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A Justice Department official overseeing FTX’s bankruptcy said the crypto platform’s collapse is likely the ‘fastest big corporate failure in American history’

A U.S. Justice Department bankruptcy watchdog called for an independent investigation into FTX’s collapse, comparing the cryptocurrency platform’s sudden failure to the fall of Lehman Brothers.

U.S. Trustee Andrew Vara, an official at the Justice Department unit monitoring bankruptcy courts, asked the judge overseeing FTX’s chapter 11 case to appoint an independent examiner to provide a transparent account of FTX’s failure because of the wider implications the exchange’s collapse has on the crypto industry.

FTX’s collapse “is likely the fastest big corporate failure in American history,” Mr. Vara said, saying the platform suffered an astonishing loss in value from a market high of $32 billion earlier this year to bankruptcy.

Mr. Vara said an examiner is necessary to investigate “the substantial and serious allegations of fraud, dishonesty, incompetence, misconduct, and mismanagement” at FTX and circumstances around its collapse.

Mr. Vara also said an examiner should review whether any viable legal claims exist to remedy losses of FTX customers. He said reports produced by the examiner appointed in the bankruptcies of Lehman and subprime lender New Century Financial “stand as examples of the bankruptcy system serving the public interest in transparency and accountability.”

“These cases are exactly the kind of cases that require the appointment of an independent fiduciary to investigate and to report on the debtors’ extraordinary collapse,” Mr. Vara said.

FTX founder and former chief executive Sam Bankman-Fried said this week that he didn’t intend to commit any fraud or use customer funds to back leveraged bets at Alameda Research, a cryptocurrency hedge fund attached to FTX. Mr. Bankman-Fried also said he wants to assist government regulators in an attempt to make customers whole.

“We welcome the investigation by the examiner and hope the investigation encompasses not only the role of management, but all parties including the role of outside professionals,” Mr. Bankman-Fried’s spokesman said Thursday.

Mr. Vara’s request for an examiner must be approved by Judge John Dorsey of the U.S. Bankruptcy Court in Delaware.

Independent examiners are more common in large chapter 11 cases when borrowers or corporate insiders are accused of misconduct. A judge appointed an examiner for bankrupt crypto lender Celsius Network LLC in September, following a request by the U.S. Trustee.

Mr. Vara praised the work done so far by FTX’s new chief executive, John J. Ray III, and bankruptcy advisers to untangle the company’s affairs but said the “questions at stake here are simply too large and too important to be left to an internal investigation.”

An independent examiner could also benefit Mr. Ray by freeing him up to manage FTX’s operations while an investigation into prior management is conducted, he added.

FTX couldn’t immediately be reached for comment. Mr. Ray, who helped unwind Enron after the energy company filed for chapter 11, has said in court papers on behalf of FTX that he has never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

A bombproof courtroom and a CEO in the dock: what to expect from the Wirecard trial

A panel of Munich judges will from Thursday begin dissecting one of the biggest frauds in German history

From Thursday, two and half years after one of Europe’s most spectacular accounting scandals unravelled, a criminal court in Munich will start dissecting the collapse of Wirecard.

Three former senior managers of the disgraced German payments company, including chief executive Markus Braun, will be facing charges of fraud, embezzlement, and accounting and market manipulation in a trial that is expected to continue into at least 2024.

Wirecard, once worth €24bn and hailed as one of Europe’s most successful tech start-ups, collapsed in June 2020 after disclosing that half of its €2bn in annual revenue and €1.9bn in corporate cash were a sham. The implosion sent shockwaves through Germany’s financial and political establishment.

In the dock alongside Braun will be Stephan von Erffa, the head of accounting, and Oliver Bellenhaus, the boss of a Dubai-based subsidiary at the core of Wirecard’s outsourced Asian operations.

“I expect that the defendants will face the full force of the law,” Matthias Hauer, an MP for the Conservative CDU who sat on the parliamentary inquiry committee, told the FT, pointing to the “massive social and economic damage” that white-collar crime is causing.

“Confidence in Germany as a financial hub has been shattered. Rebuilding it will require a full legal reckoning,” he said.

The trial will take place within the precincts one of Germany’s largest prisons, opened in 1894, in a high-security courtroom 5 metres underground and protected by a bombproof ceiling.

Built for trials of terrorists and mobsters in 2016, it is connected to the cells by a network of tunnels and is just a 20-minute drive from Wirecard’s former headquarters.

On Thursday, prosecutors will read out 89 pages of charges, alleging that Braun was the head of a gang that orchestrated a complex, multiyear fraud that included deceiving auditors with fake documents, using doctored accounts to convince banks and bondholders to provide more than €3bn in debt, and siphoning off at least €255mn in corporate cash, mainly through loans to sham business partners.

Three prosecutors led by Matthias Bühring will read in turns, having practised the task extensively over the past few weeks, according to people familiar with the matter.

Bühring has been in charge of the investigation since it was triggered by a criminal complaint from Chris Hohn, activist short seller and manager of $24bn of assets at The Children’s Investment Fund, a month before the insolvency.

Prosecutors expect that reading out all the charges will take about five hours. This year, five more court days are scheduled, with Braun and Bellenhaus, who are still in custody, expected to give their opening statements. Von Erffa, who was released on bail in the summer of 2021, will remain silent “for now”, according to his lawyer.

The first witnesses are to be summoned from January.

“After the first few days, the hearings could turn into a slow grind,” said Matthias Jahn, a Frankfurt law professor and criminal judge at Frankfurt higher regional court, adding that Germany’s criminal code stipulates all evidence needs to be directly evaluated in the courtroom.

In the US and other jurisdictions, judges can focus on key documents and facts, said Jahn, but in Germany “every email and every document that is potentially relevant needs to be introduced into the hearing”.

“This procedural approach worked well for the straightforward cases of the 19th century, but struggles to cope with hugely complex cases of our times,” Jahn added.

Like all criminal court proceedings in Germany, the Wirecard case will not involve a jury. It will instead be decided by a panel of three professional judges and two “lay” judges — members of the public who are deputised for the duration of the trial.

The trial will also start with a reserve bench of two professional and two “lay” judges who will attend every hearing and can take over should one of the original judges become unable to continue.

The panel is headed by presiding judge Markus Födisch, a 48-year-old who started his career with Bavarian law-enforcement authorities in 2001 and from 2012 to 2019 held a senior position at the Munich public prosecution office.

During their 21-month long investigation, prosecutors held 450 interviews with witnesses and suspects, sifted through 42 terabytes of data, raided 40 properties and sent out 90 requests for co-operation to foreign colleagues.

At the core of the investigation was Wirecard’s outsourced payments processing operations in Asia — the so-called third party acquiring business, known as TPA. On paper, Wirecard was co-operating with three firms in Dubai, Singapore and Manila which generated €1bn in annual revenue and all of the firm’s profit.

In theory, the TPA business had €1.9bn in Wirecard cash tied up in escrow accounts, first in Singapore and later in Manila.

After the Financial Times in October 2019 exposed that large parts of the TPA business appeared fraudulent, it became clear that bank statements were forgeries: the escrow accounts and billions in cash did not exist. After months of investigations, both Wirecard’s administrator and Munich prosecutors concluded it was a sham, existing only on spreadsheets compiled to hoodwink auditors, investors and creditors.

Braun, who denies the charges, vehemently disputes that the TPA business was fake. He argues that a criminal clique around Jan Marsalek, Wirecard’s second-in-command, and Bellenhaus, created a “shadow structure” and redirected the TPA proceeds into their own pockets, without his knowledge.

Braun’s lawyer Alfred Dierlamm — one of Germany’s most renowned white-collar crime specialists — points to payments of millions of euros between the TPA partner companies and shell companies, some of which were controlled by Bellenhaus and based in the British Virgin Islands.

Dierlamm has previously accused prosecutors of not investigating the origin and purpose of those payments, and hence not getting to the bottom of the case.

Authorities reject Dierlamm’s view, arguing that the payment flows he observed represent round-tripping transactions — circular flows of money used to make the whole system more credible. Dierlamm did not respond to an FT request for comment for this article. The prosecution office declined to comment.

Prosecutors face several obstacles in bringing a conviction.

The inner circle at Wirecard relied heavily on the Telegram messaging app, and the bulk of their conversations have been lost. In official emails, there is little trace of the fraud and there is no smoking gun showing that Braun actually knew the TPA business was a sham.

Moreover, a number of key suspects will not be present in Munich — the most prominent being Marsalek. He was directly in charge of the TPA operations and has been on the run since June 2020, with German law-enforcement authorities assuming he is hiding in Russia.

An ex-Wirecard employee who was in charge of the potentially fraudulent Manila-based outsourcing partner was reported dead in the Philippines shortly after the company imploded.

The case against Braun may hinge on testimony by Bellenhaus. A sports-car enthusiast who ran a Wirecard unit at the heart of the company’s fraud from his apartment in Dubai’s Burj Khalifa skyscraper, he voluntarily travelled from the emirate to Munich, via Switzerland, after the insolvency. There, he turned himself in to prosecutors, knowing he would remain in police custody, according to people familiar with the matter.

“Mr Bellenhaus intends to continue his co-operative behaviour as chief witness during the trial,” his lawyers said in a press release, adding that their client would “take responsibility” for his actions.

But when first giving testimony, Bellenhaus made factually incorrect statements, according to people familiar with the case. He also belatedly disclosed a private foundation in Liechtenstein where he had stashed away some €4.5mn of Wirecard cash.

While some of Bellenhaus’s oral testimony has been backed up with hard evidence — for instance the claim that von Erffa faked documents — a lot could not be independently verified and is disputed by Braun, according to documents seen by the FT.

“The whole case is monstrously big,” said Frankfurt law professor Jahn. More than 20 former insiders are also in the crosshairs of criminal prosecutors.

“Any verdict might come with the caveat that it could be preliminary,” said Jahn.

The Wirecard trial ticks closer

The Wirecard saga had all the trappings of a spy film — so it only makes sense that the trial will too.

From Thursday, a criminal court will begin dissecting one of Europe’s most spectacular accounting scandals in an underground, bombproof courtroom. In the dock are the fallen German payments group’s ex-boss Markus Braun, former head of accounting Stephan von Erffa, and the boss of a Dubai-based subsidiary Oliver Bellenhaus.

Our colleagues have compiled a helpful look ahead about what to expect:

Blackstone’s real estate crown jewel loses its shine

Blackstone’s Stephen Schwarzman and Jonathan Gray have built the best fundraising machine on Wall Street and become the envy of the private equity industry. Now, the billionaire duo are in an unfamiliar position — returning cash to clients asking for their money back.

Blackstone’s shares fell 7 per cent on Thursday after it limited withdrawals from its $125bn real estate investment fund, after a surge of redemption requests, DD’s Antoine Gara and Sujeet Indap report.

The new conditions present perhaps the biggest challenge the firm has faced since it went public just ahead of the 2008 financial crisis.

It’s well worth understanding what the fund, known as Breit, is all about. The FT’s Robin Wigglesworth breaks it down in this Alphaville post.

It’s a pool of money, mostly from wealthy individuals, which is used to buy property assets including warehouses, apartments, student housing and data centres. It offers investors steady yields: its annualised distribution rate has been 4.4 per cent since it was set up in 2017.

And it’s close to the hearts of Schwarzman and Gray — the latter of which has described it as his “beloved Breit”. You can see why. As of October, Breit accounted for about 10 per cent of Blackstone’s total fee-earning assets under management. According to Goldman Sachs, it accounted for about a fifth of its overall fee revenues last year.

But Breit faces potentially significant challenges. Higher yields are now more easily available elsewhere — and any major property downturn would hit it hard.

Most real estate investment trusts are publicly traded, and their performance has deteriorated in many cases, but Breit is private. If investors want to get out, Blackstone buys back shares at the fund’s “net asset value”. 

And that’s what’s getting tricky. Breit said on Thursday that it had been forced to limit investor withdrawals as the fund’s limits — 2 per cent of net asset value taken out per month and 5 per cent per quarter — had been already reached with about $3bn taken out so far this quarter.

It’s a reminder that Blackstone is dramatically different today than it was during the last financial crisis. It has a spectrum of funds and formats that go well beyond private equity. In particular, growth has come from permanent and perpetual capital increasingly funded by wealthy individual investors who want access to real estate and credit investment vehicles outside of public markets.

But what hasn’t been tested is how their newfangled funds behave in a time of stress, either from underperformance or investors needing liquidity to meet other obligations. The poor signalling of the “gate” may only heighten a rush for the exits.

It’s a far different scenario from the 2008 crisis when Blackstone’s traditional private equity funds with long-term lockups allowed it to ride out the crisis and fix portfolio companies, most notably the Hilton hotels chain.

Second-biggest venture capital round of the year in the US values company at $7bn

Defence technology start-up Anduril has raised nearly $1.5bn in the second-biggest venture capital round of the year in the US, marking a milestone for young tech companies trying to break into the notoriously difficult field of defence procurement.

Anduril said the investment valued it at $7bn, excluding the new cash it is raising, up from $4.2bn 18 months ago. It comes at a time when giant investment rounds, which were a feature of the recent venture capital boom, have all but dried up, while many start-ups struggle to avoid “down rounds” that force them to accept lower valuations.

Anduril was founded five years ago by Palmer Luckey, who sold his previous start-up, virtual reality company Oculus, to Facebook for $2bn at the age of 21. In an interview with the FT, Luckey said he had set out to build a large defence company based around new technologies such as AI and drones because many Silicon Valley companies, under pressure from their workers, had turned their back on the Pentagon.

“The big tech companies in the US were largely refusing to work with the [Department of Defense],” he said. “You have all this incredible technology talent that’s just inaccessible to the DoD. There’s never been a point in US history where that’s how things were.”

Tech start-ups have struggled to sell to the military because of the defence industry’s long purchasing cycles and the challenge of earning enough trust to win sizeable contracts.

“They were laughed out of Silicon Valley, a lot of people didn’t believe it could be done,” said Katherine Boyle, a partner at Andreessen Horowitz, an Anduril investor. “The nature of warfare has changed fundamentally and the [large defence contractors] are not going to be able to meet the procurement needs.”

In the strongest sign yet that the Pentagon is turning to the software and AI capabilities of newer defence companies, Anduril earlier this year won a contract from the US Special Operations Command worth nearly $1bn to act as a systems integrator on a counter-drone project. Along with a series of contracts with different branches of the US military, Luckey said the company works with “half a dozen Nato allies” and has “hundreds of millions” of dollars in annual revenue.

Anduril is known mostly for autonomous systems such as drones, as well as surveillance towers used for border security. Most of its engineers work on its software platform Lattice, which pulls together data from many different surveillance and weapons systems, most of which are not built by the company.

Russia’s invasion of Ukraine has changed attitudes in Silicon Valley and made many more tech start-ups willing to consider working with the Pentagon, Boyle said. However, there is still a heated debate in tech circles about how far companies that were not set up purely to work on defence should go, particular when it comes to offensive weapons.

Luckey said Anduril did not draw the line at building weapons but would not use facial recognition software, because the technology could never be reliable enough to trust in life-or-death situations. He rejected calls for a ban on autonomous weapons, arguing that always requiring a “human in the loop” to make the ultimate decision to fire would leave the US and its allies at a disadvantage to countries that used fully robotic weapons.

Instead, he called for clear lines of responsibility over the decision to employ autonomous weapons in particular situations, rather than actually fire them, but added that only democratically elected leaders should set the rules.

“You shouldn’t want me to make that decision because you shouldn’t want corporate executives setting US foreign policy or military policy,” he added. “We should just be the dumb computer boys who make these things.”

The latest investment, which takes Anduril’s total fundraising to $2.2bn, was led by Valor Equity Partners. The company was reported earlier this year to have started the process of raising the round. In the biggest VC round of the year, Elon Musk’s space company, SpaceX, raised nearly $1.7bn in June.

US president Joe Biden has said he is “prepared to speak with” Vladimir Putin about the war in Ukraine if Russia’s leader shows an interest in bringing the nine-month conflict to an end.

“I am prepared to speak with Mr Putin if in fact there is an interest in him deciding he is looking for a way to end the war,” Biden said, adding that he would only do so after consulting Nato allies.

The remarks, made at a press conference in Washington, DC, during a bilateral summit with Emmanuel Macron, president of France, mark the furthest Biden has gone in expressing an openness to discuss the war with Putin.

The US president said he had “no immediate plans” to contact Russia’s leader, adding that he had not seen any indications from Putin that he was willing to bring the war to an end.

“He hasn’t done that yet. If that’s the case, in consultation with my French and Nato friends, I’ll be happy to sit down with Putin to see what he has in mind,” Biden said.