The executive hired to run FTX Group through bankruptcy offered his first findings of improper fund transfers and poor accounting at the collapsed crypto exchange on Thursday, describing it as a “total failure” of controls. John Ray, who was named CEO of FTX after the company filed for bankruptcy on Nov. 11, said in a court filing that the company’s oversight, safety and governance deficiencies he identified were greater than any other process he has managed in his 40 years. years as a bankruptcy specialist, including Enron.
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of credible financial information as here,” Ray said in a filing in Delaware County bankruptcy court. FTX collapsed after its founder Sam Bankman-Fried used $10 billion in client funds to prop up his hedge fund Alameda Research, which suffered losses when its bets on crypto businesses fell. This left FTX short of funds to cover withdrawals when a plunge in the value of one of its currencies, FTT, triggered a bank run.
While Ray’s submission does not provide a full account of FTX’s demise, it does detail several mistakes that contributed to the downfall. The Alameda entity loaned $2.3 billion to the FTX entity, while Bankman-Fried and FTX co-founders and senior executives Nishad Singh and Ryan Salame together borrowed $1.6 billion from Alameda, according to the filing. More such “related party” transactions are listed in the filing, although details are not offered.
Bankman-Fried, Singh and Salame did not respond to requests for comment Thursday. FTX funds were also used to purchase homes and other personal items for employees and advisors, Ray wrote. Some of these money transfers were not documented as corporate loans, while the houses were registered in the names of employees, Ray added. According to the filing, proper checks and balances were lacking. Employees submitted payment requests through an online “chat” platform and were approved by supervisors for personalized emoticons, the filing said.
Bankman-Fried often communicated through apps that were set to automatically delete after a short period of time and encouraged employees to do the same, Ray wrote. Most of the financial statements reviewed by Ray were not audited. He said he had “substantial concerns” about statements he found audited because they relied on Prager Metis, an accounting firm operating in the virtual world, on the Decentraland metaverse platform.
Ray also wrote that Bankman-Fried made “unusual and misleading public statements,” citing an exchange with a reporter on Twitter. Vox published an interview with Bankman-Fried on Wednesday, in which he said he regretted his decision to file for bankruptcy protection and criticized regulators. He later tried to backtrack, saying he was “venting” and thought his exchange of messages with the reporter that formed the basis of the interview was private.
FTX had 1 million users in the United States and many more worldwide, according to the filing. It is unclear how many of them will be able to recover their funds through bankruptcy. Singapore state investor Temasek Holdings, an FTX investor, also criticized Bankman-Fried on Thursday when it announced it would write down the value of its $275 million stake. “It is clear from this investment that perhaps our faith in the actions, judgment and leadership of Sam Bankman-Fried … appeared to be misplaced,” Temasek said.
Other investors, including visionary fund Softbank Group and Sequoia Capital, also wrote down their investments in the stock market as ripples from the FTX bankruptcy continue to be felt around the world. Major crypto player Genesis Global Capital on Wednesday suspended repayments to customers in its lending business in response to “extreme market disruption and loss of confidence in the industry caused by the FTX implosion.” Financial and markets authorities around the world scrambled on Thursday to devise answers to FTX’s failure, with Singapore’s finance minister saying its collapse had prompted “very serious allegations that constitute potential fraud”. Indonesia orders crypto exchanges to stop trading FTX tokens. Brazilian cryptocurrency advocates cited FTX’s implosion in an effort to convince lawmakers to give final approval to a bill to strengthen oversight of the cryptocurrency industry.
