FTX Feeder Funds?

On November 11, 2022, FTX Trading Ltd. dba FTX.com and over 130 related entities filed petitions in the U.S. Bankruptcy Court for the District of Delaware for relief under Title 11 of the United States Code.

According to the bankruptcy court records, the day leading to the Chapter 11 filings, FTX’s founder Samuel Benjamin Bankman-Fried, reportedly resigned and authorized the appointment of John J. Ray III as the Chief Executive Officer to oversee “any restructuring and insolvency related proceeding that may be appropriate or necessary.”

What led to the FTX Bankruptcies?

On November 17, John J. Ray III, who among others oversaw the well-known Enron liquidation, filed a Declaration in Support of Chapter 11 Petitions, according to which, “multiple” regulators and government authorities, including the U.S. Commodity Futures Trading Commission (“CFTC”), the U.S. Attorney’s Office for the Southern District of New York, the U.S. Securities and Exchange Commission (“SEC”), and the U.S. Congress, are investigating the circumstances surrounding the FTX financial meltdown.

“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.” John J. Ray III

In his declaration, John J. Ray further revealed troubling shortcomings concerning FTX’s accounting, audit, cash management, cybersecurity, human resources, risk management, and data protection systems.

Furthermore, the entities that were part of the FTX Group allegedly did not maintain a centralized control of their cash and lacked liquidity forecasts.

Also concerning are the allegations that the FTX Group entities are either not able to provide any audited financial statements or received audit opinions on consolidated financial statements that can’t be relied on to reflect the accurate financial situation. Moreover, because FTX’s alleged failure to “keep appropriate books and records, or security controls, with respect to its digital assets,” only a fraction of these assets was allegedly located and secured, which represents further cause for concern, according to the new CEO.

“The FTX Group Has Billions in Investments Other Than Cryptocurrency”

According to the bankruptcy records, FTX Trading Ltd. and West Realm Shires Inc. have received third party equity investments, such as investment funds, endowments, sovereign wealth funds and families. Based on the information available, approximately 25% of the equity in FTX Trading is reportedly owned by at least 600 third party equity investors, while over 22% of West Realm Shires Inc. is owned by approximately 570 third party equity investors.

According to the investigation by securities attorneys Alan Rosca, Paul Scarlato, and Kathryn Weidner at Rosca Scarlato, investors in FTX’s funders, financiers, and lenders may be entitled to compensation and are urged to secure timely legal representation to protect their rights.