Former FTX CEO Sam Bankman-Fried received a $1 billion personal loan from one of four silo companies deeply involved in the collapse of cryptocurrency exchange FTX.
An official statement in the pending Chapter 11 bankruptcy filings of new FTX CEO John Ray III revealed further embezzlement by Bankman Fried.
According to the filing, Alameda Research loaned $1 billion directly to Bankman-Fried, while FTX engineering director Nishad Singh also received a $543 million loan from the company.
Ray III, who was responsible for picking up the pieces after Enron’s infamous collapse, was scathing in his initial filing with the United States Bankruptcy Court for the District of Delaware.
He went so far as to describe the situation as the worst he had seen in his corporate career, pointing to “the complete failure of corporate controls” and the absence of reliable financial information:
“From the compromised integrity of systems and faulty regulatory oversight overseas, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented. “
The Chapter 11 filing will seek to implement controls over accounting, auditing, cybersecurity, human resources, data protection and other systems for four groups of businesses associated with the corporate organization from FTX.
Four silos make up FTX Group
Ray III identifies four “silos”, which include a multitude of different companies that make up the FTX group. The “WRS” silo includes subsidiaries of West Realm Shires Inc., which includes FTX US, LedgerX, FTX US Derivatives, FTX US Capital Markets and Embed Clearing.
Alameda Research is a stand-alone silo in the docket with its own subsidiaries, while Clifton Bay Investments LLC and Ltd, Island Bay Ventures Inc. and debtor FTX Ventures Ltd fall under the “Ventures” silo. The “Dotcom” end silo includes FTX Trading Ltd and exchanges doing business under the FTX.com umbrella.
According to Ray III’s filing, all of the silos were controlled by Bankman-Fried, while minor stakes were held by former FTX CTO Zixiao “Gary” Wang and Singh. The WRS and Dotcom silos had third-party equity investors that included a host of investment funds, endowments, sovereign wealth funds and families that were impacted by the FTX collapse.
The dossier contains other damning indictments of the inner workings of Bankman-Fried’s empire. The wider FTX Group failed to “maintain centralized control” of its cash, failed to maintain accurate bank account listings, and paid “insufficient attention to the creditworthiness of banking partners”.
Ray III also notes that the WRS silo was the only arm that undertook a reliable audit with a notable accounting firm. He expresses concern about the audited financials of the Dotcom silo, while finding no audited financials for the Alameda and Ventures silos.
The disbursement of funds was also highly dysfunctional, according to the record:
“For example, FTX Group employees submitted payment requests via an online ‘chat’ platform where a disparate group of supervisors approved disbursements by responding with personalized emojis.”
Ray III also notes that company funds were used to purchase homes and personal items for employees and advisers, with a lack of documentation for transactions, including loans.
The crypto guard in disarray
Custody of cryptocurrency assets was also a mess, according to the Chapter 11 filing, with inadequate records or security controls in place for FTX Group’s digital assets.
Bankman-Fried and Wang controlled access to the cryptocurrency holdings of the main group companies. Ray III describes “unacceptable practices” which include the use of an unsecured group email account to access confidential private keys and highly sensitive data for the global corporate network.
The group also failed to perform a daily reconciliation of cryptocurrency holdings and used software to conceal the misuse of customer funds. It also allowed Alameda to be secretly exempted from certain aspects of FTX.com’s reverse charge protocol.
Perhaps most telling is the fact that debtors who filed for bankruptcy only secured “a fraction of the digital assets” they hoped to recover. Cold wallets containing $740 million worth of cryptocurrency have been obtained, but it is unclear which silo the funds belong to.
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