By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

Fears were raised yesterday that the Supreme Court order freezing all assets of FTX’s Bahamian subsidiary was violated when some of the collapsed crypto currency exchange’s clients withdrew their monies late last week.

Well-placed Tribune Business sources, speaking on condition of anonymity because they were not authorised to speak publicly, suggested those involved could be prosecuted for contempt of court and be forced to repay the funds removed since the transactions represent a so-called “fraudulent preference” where they gain undue advantages over other FTX clients whose assets remain frozen.

This newspaper confirmed that some clients of FTX Digital Markets, the entity licensed and registered by the Securities Commission of The Bahamas, were able to retrieve their assets - which the crypto exchange was holding for them on trust or in escrow, in a fiduciary capacity - starting around the time that the Supreme Court issued its Order last Thursday shutting down all local operations.

FTX, in a Twitter tweet sent out at 2.08pm on Thursday, November 10, barely hours before the Securities Commission’s announcement of the asset freeze and provisional liquidator’s appointment, wrote: “Per our Bahamian HQ’s (FTX Digital Markets) regulation and regulators, we have begun to facilitate withdrawals of Bahamian funds. As such, you may have seen some withdrawals processed by FTX recently as we complied with the regulators.

“The amounts withdrawn comprise a small fraction of the assets we currently hold on hand, and we are actively working on additional routes to enable withdrawals for the rest of our user base. We are also actively investigating what we can and should do across the world.”

This assertion, and the subsequent fall-out, eventually prompted the Securities Commission to clarify that it had not given FTX Digital Markets permission to release customer funds or prioritise/give preference to Bahamian clients. In a statement issued at 6.13pm on Saturday evening, more than 48 hours after FTX’s original tweet, it warned that such payments would be treated as “voidable preferences” and likely subject to recovery by the provisional liquidator. 

“The Commission wishes to advise that it has not directed, authorised or suggested to FTX Digital Markets the prioritisation of withdrawals for Bahamian clients,” the Securities Commission said. 

“The Commission further notes that such transactions may be characterised as voidable preferences under the insolvency regime, and consequently result in clawing back funds from Bahamian customers. In any event, the Commission does not condone the preferential treatment of any investor or client of FTX Digital Markets or otherwise.”

Tribune Business sources, confirming that some FTX Digital Markets clients were able to successfully withdraw and obtain their monies around the time of the Supreme Court’s freezing Order and after, blamed this on the “chaos” and confusion surrounding the crypto exchange’s rapid collapse that took less than one week. Staff were said to have believed mistakenly that the Securities Commission had given “the go-ahead” to release funds rather than freeze them.

“Somehow in the chaos of wanting to do right and manage things it was attributed to the regulator, but it was not the regulator,” one well-placed contact said of the decision/instruction to release funds and what occurred. 

However, another added: “I don’t understand why they blocked all the transfers in the US and allowed them here? Bahamians were acting as commission agents to convert tokens into cash. There was a freezing Order in place; it’s a breach of the Supreme Court’s injunction. 

“They were doing indirectly what can’t be done directly. The story I’m hearing is that there were some named individuals involved in assisting these people to get their money - the Bahamian assisters and agents, and the foreign clients. That’s what I’ve heard from several sources.”

CNBC on Saturday reported that some FTX clients were accessing their funds via what was termed “a backdoor in The Bahamas”. The US business TV channel added that research by data firm, Argus, showed “desperate” FTX clients were turning to users in the Bahamas for help in cashing out and getting their monies. It reported that Bahamians were receiving a percentage of the assets once successfully withdrawn from FTX.

Concerns that the Supreme Court asset freeze has been violated were among a series of fast-paced developments surrounding FTX’s collapse, which on Friday saw its co-founder and one-time crypto guru, Sam Bankman-Fried, resign as chief executive and place the group’s 134 companies - Bahamas-domiciled FTX Digital Markets excepted - into Chapter 11 bankruptcy protection in the Delaware courts.

The filing, which revealed minimal details, listed parent company, FTX Trading, as having more than 100,000 clients. Assets were shown as being between $10bn-$50bn, as were liabilities. Among the entities placed into Chapter 11 were Crypto Bahamas LLC, likely the company that organised and owned the conference of the same name that was held in The Bahamas earlier this year, and Alameda Research (Bahamas) and Technology Services (Bahamas).

The failure of Mr Bankman-Fried’s sprawling crypto empire, which just months ago was valued at around $32bn, in just one week will likely go down in history as one of the most spectacular corporate implosions in history. The episode is being compared to both Enron’s crash in 2001, amid a series of accounting and corporate governance scandals, and the Lehman Brothers failure in 2008 that triggered the global financial crisis and subsequent recession.

FTX’s collapse is already having a similar impact to Lehman Brothers for the global digital assets industry, as valuations plummet. Mr Bankman-Fried was yesterday said to remain holed up in The Bahamas, likely in FTX’s offices and condos at Albany, with his shattered empire undergoing criminal and regulatory probes both in this nation and the US.

It was last night suggested that the Securities Commission and Brian Simms KC, the Lennox Paton senior partner who has been named as FTX Digital Markets provisional liquidator, had spent much of the weekend grilling Mr Bankman-Fried and his senior executives over what had led to the company’s failure and how they can gain access to the necessary network systems, books and corporate/accounting records

However, both Mr Simms and Christina Rolle, the Securities Commission’s executive director, declined to comment when contacted by Tribune Business yesterday. It is thought that the provisional liquidator has also been sitting through an endless series of briefings and meetings, as well as reading multiple documents, as he tries to get a grip on the FTX empire.

Among the most serious allegations facing FTX and Mr Bankman-Fried is that around $10bn belonging to the crypto exchange’s clients was transferred to Alameda Research, his trading firm, without their permission. These funds were then employed to bail-out other troubled crypto businesses such as Blockfi (a $240m option to buy and $400m credit facility) and Voyager ($1.3-$1.4bn) which had run into trouble during the so-called ‘crypto winter’.

However, the only collateral for this $10bn transfer subsequently turned out to be FTX’s own token, FTT, which was essentially worthless. Besides an $8bn liquidity shortfall at FTX, with liquid assets of $900m compared to $9bn in liabilities, reports at the weekend alleged that between $1bn to $2bn of the sums transferred to Alameda were missing.

This, though, was denied by Mr Bankman-Fried, who told the Reuters news agency that he “disagreed with the characterisation” of the transfer, saying: “We had confusing internal labelling and misread it.” When asked about the missing customer funds, he replied via Twitter: “???” And, to further complicate a confusing picture, there were suggestions that another $515m had disappeared from FTX - either as a result of a hack or “inside job”.

Either way, unlike the Lehman Brothers saga, global attention is now fixated on The Bahamas because FTX’s international headquarters are based here. “I think everyone at this stage is scurrying for the lawyers. The chickens are coming home to roost and it’s every man for himself,” one Bahamian attorney said yesterday of FTX’s implosion. “This is enormously tragic for the country and very embarrassing for the Government.

“They were hustling to take all the credit for digital assets and now it has backfired on them and there is huge egg on their face. You can bet your bottom dollar that there’s going to be a complete regulatory overhaul led by the Securities & Exchange Commission (SEC) on this whole crypto industry. Consequently, there are going to be some people who pay the ultimate price.”