Bankruptcy of FTX
In November 2022, Binance CEO Changpeng Zhao revealed on Twitter that his firm intended to sell its holdings of FTT, FTX's token, which triggered a spike in customer withdrawals from FTX that FTX was unable to fulfill, much like a bank run. Binance received $529 million worth of FTT as part of a sale of its equity in FTX in 2021. Zhao published his tweet soon after a report from CoinDesk stating that the bulk of the holdings of Alameda, Bankman-Fried's trading firm, were in FTT. Bloomberg and TechCrunch reported that any sale by Binance would likely have an outsized impact on FTT's price because of the token's low trading volume. The announcement by Zhao of the pending sale and disputes between Zhao and Bankman-Fried on Twitter led to a decline in the price of FTT and other cryptocurrencies. Shortly before, Zhao had criticized Bankman-Fried's lobbying efforts.
On November 8, Zhao announced that Binance had entered into a nonbinding agreement to purchase FTX due to a liquidity crisis at FTX. Zhao stated that Binance would complete due diligence soon and that all crypto exchanges should avoid using tokens as collateral. He also wrote that he expected FTT to be "highly volatile in the coming days as things develop". On the day of the announcement, FTT lost 80 percent of its value. On November 9, the Wall Street Journal reported that Binance had decided not to acquire FTX. Binance cited reports of FTX's mishandling of customer funds and pending investigations of FTX as the reasons the firm would not pursue the deal. Amid the crisis, Bankman-Fried was no longer a billionaire, according to the Bloomberg Billionaires Index. The very next day, Bloomberg reported that the Securities and Exchange Commission and Commodity Futures Trading Commission were investigating FTX and the nature of its connections to Bankman-Fried's other holdings.
On November 11, 2022, FTX, Alameda Research, and more than 130 associated legal entities declared bankruptcy. Anonymous sources cited by Reuters stated that, earlier in 2022, Bankman-Fried had transferred at least $4 billion from FTX to Alameda Research without any disclosure to the companies' insiders or the public. The sources said that the money transferred included customer funds and that it was ostensibly backed by FTT and shares in Robinhood. An anonymous source cited by The Wall Street Journal stated that Bankman-Fried had disclosed that Alameda owed FTX about $10 billion, which was secured through customer funds held by FTX when FTX had, at the time, $16 billion in customer assets. According to anonymous sources cited by The Wall Street Journal, the Chief Executive of Alameda Research, Caroline Ellison, told employees that Bankman-Fried was aware that FTX had lent its customers' money to Alameda to help it meet its liabilities.
Bankman-Fried resigned as CEO of FTX on November 11, 2022, and was immediately replaced by John J. Ray III, who from 2004 to 2009 had chaired the effort to recover Enron assets for creditors through litigation against numerous banks in the Enron Bankruptcy case. FTX and related entities filed for bankruptcy in Delaware on the same day.
One day after FTX declared bankruptcy, on November 12, Bankman-Fried was interviewed by the Royal Bahamas Police Force. On November 17, Ray stated in a sworn declaration submitted in bankruptcy court that according to the firm's records, Alameda Research had lent $1 billion to Bankman-Fried, adding, "Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information."
In the testimony Bankman-Fried had prepared to present in December 2022 to the House Financial Services Committee, he maintained that "[FTX] is solvent" but he was "pressured" by FTX general counsel and former partner at the Sullivan & Cromwell law firm, Ryne Miller, to declare bankruptcy. He also implied that the managing team and the law firms managing the bankruptcy were using the Enron precedent in an effort to reap inordinately large amounts of fees from the process. After his arrest and imprisonment, he did not testify in Congress; John J. Ray III testified instead.
