U.S. court administrator plans to appoint examiner in FTX case, while SBF describes strange margin trading practices

The U.S. Trustee explained in the letter that the FTX collapse was comparable to complex bankruptcy cases such as Lehman, Washington Mutual Bank, and New Century Financial. In addition, while the U.S. Trustee submitted a brief requesting a third-party examiner, former FTX CEO Sam Bankman-Fried continued to appear in numerous media interviews.

U.S. Trustee: An examiner should “investigate substantial and serious allegations of fraud.”

The U.S. Trustee, a component of the U.S. Department of Justice, is getting involved in the FTX bankruptcy case after attorney Andrew Vara filed a request for an independent examiner. The regulatory entity is responsible for overseeing the administration of bankruptcy proceedings to ensure that it protects the integrity of the federal bankruptcy system.

Andrew Vara’s filing cites initial testimony from current FTX CEO John Ray, who noted at FTX a “complete failure of corporate controls and a total absence of reliable financial information“. Andrew Vara asserts that the collapse of FTX “is probably the fastest of the major corporate bankruptcies in American history, resulting in “free-fall” bankruptcy cases“.

In addition, the U.S. Trustee’s counsel compared the fallout from FTX to some of the largest bankruptcies in history. “Like the Lehman, Washington Mutual Bank, and New Century Financial bankruptcy cases before them, these cases are exactly the kind of cases that require the appointment of an independent trustee to investigate and report on the extraordinary collapse of the debtors“, details Andrew Vara’s filing. The U.S. Trustee believes that the appointment of an independent reviewer would be in the best interests of the Debtors and creditors.

In addition, Andrew Vara insists that the FTX collapse should be thoroughly investigated for any type of financial misconduct and fraud. “An examiner could – and should – investigate substantial and serious allegations of fraud, dishonesty, incompetence, misconduct, and mismanagement by the Debtors, the circumstances surrounding the Debtors’ bankruptcy, the apparent conversion of the Exchange’s customers’ assets, and whether there are colorable claims and causes of action to redress the losses.“

Jesse Powell of Kraken: “SBF has no idea how margin trading works“.

While the U.S. Trustee’s filing with the bankruptcy court was underway, Sam Bankman-Fried (SBF) decided it would be a good idea to do an analysis of the situation. interview on Twitter Spaces. The disgraced crypto CEO was invited by Mario Nawfal and tens of thousands of people tuned in. SBF avoided much of the questions by noting that he was unaware of specific details that occurred, and he also said he didn’t have good information because he no longer had control of FTX.

Despite the lack of information, SBF answered questions for about two hours, and he described a strange margin and lending process that was completely inconsistent with the way traditional derivatives trading is supposed to work. Jesse Powell of Kraken called SBF’s description of margin trading pure hogwash.

SBF is completely full of shit about how margin trading works. He’s saying that the whole exchange operated on a net account equity model and anybody could borrow anything (in any amount?) from client funds or from nowhere. That’s not how it should work.https://t.co/3k7PkbAHVM

– Jesse Powell (@jespow) December 1, 2022

“SBF is completely out of touch with how margin trading works“, said Powell stated During the Thursday night interview (ET). He said the whole exchange was operating on a net account equity model and anyone could borrow anything (any amount?) from customer funds or from nowhere. That’s not how it should work. “Everything added up if you counted negative balances as 100% recoverable” WTF!? No, man. Borrowing 10,000 BTC from customer balances vs. FTT at market value is not only poor risk management“, said Mr. Powell. opine:

This is a masked fraud. The only difference between SBF and Madoff is that Madoff had no tokens.

During his interview, SBF explained that he feels “incredibly bad” about the situation and that he has recently acquired a new lawyer. “I have legal counsel right now. I have new legal counsel“, SBF told attendees at Nawfal’s Twitter Spaces event. While SBF has a hard time remembering the details, participants insist that SBF admitted to mixing FTX’s cash trading books with FTX’s margin books. Simon Dixon of Bank to the Future explained:

We managed to get Sam Bankman-Fried to admit directly that FTX spot and margin hot wallets were mixed, including Alameda and FTX accounts . Backing a bitcoin to sell short or invest in VC with illiquid FTTs as collateral implies custody.

We managed to get @SBF_FTX to straight up admit that #FTX Spot & Margin Hot Wallets Were Co-Mingled including Alameda #FTX account (Custody & Collateral). Backing a #BTC loan to go short or VC invest with illiquid $FTT as collateral means custody get REKT pic.twitter.com/vneMwUhFf8

– Simon Dixon (Beware Impersonators) (@SimonDixonTwitt) December 2, 2022

The interview with the former FTX CEO was a bit more revealing than the interviews he did during his media tour. Some of the Twitter Spaces guests believe that SBF’s main motivation for talking to people is to be able to make himself look better in order to stay out there. SBF also admitted that withdrawals from the Bahamas have occurred, and perhaps on two occasions.

The fact is that no one is sure why SBF is doing these interviews, but many Twitter Spaces listeners believe that he simply dodged the questions and answered them in a very calculated manner. While the U.S. attorney is seeking to appoint a third-party reviewer to investigate possible misconduct, it is possible that the reviewer will find SBF’s interviews very interesting.