Sam Bankman-Fried’s bankrupt FTX trading empire misused client funds and lacked reliable financials or proper internal controls, says new boss of collapsed $32 billion crypto exchange .
John Ray III, a veteran insolvency practitioner who oversaw the liquidation of Enron, said in a U.S. court filing on Thursday that FTX was the worst case of corporate bankruptcy he had seen in more than 40 years of career.
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of reliable financial reporting as has happened here,” he wrote.
The statement highlighted the chaos and mismanagement at the heart of what was once a major player in the crypto industry with deep ties to Washington DC. The demise of Bankman-Fried’s FTX empire has thrown the crypto markets into crisis. Bankman-Fried did not immediately respond to a request for comment on the new filing.
Ray said he found in FTX international, FTX US and Bankman-Fried trading firm Alameda Research “compromised systems integrity”, “flawed regulatory oversight” and a “concentration of control in the hands of ‘a very small group of inexperienced, unsophisticated and potentially compromised people’.
The scathing filing in federal bankruptcy court in Delaware painted a picture of Bankman-Fried’s serious mismanagement at FTX, a company that has raised billions of dollars from top venture capitalists such as Sequoia. , SoftBank and Temasek.
FTX failed to maintain proper books, records, or security controls for the digital assets it held for clients, used software to “conceal misuse of client funds” and granted special treatment at Alameda, Ray said, adding that “debtors don’t have a bookkeeping and outsource that function.”
He said the company did not have an “accurate list” of its own bank accounts, or even a complete record of who worked for FTX. He added that FTX used “an insecure group email account” to manage security keys for its digital assets.
The group’s funds had been used “to buy houses and other personal items” for staff and advisers, and payments were approved through the use of “personalized emojis” in an online chat, according to Ray.
Ray said that “one of the most common failures” at FTX’s main international exchange was the lack of decision-making documents. He said Bankman-Fried often used messaging platforms with an auto-delete feature “and encouraged employees to do the same.”
Among the assets listed in the document were $4.1 billion in related party loans made by Alameda, including $3.3 billion to Bankman-Fried both personally and to an entity he controlled.
Bankman-Fried previously told the Financial Times that FTX “accidentally” donated $8 billion in FTX client funds to Alameda.
Ray said that among the main objectives of the bankruptcy proceedings was a “thorough, transparent and deliberate investigation into [potential legal] claims against » Bankman-Fried.
Several academic and industry experts told the FT that creditors may seek to have a “trustee” appointed to take over management of FTX given the extent of the alleged misconduct that led to the bankruptcy.
Ray added that the fair value of crypto assets held by international exchange FTX was only $659,000 as of September 30. The filing does not include an estimate of the crypto assets owed to customers, but says they should be “significant.”
He said FTX was able to transfer $740 million worth of cryptocurrency to offline “cold” wallets where it could be safe. The company had also suffered a hack of almost $400 million worth of crypto right after filing for bankruptcy.
The bankruptcy process has been hampered by the lack of reliable information kept by the company, according to Ray, who warned that even the balance sheet figures provided in the filing may not be reliable as they were prepared when Bankman- Fried ran FTX.
He noted that the financial statements produced by FTX under the direction of Bankman-Fried did not include client liabilities and said he did not believe the company’s 2021 audited accounts could be relied upon. At the initial bankruptcy filing last Friday, the combined assets and liabilities of FTX international, FTX US and Alameda were estimated to be between $10 billion and $50 billion.
Amid Ray’s early statements about FTX’s collapse, a jurisdictional fight over the company’s legal proceedings emerged. Earlier in the week, Bahamian officials filed for Chapter 15 bankruptcy in federal court in New York asking a judge to respect a liquidation effort that had begun in the island nation.
At issue is an FTX subsidiary known as “FTX Digital” that is not involved in the US Chapter 11 case in which the Bahamas claims significant client assets reside. Ray wrote in a court filing on Thursday that the Chapter 15 case is expected to be consolidated in Delaware bankruptcy court.
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