At the Wall Street Journal, "The emerging picture of what went wrong suggests the crypto empire was a mess almost from the start, with few boundaries, financial or personal":
NASSAU, Bahamas—Sam Bankman-Fried’s $32 billion crypto-trading empire collapsed in an incandescent bankruptcy last week, prompting irate customers, crypto acolytes and Silicon Valley bigwigs to ask how something that seemed so promising could have imploded so fast. The emerging picture suggests FTX wasn’t simply felled by a rival, or undone by a bad trade or the relentless fall this year in the value of cryptocurrencies. Instead, it had long been a chaotic mess. From its earliest days, the firm was an unruly agglomeration of corporate entities, customer assets and Mr. Bankman-Fried himself, according to court papers, company balance sheets shown to bankers and interviews with employees and investors. No one could say exactly what belonged to whom. Prosecutors are now investigating its collapse. Mr. Bankman-Fried’s companies had neither accounting nor functioning human-resources departments, according to a filing in federal court by the executive brought in to shepherd FTX through bankruptcy. Corporate money was used to buy real estate, but records weren’t kept. There wasn’t even a roster of employees, to say nothing of the terms of their employment. Bankruptcy filings say one entity’s outstanding loans include at least $1 billion to Mr. Bankman-Fried personally and $543 million to a top lieutenant. The lives of the people who ran FTX and its related companies were similarly blurred. Ten of them lived and worked together in a $30 million penthouse at an upscale resort in the Bahamas. The hours were punishing, and the lines between work and play were hard to discern. Romantic relationships among Mr. Bankman-Fried’s upper echelon were common, as was use of stimulants, according to former employees. Mr. Bankman-Fried, 30 years old, kept a hectic schedule, toggling between six screens and getting by on a few hours of sleep a day. He was at times romantically involved with Caroline Ellison, the 28-year-old CEO of his trading firm, Alameda Research, according to former employees. “Nothing like regular amphetamine use to make you appreciate how dumb a lot of normal, non-medicated human experience is,” Ms. Ellison once tweeted. A lawyer for Ms. Ellison declined to comment. To the outside world, Mr. Bankman-Fried was the mayor of cryptoland, the man charged with convincing lawmakers, investors and enthusiasts that he’d built a new kind of finance. He urged Congress and regulators to approve his model for crypto trading. On his cryptocurrency trading exchange, FTX, positions and risk were cross-checked by computers, and algorithms would react within milliseconds to protect bad trades from spilling over to hurt other customers, he said. On Twitter, he admonished competitors for practices he called unsafe. But behind the scenes, Mr. Bankman-Fried was taking huge risks himself. Though he said publicly that Alameda was just a regular user on the exchange, the firm ran up a bill of $8 billion buying stakes in startups, trading on credit that no other user could get. Much of that money, much of which belonged to FTX’s customers, is likely gone. FTX’s swift collapse—it went from paragon to bankrupt in just over a week—has renewed questions about crypto’s viability, its unregulated status and how so many well-heeled investors could have been misled for so long. Investors have poured hundreds of billions of dollars into digital currencies in recent years. Staid financial institutions were finally getting in on the action, too. The executive tapped to guide Mr. Bankman-Fried’s companies through bankruptcy said the state of FTX’s affairs was the biggest mess he had seen in a decadeslong career that includes unwinding the accounting scandal that was Enron Corp. In a court filing he said many of the firm’s records of its digital assets seemed to be missing or incomplete; in many cases, he was unable to locate relevant bank accounts. In last week’s bankruptcy papers, a Kenya-based money-transfer company was listed as an FTX entity. That surprised its CEO, Elizabeth Rossiello. In a 2021 financial report, FTX said it had agreed to buy her company for about $220 million. FTX never did. There was no agreement, at any price, said Ms. Rossiello. “We were going to be their exclusive partner in Africa,” she said, nothing more. “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,” John J. Ray III said in court papers. A full accounting of what went wrong at FTX is likely months away, but a reconstruction of what the firm did and how its executives operated makes plain its public image—a team of brilliant quants bringing a sophisticated, digital approach to risk—was a mirage. Mr. Bankman-Fried has blamed the misuse of customer funds on sloppy record-keeping and a flood of unexpected customer withdrawals...
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