Ftx, the battle of Italian savers to recover funds

Ftx

The Pandora's box of the Ftx crash, one of the largest cryptocurrency trading platforms in the world, has no bottom. The more the liquidators dig into the papers and accounts of the exchange founded by Sam Bankman-Fried, the now former good face of the crypto world, the more disturbing details come to light on the management of funds deposited by savers.

The new CEO of Ftx, John Ray, appointed after the bankruptcy filing of November 11 (the so-called Chapter 11 of US law), one who has the liquidation of Wall's collapse par excellence on his resume Street, of Texas energy company Enron, said FTX managers can't even tell where the funds are. Of the $16 billion to be recovered, $740 million have been identified so far. In the aftermath of his appointment, Ray did not hold back on the behind-the-scenes situation at FTX: “ Never in my career have I seen such a complete failure of corporate controls and such a total absence of reliable financial information ”. The exchange team had come to approve corporate expenses and transfers with emojis.

The Italian committee

The smileys are just the tip of the iceberg of a series of problems in the bankruptcy of Ftx, which make it even more difficult for liquidators to unravel the skein and for savers get your money back. Because in addition to understanding where the investments placed by the exchange's customers actually ended up (at least 12 billion have disappeared), there is a very complicated interweaving of companies, investees and subsidiaries in which to put order, reciprocal loans between the four main groups in the galaxy by Bankman-Fried (Dotcom, Wrs, Ventures and Alameda, from which the fuse started), different destinies for funds in cryptocurrencies and those in fiat currencies (i.e. with legal tender, such as the dollar and the euro) and confusing rules , between the jurisdiction of the Bahamas (where many companies are based), the United States (where the bankruptcy petition was filed) and those of the countries of savers.

Italian Ftx investors are well aware of this. On November 23, the establishment of a guardianship committee, informally renamed the Ftx Bank Run Committee, was formalized. It is led by Mario Garofano, an entrepreneur in the technological field, saver affected by the collapse of Ftx and administrator of a dedicated Telegram group (with over 3 thousand members, not all necessarily involved). He is supported by the lawyers Fabio Angelini of the Parola Angelini studio and Sergio Di Nola of Cdra, specialized in the banking and financial fields. The goal is to develop a strategy to protect Italian savers from the collapse of the exchange. “Our idea is to join an international initiative, defined by important players - explained Garofano to sportsgaming.win in the days immediately preceding the establishment of the committee -. We are looking at massive action, because dilution does not help, and we would like to protect small savers with free membership for those who have less than 30 thousand euros on Ftx ”.

The skein to unravel

The European tangle A question of dates Direction Cyprus Clouds in the Bahamas Paths to choose All the companies in Bankman Fried's empire

The European tangle

The first problem is to bring order to the galaxy of companies and subsidiaries of the Ftx group. Chapter 11 has been filed for the US platform. But there is a myriad of FTX-branded boxes throughout Europe, as revealed by the liquidators' reconnaissance: three in Germany, four in Switzerland, as many in Cyprus, two in Malta. Then Ireland, Liechtenstein and Gibraltar, recently removed from the list of tax havens in the old continent. And all these companies have cross-shareholdings and interconnected tasks.

For example, Ftx Europe Ag, a company incorporated under Swiss law, has under it, among others, a Cypriot Ftx that offers services in cryptocurrencies, a another Ftx based in Cyprus born from the ashes of a former local company in the sector and which holds the European license, then a Swiss Ftx for certificates, a German one for certificates which in turn owns a Swiss box dedicated to derivatives (but not operational).

The tangle of companies under Ftx

Matter of dates

These companies have not yet been declared bankrupt. However, it is necessary to understand what goods they have in their stomachs, if they can be attacked and for whose benefit. According to what the Italian Ftx committee was able to reconstruct, not all Italian savers had relations with the US platform. “ From discussions with members of the group it emerged that some wire transfers went through Cyprus, Lithuania, Germany and Switzerland - explains Garofano -. In addition, some were subjected to the Mifid questionnaire " , an obligation that financial intermediaries within the European Union must comply with to ascertain the knowledge of their customers. The change of course would have occurred last May, months before the issuance of the license community for the Ftx Eu branch, which arrives in September, but not all European savers have received the questionnaire.

In the newsletter, the committee led by Garofano explains that "thanks to some elements that emerged through direct conversations with the Ftx legal office, more certain elements are now arriving to determine one's membership of the European entity". Among these are the date of opening the account (before or after May 2022 is the issue); documents supporting the relationship with Ftx Eu, such as emails, screenshots, logos; documents about your country of residence; the email address used to open the account.

According to the liquidators' survey, Europe has a p marginal exo in the distribution of Ftx customers: 6% of the total between Wrs and Dotcom, the holding companies of the various platforms of the group, distributed between France, Cyprus, Ireland, Czech Republic, Luxembourg, Holland, to which add a 1% supported by the Isle of Jersey, an English tax haven, and 8% of the UK. However, the document appears curious for at least four reasons: First: Belgium and Portugal are indicated with a 0% (perhaps for zero point percentages). Second: Italy is absent, where according to estimates by Il Sole 24 Ore there are at least 100 thousand betrayed users, but also Spain, with whose spontaneous committee the Italian one says it is in contact. Third: because almost a fifth of customers are based in the Caymans (22%), while in the United States there is only 2%. Four: because there are 5% of customers of unknown nationality.

The distribution of customers of the platforms under Wrs and Dotcom

Cyprus direction

In Europe the spotlight they are aimed at Cyprus, where FTX has acquired the license to operate. Nicosia has simpler rules for starting financial services and is one of those countries of the Union where international startups and platforms land to get the pass to work with in all 27 European states. And it was precisely to Cyprus that some Italian customers were also diverted, with a strategy that did not, however, follow a single criterion for everyone. Since May, someone has found himself making wire transfers to accounts in Europe, answering MiFID questionnaires and getting information from entities based in the Old Continent, while someone else has continued to do business with the Bahamas, the headquarters of Sam Bankman-Fried's empire .

For this reason, some Italian savers have asked themselves whether it is not the case to attack the Cypriot Ftx, appealing to the guarantee fund for financial instability envisaged by the community rules. But even here there are some problems. First and most important: “ The Cypriot FTX has not gone bankrupt ”, recalled Garofano. At the moment Cysec, the Cypriot authority for the regulation of financial markets (the equivalent of our Consob), has limited itself to suspending Ftx Eu (which in fact obtained its license by incorporating a company, K-dna financial services, authorized since 2015). The stop comes on November 11, the same day as the bankruptcy petition. Under Cypriot rules, the platform has one month to clarify its position. In the meantime, it cannot offer services, recruit new clients and advertise itself, while it is permitted to complete previously established transactions and return funds and financial instruments attributable to clients.

Garofano explains that contacts with some Cypriot lawyers have been carried out some insights into the local situation. The question mark is whether the guarantee fund, which would cover up to 20,000 euros each, recognizes at least fiat currencies, which savers parked in their accounts to benefit from accrued interest. Ftx docs are smoky. They mention the possibility of paying an amount of e-money equivalent to deposits in fiat currencies and warn that it is not legal tender, nor is it guaranteed by public or private institutions. Then we have to understand if Cysec itself can be sued, for the carelessness with which it distributed the authorizations. Or if the authority intends to declare the state of insolvency of Ftx. At that point, recalls Garofano, there would be three months to register on the list of savers to be protected, but only for currencies with legal tender and not to recover cryptocurrencies (or their equivalent). A similar reconnaissance is underway on Ftx in Switzerland.

Ftx without peace: almost half a billion dollars in cryptocurrencies stolen A few hours after the bankruptcy, 477 million dollars were mysteriously stolen from the exchange, and there are suspicions on the involvement of people inside the company

Clouds in the Bahamas

The situation on the US front is also complicated. Basically, on the one hand there is the Chapter 11 process, on the other the bankruptcy declared by the founder in the Bahamas, which Bankman-Fried wanted to transform into an Eldorado of cryptocurrencies but does not have adequate rules to deal with the market.

James Bromley, liquidator lawyer of the US law firm Sullivan & Cromwell enlisted by Ftx, in the first hearing after the bankruptcy petition filed by the exchange in a Delaware court described the exchange as the " personal fiefdom” of its founder. And anticipated a discovery of the team of liquidators: "huge sums" would have been diverted from Ftx and used for personal expenses by Bankman-Fried, including the purchase of real estate in the Bahamas for 300 million dollars. Even generous donations to politics, according to Ray, could be requisitioned to repay savers, if their origin from the exchange were proven.

The problem is really putting the platform in order. Deposit management was not transparent and this will create problems when it comes to deciding who gets what. There is the question of the theft of funds, which however according to Bankman-Fried's bankruptcy documents, would have been withdrawn by the founder himself to transfer them under the jurisdiction of the Bahamas. And then $5 billion in withdrawals completed before FTX blocked all transfers. Perella Weinberg Partners is the financial firm enlisted by Ftx's curators to take an inventory of the company's assets.

Ftx boss's race to save another exchange A group of volunteers are trying to prevent Serum from making the same end of the recently bankrupt platform, but the task is far from simple

Paths to choose

In the newsletter Garofano explains that the committee is “by now working with a few dozen interlocutors, belonging to domestic law firms , international, consumer associations and savings protection unions, and, in parallel, with litigation buyout funds ”.

And he adds: " We are advising against launching "hastily" legal actions, whether they are class actions or not, which, strengthened by a collective instrument but devoid of substance, are deficient in terms of adequate planning in order to the subjects to be involved", because "it does not benefit anyone, diluting the action of an attentive and large group, united by a single common purpose which is the recovery of lost funds, to initiate actions that provide for uncertain times and methods, often with the need to advance certain expenses ”.

The Italian committee is mainly evaluating two ways. The first is to rely on a litigation buyout fund, funds that actually finance legal actions by earning on the percentage of what is recovered (success fee). “ We are on standby awaiting a formal proposal ”, writes Garofano. An action of this kind, coordinated at an international level, aims to enlist law firms of very high standing and would not involve initial costs for savers. Garofano aims to launch an initiative that has no costs for those with deposits under 30 thousand euros, for example.

The second way is a class action, which could collect the first adhesions as early as these days. The Italian Investment Protection Union, led by Domenico Bacci, has also offered to provide assistance to savers. “If it were possible to represent an entire category, as broad as possible, with a very significant number of adherents and funds, despite Europe being a marginal market for Ftx – as it appeared from the first survey results – we could certainly have more incisiveness ”, insists Garofano. The committee is also awaiting a defense proposal from Johnthan Levy, a lawyer who in the United States handled the bankruptcy of the cryptocurrency lending platform Celsius. Levy himself wants to send the European Parliament the proposal to create a fund to protect savers in the crypto world.

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