John Ray III, a veteran insolvency practitioner who oversaw Enron’s liquidation, told a US court on Thursday that FTX was the worst case of corporate failure he had seen in his 40-year career.
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of reliable financial information as occurred here,” he wrote.
The statement underscored the chaos and mismanagement at the heart of what was once a top player in the crypto industry with deep ties to Washington. The collapse of Bankman-Fried’s FTX empire has plunged crypto markets into crisis. Bankman-Fried did not immediately respond to a request for comment on the new filing.
Ray said he found at trading firm FTX international, FTX US and Bankman-Fried’s Alameda Research “compromised system integrity,” “diminished regulatory oversight” and “concentration of control in the hands of a very small group of inexperienced, unsophisticated, and potentially compromised individuals.” ».
The scathing filing in federal bankruptcy court in Delaware painted a picture of serious mismanagement by Bankman-Fried at FTX, a company that has raised billions of dollars from leading venture capitalists such as Sequoia, SoftBank and Temasek.
FTX failed to keep appropriate books, records or security controls for the digital assets it held for customers. used software to “conceal misappropriation of client funds”; and gave special treatment to Alameda, Ray said, adding that “debtors do not have an accounting office 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 the people who worked for FTX. It added that FTX used “an unsecured group email account” to manage security keys for its digital assets.
The group’s funds had been used “to purchase houses and other personal items” for staff and advisers, and payments were authorized through the use of “personalized emojis” in an online chat, according to Ray.
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Ray said “one of the most pervasive failures” at FTX’s main international exchange was the lack of records on decision-making. 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, $3.3 billion of which were held by Bankman-Fried both personally and in an entity it controlled.
Bankman-Fried previously told the Financial Times that FTX had “inadvertently” given $8 billion of FTX client funds to Alameda.
Ray said that among the main goals of the bankruptcy proceedings was a “comprehensive, transparent and purposeful investigation of [potential legal] claims against” Bankman-Fried.
Several academics and industry experts told the FT that creditors may seek to appoint a “trustee” to take over the management of FTX, given the scale of the alleged wrongdoing leading up to the bankruptcy.
Ray added that the fair value of crypto assets held by international exchange FTX was just $659,000 as of September 30. The filing does not include an estimate of crypto assets owed to clients, but says they are expected to be “significant.”
He said FTX was able to move $740 million worth of cryptocurrency into “cold” offline wallets where it could be secured. The company also suffered a nearly $400 million crypto breach shortly after filing for bankruptcy.
The bankruptcy process was hampered by a lack of reliable information kept by the company, according to Ray, who warned that even the balance sheet figures provided in the filing may be unreliable because they were prepared when Bankman-Fried ran FTX.
He noted that financial statements prepared by Bankman-Fried-led FTX did not include customer liabilities and said he did not believe they could be relied upon in the company’s audited accounts in 2021. In the initial bankruptcy filing last Friday, the combined assets and liabilities of FTX international, FTX US and Alameda were estimated between $10 billion and $50 billion.
Amidst Ray’s early statements about FTX’s collapse, a jurisdictional fight over the company’s legal proceedings has arisen. Earlier in the week, officials from the Bahamas filed for Chapter 15 bankruptcy in a New York federal court asking a judge there to honor the 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, which the Bahamas says has significant client assets. Ray wrote Thursday in a court filing that the Chapter 15 case should be consolidated in Delaware bankruptcy court.
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