Fallen FTX was the Wild West
It was the Wild West.
A place where everything was acceptable, even the unthinkable.
Everything was allowed and there was no control to call to order those who went too far. There was no red line.
The CEO treated funds from one of his companies as his personal bank. The employees dipped into the company’s money to buy houses in the Bahamas and none of these transactions were recorded anywhere.
There may even have been fictitious employees. The board of directors, supposed to contain everyone’s instincts, never met.
Welcome to the cryptocurrency empire of Sam Bankman-Fried, 30, the deposed king of the cryptosphere, who filed for Chapter 11 bankruptcy on November 11. This empire mainly includes cryptocurrency exchange FTX and Alameda Trading, a crypto hedge fund.
“Potentially compromised people”
John Ray, the new CEO tasked with restructuring this empire, gave this scathing description in a 30-page document filed with the US Bankruptcy Court for the District of Delaware. The document was made public on November 17.
Page after page, Ray describes a company whose practices seem surreal. What dominates here are the lawless cowboys.
“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,” Ray wrote. “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. “
Ray is not a rookie. He was the liquidator of Enron, the brokerage whose collapse remains one of the greatest financial fiascos of modern times.
Each page is a bomb, an indictment against the Bankman-Fried regime. For Ray, the former trader and his two associates — Zixiao “Gary” Wang and Nishad Singh — failed on many levels.
“Many companies in the FTX Group, especially those organized in Antigua and the Bahamas, did not have proper corporate governance. I understand that many entities, for example, never had a board meeting. administration”, lambasted the new CEO.
He added that there was “the use of software to conceal the misuse of client funds”.
Ray did not provide further details. But his statement clearly undermines Backman-Fried’s denial that there was a backdoor, allowing him to alter the records without third parties, including auditors and investors, noticing.
Reuters reported last week that financial data from FTX showed there was a “backdoor” on the books, created with “bespoke software”. It was described as a way for Bankman-Fried to cook the books without raising an alert.
$1 billion in personal loans
“Unacceptable management practices included using an insecure group email account as the root user to access confidential private keys and highly sensitive data for FTX Group companies around the world” , wrote the seasoned restructuring veteran.
FTX’s insolvency was due to a lack of liquidity when clients attempted to withdraw funds from the platform. The lack of liquidity appears to have been the result of the transfer of $10 billion in client funds from FTX to Alameda Research by the founder of FTX.
FTX faces a shortfall of $1-2 billion.
As a crypto exchange, FTX executed orders for its clients, taking their money and buying cryptocurrencies on their behalf. FTX acted as custodian, holding clients’ cryptocurrencies.
FTX then used the crypto assets of its clients, through the trading arm of its sister company Alameda Research, to generate liquidity through borrowing or market making. Money borrowed by FTX was used to bail out other crypto institutions in the summer of 2022.
At the same time, FTX used the cryptocurrency it issued, FTT, as collateral on its balance sheet. This represented a significant exposure, due to the concentration risk and volatility of FTT.
According to John Ray, Bankman-Fried received a $1 billion personal loan from Alameda. The company also provided a personal loan of $543 million to Singh and $55 million to Ryan Salame, co-CEO of FTX Digital Markets, one of FTX’s subsidiaries.
“In the Bahamas, I understand that FTX Group Company funds have been used to purchase homes and other personal items for employees and advisors,” the seasoned executive said.
“I understand that there does not appear to be documentation for some of these transactions as loans, and that some real estate has been registered in the personal names of these employees and advisors in the Bahamian records.”
He further said that to get reimbursed for business expenses, employees only need to submit the request via chat and a supervisor will immediately approve with a personalized emoji.
“Receivables lacked the type of disbursement control that I believe is appropriate for a commercial enterprise,” the new CEO wrote. “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.”
Finally, Ray said he still hasn’t been able to locate some of the alleged employees, suggesting that some either fled or didn’t exist.
“At this time, the debtors have not been able to prepare a complete list of people who worked for the FTX group,” he said. “Repeated attempts to locate certain alleged employees to confirm their status have been unsuccessful to date.”