund.

Federal prosecutors have accused Bankman-Fried of misleading FTX investors and lenders and stealing billions of dollars in customer funds to buy real estate, make political contributions through an illegal straw-donor scheme and make up for losses at Alameda. He is also charged with bribing Chinese officials.

Three of FTX's top executives have pleaded guilty on federal charges and are now cooperating with investigators. 

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As told in the report, FTX "had difficulty establishing bank relationships" upon its founding because many banks were skeptical of the emerging cryptocurrency industry. To circumvent rigorous bank restrictions, FTX senior executives allegedly funneled customers' deposits and withdrawals through Bankman-Fried's other firm, Alameda Research, and other affiliates and "made misrepresentation to banks about the purpose for which it was using the accounts," the report said.

FTX and its related companies established an entity called North Dimension to get access to banks. The report alleges that at the direction of the unnamed attorney — reportedly Friedberg — FTX and its related companies "falsely represented to a bank that North Dimension was a crypto trading firm with substantial operations, when in fact North Dimension was a shell company with no operations."

Beginning in April 2021, FTX opened deposit accounts for North Dimension and began instructing FTX customers to wire funds to them, the report states. 

When a less senior attorney at FTX group discovered and raised concerns that North Dimension accounts were being used to fund FTX exchange customer withdrawals, the unnamed senior attorney fired him, according to the report. 

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This attorney, along with Bankman-Fried, allegedly created sham agreements that purported to legitimize certain improper transfers and arrangements of FTX and its related companies, the report said. One such fake agreement made in early 2021 was backdated by nearly two years. It was given to an external auditor retained to prepare financial documents for FTX's contemplated initial public offering. 

A person close to Friedberg disputed the report's characterization of the FTX-Alameda intercompany agreement and said the former FTX chief regulatory officer did not know that North Dimension was used for FTX customer funds, the Wall Street Journal reported. The outlet's source acknowledged that Friedberg fired a lawyer who briefly worked as Alameda's general counsel but asserted that the firing was related to other employment concerns, not their whistleblowing. 

Ray, who was tasked with restructuring FTX, said his team had recovered $7 billion in assets that can be sold to pay back customers. 

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"The release of this report furthers our stated objective of transparency, both about the facts uncovered about the operation of FTX.com and the important issues being navigated as we seek to maximize recoveries," Ray said in a statement.

"The image that the FTX Group sought to portray as the customer-focused leader of the digital age was a mirage. From the inception of the FTX.com exchange, the FTX Group commingled customer deposits and corporate funds, and misused them with abandon at the direction and by the design of previous senior executives. We will continue to report our analysis and findings as our work progresses, and remain committed to recovering as much value as possible for creditors."

Fox Business' Breck Dumas, Marta Dhanis, Kelly O'Grady and Landon Mion and Reuters contributed to this report