 Hello everyone. In this session, I'm going to be explaining the FTX collapse from one single angle and that's angle is mark to market accounting. So I am not going to be discussing anything about the failure of internal controller of FTX. There's a lot can be said about this maybe in a separate recording or a separate few separate sessions. And I would like to disclose one thing I am not familiar with crypto trading. So maybe there are certain terminologies I might use. They may not be 100% perfect because I'm not familiar with this topic itself, but I can explain from an accounting perspective mark to market what happened and what should we learn as accountant as auditors what should be on the lookout for. Before we proceed any further, I have a public announcement about my company farhatlectures.com. Farhat accounting lectures is a supplemental educational tool that's going to help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true false questions as well as exercises. Go ahead, start your free trial today. No obligation, no credit card required. The first thing I'm going to give an overview of the three main players in this collapse. So this way you have a good idea what's going on and that's FTX, Binance and Alameda Research. What was FTX? FTX was one of the large cryptocurrencies, the third largest one by volume and crypto hedge fund. Simply put, what you do is you can deposit your cryptocurrency and keep it with FTX. That's basically the idea. And you can trade it, you can sell it, you can buy so on and so forth. And they do trading as well because they do crypto hedge fund. So simply put, they trade and who was in charge, this fellow here, which is, we should all know who he is, SPF, Sam Bankman Fried. Now Binance is the largest exchange in the world in terms of daily trading volume of cryptocurrency. So this is basically number one. Some people think this FTX was number two, some think number three, it doesn't matter. Just know Binance was another exchange. Now why do we have to learn about this? This company, Binance was run by this guy abbreviated as CZ or his name is Champing Zoo. And Binance used to own 20% of FTX. But last year, which is 2021, Binance sold their 20% equity in FTX. And Sam Bankman Fried paid for this. Partly, he paid using FTT token. What is FTT token? Basically the token, the money that they use on the exchange. They paid cash, but they also paid FTT token. It's worth mentioning the exit was not an amicable one. And what was happening, Sam Bankman Fried was trying to register in different countries. And since Binance own 20%, he was given him hard time, given him the proper disclosure in order to be able to file on various foreign exchanges. But that's a different story. You can read about this, but the point is it was not a friendly exit. That's the point. And Binance now have FTT token. Alameda Research is a trading firm. Basically they trade digital currency, which is they trade all sorts of digital currency. It was co-founded by SPF and it was losing money trading. So that's important to know. And it was run by Caroline Allison, who happens to be SPF girlfriend. So this is the relationship between the three. So those are the three players. So on November 2nd, Coin Desk article, what is Coin Desk? Basically think of it as a news site for the cryptocurrency industries. They published an article that Alameda Research Balance Sheet shows 16.4 billion in asset. Well, that's fine. You have 16.4 billion of assets of which 8 billion was FTT tokens. Now think of FTT tokens because I myself, I'm not familiar with cryptocurrencies as units or stocks. Basically, you know, stocks that are worth 8 billion. Now again, you're going to be taking some units times the price to come up with the fair value of 8 billion. Now here's the problem with this. Once this article came out November 2nd about Alameda Research. So why would they have that many for one thing? Notice for one thing, close to 50% of their assets is FTT token. Think about a company that's in trading and 50% of their assets is in one asset. FTT token. It's not only in one asset. Remember, there's a relationship between FTX and Alameda. So something is questionable. Okay? So 50% of your assets is this number is most likely we're going to see it was even fake. Why was it fake? Because if you look at the FTX website, they say they only have 190 million FTT in circulation. Well, if there are 197 million units in FTT circulation, the price as of June 20th was 24.53. So if you take 24, this is the closing prices of June 30th. If you take $24.53 and let's assume Alameda had all the token that's out in circulation, it will be approximately, let me just do the math one more time, 24.53. It should be approximately 4.8 rounded, you know, 4.8 to 4.8 billion. That's the maximum they should have. Why do they have 8 billion in FTT token? So this has started to raise question about what's going on at Alameda Research and why would they have all these FTT tokens? So something is wrong right there. This is more to market accounting and, you know, the question is what was the auditor thinking? What was the accountant thinking? We're going to know later on how did they come up with this number? 8 billion really did not exist. Even if you said, you know, the price it treated the price, you have to treat the price of was 28 and some change to come up with this value. So there is maybe, let me see, $121.97, if you value it at $28, you would still come up at 5 billion. It has to be way, way more. So again, we're going to learn more about this, but this is mark to mark accounting. Now what's the price of FTT today? Who has I'm doing this recording? It's 86 pennies. So now you have to do is take 196 million multiplied by 86 pennies. That's the value of the FTT token. So you know what happened? It collapsed. Let me show you what happened. So this is November 2nd. This is when the article came out. Let me change colors here. So you would see this is where basically some place here, some place here, this is November 2nd. This is when the article came out and the price was approximately $25. Now the price started to drop, then suddenly dropped substantially. Now we need to know what happened from this date, from November 2nd till November 10th basically till November 10th. This is where the big drop is. So let's see what happened between those two dates on November 6th, which is four days later. Now you have to keep in mind there was, you know, stuff going on between Binance and FTX. Remember, they're not friendly. Okay. So here's what CZ tweeted as part of our Binance exit from FTX last year. We received $2.1 billion in USD equivalent in cash, which was this token and FTX due to the recent revelations, which is about the balance sheet of Alameda, which is a company related to FTX. Well, we are going to, we decided to liquidate any remaining FTX. So what he said, he said, I am going to sell my FTX position because I don't trust FTX. And when a person that used to own 20% of the company is selling all these shares, obviously, if everything is good, the price will go down. Like for example, when Elon Musk sells his Tesla shares, the price go down. Basically, you are supplying more units. You're selling more. Well, the law of supply and demand, the prices will go up. So as a result, as you try to sell, more people will try to sell as well. And the price will keep on dropping because everyone wants to exit before you exit. And guess what? The price will crash. On November 6th, liquidating our FTX is just post exit risk management, learning from Luna, which is some other experience we gave support before, but we won't pretend to make love after divorce, which is because again, they were part of FTX, but now they sold our position. We're not against anyone. Notice here, there was some animosity going on, going on, but we won't support people who lobby against other industry players behind their backs onwards. So he's talking about SS, he's talking about SBF. Why? A lot of rivalry between the two. Fast forward till November 8th. So two days later, this afternoon, FTX, FTX asked me for our help. So now FTX contacted him and said, okay, would you be interested in buying us? There's a significant liquidity crunch to protect users. We signed a non-binding letter of intent, intending to fully acquire FTX. Now they're saying on November the 8th, yes, we will take a look at your company. Yes, we might buy you to get you out of this liquidity crunch, because when the price was going on, everybody was liquidating to cover the liquidity crunch. We will be conducting a full DD, due diligence in the coming days. Due diligence means what? It means open your books and let's see what's there because we're going to buy your company. Well, guess what? From November 2nd to November 10th, they learned what they needed to learn and what they find out is SBF was there was a lot of fraud going on and they discovered what's going on between Alameda and FTX and 8 billion were missing, 8 billion in cash, and this is the letter that they, this is the letter that he published on November the 10th, and this is what happened between the 2nd and the 10th, and this is why the collapse occurred. Basically, those are what was happening. So he just said, we found so many irregularities. You could read the article, but the point is they find out internal control were not good. We should not be touching this company. It's a lot of liabilities, so on and so forth. And now the price again is 86 pennies, basically worthless in a sense, because again, they're in bankruptcy. So the point is, it was a market accounting from Alameda research. If they had good internal control, I know I'm not going to talk about good internal control, but I have to talk about this. We cannot not talk about this. How did Alameda had 8 billion in assets? For assets, that was not worth 8 billion. That's more to market accounting. It cannot be a mistake. It's definitely fraudulent. Again, we would learn more. I hope you find this interesting because I was trying to follow this, but I guess that's the shortest amount of time. I can give you the big picture of this. Again, we would learn more and more. This can be a course by itself about internal control and accounting fraud. Good luck, everyone. Stay safe. And if you're an auditor, always be on the lookout, always be sceptic, even if you might look stupid, ask stupid questions, verify everything, verify everything. Mark the market accounting should not be difficult, especially if the prices are available. Do your due diligence, keep us proud, and stay safe and study hard.