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FTX books a ‘complete failure’, investors did ‘little homework’ with billions owed

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Embattled and bankrupt, cryptocurrency exchange FTX said it owes its top 50 creditors more than $3 billion. The largest single lender is out around $226 million, according to a court filing.

As FTX and founder Sam Bankman-Fried continue the fall from grace, contagion is spreading. Almost immediately following the fallout, Solana DeFi lost almost $700 million in value, while digital-asset brokerage Genesis is now warning of possible bankruptcy.

A ‘complete failure’

As lawsuits and investigations pile on, corporate restructuring expert John J. Ray III has his hands full as the firm’s new CEO.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” Ray wrote in a court filing last week. “From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”

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The nature of Ray’s comments are particularly grave considering his experience with some of the major corporate disasters of his time, including overseeing the Enron liquidation after its 2001 collapse.

“That quote already has become the most notable quote and most retweeted quote in the history of bankruptcy law,” said David Tawil, a former bankruptcy attorney and current president and co-founder of ProChain Capital, a crypto-asset fund. “It seems that the books and records of FTX were in absolute shambles.”

Investors, customers owed billions

Tawil said investors did “very little homework” before giving money over to FTX and Alameda, Bankman-Fried’s trading fund that is implicated in the FTX disaster. He said investors likely relied solely on summary materials and Bankman-Fried’s word before handing over large sums. Affected investors stretch beyond the venture-capital space, as well. The Ontario Teachers’ Pension Plan wrote off a $95 million loss from its holding in FTX.

“Shame on them because they obviously did not do the research that they were supposed to do on the venture FTX to make sure that the books and records were in line, that the assets were where they’re supposed to be, that the risk controls were in place,” Tawil said.

Still, Tawil drew a stark contrast between FTX’s major investors and the customers and depositors who used the exchange platform to hold and trade cryptocurrency.

“They were told in their documents that their Bitcoin and Ether and other cryptocurrencies would be segregated and would not be siphoned off and used for other matters,” Tawil said. “So I think those folks did everything that they did. The onus there falls on regulators and lawmakers to make sure the likes of something like a centralized exchange, like FTX, does what in fact it says it’s going to do in their customer agreements.”

According to court filings, FTX may owe more than one million people money, though customers are “losing hope” they’ll ever be made whole, the Wall Street Journal reported.

Watch the full interview above for Tawil’s take on the “hard lessons” learned here and where it is safest to store cryptocurrency.

SIMONE DEL ROSARIO: Embattled and bankrupt, cryptocurrency exchange FTX says it owes its top 50 creditors more than $3 billion, the largest lender out nearly a quarter of a billion according to court filings. Now as FTX continues its catastrophic fall from grace. I’m joined now by David towel president and co founder of Progen. Capital. David, we saw the contagion of this collapse immediately take Solana defi, which lost almost 700 million in value from FTX’s fallout, are the dominoes still falling here?

DAVID TAWIL: Likely they are still falling behind the scenes, it’ll probably take another couple of weeks until we know the truth of it all. And then hopefully the dust settles.

SIMONE DEL ROSARIO: Who is most susceptible to this right now.

DAVID TAWIL: I’m going to say something that’s totally easily extrapolated, which is anybody who is directly or indirectly associated with FTX or Alameda,not only because of a loss of value, but also because of a freezing a value potentially. So you know, other counterparties that have some FTX, you know, may be able to go ahead and withstand the loss. But they cannot afford to go ahead and provide all of their customers or depositors in turn with immediate liquidity. And so therefore, they’ll go, they’ll have to go ahead. And we’ve already seen some of this freeze assets, nobody to move cryptocurrency in or out. And so therefore, and that’s where the idea of contagion comes, is that if the entire market has to freeze, that unfortunately, will create an incredibly difficult set of circumstances?

SIMONE DEL ROSARIO: Well, FTX’S is new CEO, John Ray, the third made this damning statement in a court filing last week, he said, Never in my career have I seen such a complete failure of corporate controls, and such a complete absence of trustworthy financial information as occurred here. And this is the guy that’s been in charge of some of the biggest corporate disasters in history. I mean, he saw the liquidation of Enron. So quite a statement from him. And given that I wanted to ask you, what sort of homework Do you think investors did? Before shelling billions over to Sam Bankman-Fried?

DAVID TAWIL: Very, very little homework. Let me go back to the quote. So I’m a bankruptcy attorney, by training and by practice for a bunch of years, and I was a distressed debt investor for a bunch of years before entering into crypto. So I’m particularly poised to go ahead and comment on this. But I think that that quote, already has become the most notable quote and most retweeted quote, in the history of bankruptcy law. And I don’t think we’ll, we’ll it will stop. And it seems that the books and records of FTX were an absolute shambles. And what I mean by that is there was just no accounting. And that makes piecing things together much more difficult, I think in terms of what investors and depositors and so forth, did prior to letting their money go to FTX or to Alameda, which is the related hedge fund is really just summary materials that they may have received. And frankly, sandbank been Freed’s word on most matters to give them to give those investors comfort.

SIMONE DEL ROSARIO: And these investors, they’re, they’re not just, you know, risky investors out there, or people who are trying to invest in the crypto space, the Ontario teachers pension plan wrote off a $95 million loss from their holding in FTX. What is the lesson here when it comes to investing and especially investing in crypto?

DAVID TAWIL: So let’s let’s let’s do one thing before we do that, which is there are investors in FTX, the entity like the Ontario teachers pension fund, and then some very large venture capital funds that own a piece of the equity of the ownership stake of FTX. I think we now will all agree regardless of what happens going forward, there’s zero value to the franchise, right? The name FTX has been sullied for eternity at this point, and it’s very unlikely that there’s going to be a resuscitation of the business although their chief restructuring officer has come out and said there’s certain units that are solvent, but nevertheless, let’s assume that $32 billion valuation which is I think, where they last raised money is essentially down to zero. The other type of stakeholder here are the customers and depositors those that used FTX is exchange processes in order to go ahead and trade in cryptocurrency, those folks also have been harmed massively, we don’t know what their recovery is going to be, it’s going to take a very long time, they’re certainly not going to get back into bitcoin in the ether that they transferred. Because FTX does not have any bitcoin or ether. So they’re going to get some other form of value of whatever it is that FTX holds, those people also have a duty going forward. But their duty is not necessarily that they didn’t read their documentation. They were told in their documents that their Bitcoin and ether and other cryptocurrencies would be segregated and would not be siphoned off and used for other matters. So I think those folks did everything that they did the onus there falls on regulators and lawmakers to make sure the likes of something like a centralized exchange, like FTX does what in fact, it said, it says it’s going to do in their customer agreements with respect to the VC funders to go back to Ontario teachers, they obviously, shame on them, because they did obviously not do the research that they were supposed to do on the venture FTX to make sure that the books and records were in line, that the assets were where they’re supposed to be that the risk controls were in place, and so on and so forth. So there’s two sets of lessons to be had here, one for the the investing public, mostly of which were institutional investors. And then the other for the retail deposit, frankly, think that they did what they were supposed to do. It is FTX the fail to them in not doing what it contracted to do.

SIMONE DEL ROSARIO: David, I’m really glad that you brought that up. I’m wondering, and I know that this is more of a hardcore perspective on crypto, but should these retail investors be keeping their crypto on exchanges at all?

DAVID TAWIL: It’s a great question. And it really goes to the philosophical underpinnings of cryptocurrency. Cryptocurrency, as it was first imagine, was supposed to be something that was decentralized, we were supposed to go ahead and be removing all middlemen, exchanges, brokerages, Agent agents, other types of intermediaries that we have in centralized finance, which we use banks and Brooklyn exchanges, and so on and so forth, in order to move out and properly and crypto was going to go ahead and remove all that and make things much more efficient and much cheaper to go ahead and function. Unfortunately, a lot of people don’t like the onus, or the requirements, the the obligations, the pressure that come along with holding your own value, you’d rather pass it on to a large institution, pay them a little bit of money, and then be able to sleep well at night. And this teaches us that even the largest of institutions, you know, we can’t always rely on them, there are always going to be bad actors. And those bad actors are going to violate the law at times. And you know, misuse the trust of the public, and do things that they’re not supposed to. And so if you want the most foolproof way of making sure that your value is safe, it is only you that can make sure of that process, not giving it off to somebody else.

SIMONE DEL ROSARIO: David Tawil president and co founder of pro chain capital. Thank you so much for your time today.

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Embattled and bankrupt, cryptocurrency exchange FTX said it owes its top 50 creditors more than $3 billion. The largest single lender is out around $226 million, according to a court filing.

As FTX and founder Sam Bankman-Fried continue the fall from grace, contagion is spreading. Almost immediately following the fallout, Solana DeFi lost almost $700 million in value, while digital-asset brokerage Genesis is now warning of possible bankruptcy.

A ‘complete failure’

As lawsuits and investigations pile on, corporate restructuring expert John J. Ray III has his hands full as the firm’s new CEO.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” Ray wrote in a court filing last week. “From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”

Tom Brady, Shaquille O’Neal, 9 other celebrities sued in FTX class action

The nature of Ray’s comments are particularly grave considering his experience with some of the major corporate disasters of his time, including overseeing the Enron liquidation after its 2001 collapse.

“That quote already has become the most notable quote and most retweeted quote in the history of bankruptcy law,” said David Tawil, a former bankruptcy attorney and current president and co-founder of ProChain Capital, a crypto-asset fund. “It seems that the books and records of FTX were in absolute shambles.”

Investors, customers owed billions

Tawil said investors did “very little homework” before giving money over to FTX and Alameda, Bankman-Fried’s trading fund that is implicated in the FTX disaster. He said investors likely relied solely on summary materials and Bankman-Fried’s word before handing over large sums. Affected investors stretch beyond the venture-capital space, as well. The Ontario Teachers’ Pension Plan wrote off a $95 million loss from its holding in FTX.

“Shame on them because they obviously did not do the research that they were supposed to do on the venture FTX to make sure that the books and records were in line, that the assets were where they’re supposed to be, that the risk controls were in place,” Tawil said.

Still, Tawil drew a stark contrast between FTX’s major investors and the customers and depositors who used the exchange platform to hold and trade cryptocurrency.

“They were told in their documents that their Bitcoin and Ether and other cryptocurrencies would be segregated and would not be siphoned off and used for other matters,” Tawil said. “So I think those folks did everything that they did. The onus there falls on regulators and lawmakers to make sure the likes of something like a centralized exchange, like FTX, does what in fact it says it’s going to do in their customer agreements.”

According to court filings, FTX may owe more than one million people money, though customers are “losing hope” they’ll ever be made whole, the Wall Street Journal reported.

Watch the full interview above for Tawil’s take on the “hard lessons” learned here and where it is safest to store cryptocurrency.

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