John Ray III, a veteran insolvency professional who oversaw the liquidation of Enron, said in a US court filing on Thursday that FTX was the worst case of corporate failure that he had seen in his more than 40-year career.
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” he wrote.
The statement underlined the chaos and mismanagement at the heart of what was once a leading crypto industry player with deep ties in Washington, DC. The demise of Bankman-Fried’s FTX empire has plunged crypto markets into a crisis. Bankman-Fried did not immediately respond to a request for comment on the new filing.
Ray said he had found at FTX international, FTX US, and Bankman-Fried’s Alameda Research trading company “compromised systems integrity,” “faulty regulatory oversight,” and a “concentration of control in the hands of a very small group of inexperienced, unsophisticated, and potentially compromised individuals.”
The scathing filing in the federal bankruptcy court in Delaware painted a picture of severe mismanagement by Bankman-Fried at FTX, a company that raised billions of dollars from top-tier venture capital investors such as Sequoia, SoftBank, and Temasek.
FTX failed to keep proper books, records, or security controls for the digital assets it held for customers; used software to “conceal the misuse of customer funds”; and gave special treatment to Alameda, said Ray, adding that “the debtors do not have an accounting department and outsource this 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. He added that FTX used “an unsecured group email account” to manage the security keys for its digital assets.
The group’s funds had been used “to purchase homes 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 pervasive failures” at FTX’s main international exchange was the lack of records about decision-making. He said that Bankman-Fried often used messaging platforms with an auto-delete function “and encouraged employees to do the same.”
Among the assets listed in the document was $4.1 billion of related party loans extended by Alameda, $3.3 billion of which was to Bankman-Fried both personally and to an entity he controlled.
Bankman-Fried previously told the Financial Times that FTX had “accidentally” given $8 billion of FTX customer funds to Alameda.
Ray said that among the core objectives of the bankruptcy proceedings was a “comprehensive, transparent and deliberate investigation into [potential legal] claims against” Bankman-Fried.
Several academic and industry experts have told the FT that creditors may seek to have a “trustee” appointed to take over the management of FTX given the scale of alleged misconduct leading up to the bankruptcy.
Ray added that the fair value of the crypto assets held by the FTX international exchange was a mere $659,000 as of September 30. The filing does not include an estimate of crypto assets owed to customers, but says they are expected to be “significant.”
He said FTX had been able to move $740 million of cryptocurrency to offline “cold” wallets where it could be secured. The company had also suffered a near $400 million hack of crypto just after it filed for bankruptcy.
The bankruptcy process has been hampered by a lack of reliable information kept by the company, according to Ray, who cautioned that even the balance sheet figures provided in the filing might be unreliable because they were prepared when Bankman-Fried ran FTX.
He noted that financial statements produced by FTX under Bankman-Fried’s leadership did not include customer liabilities, and said he did not believe the company’s audited 2021 accounts could be relied on. In the initial bankruptcy filing last Friday, the combined assets and liabilities of FTX international, FTX US and Alameda were estimated at between $10 billion and $50 billion.
Amid Ray’s first statements on the collapse of FTX, a jurisdictional fight over the company’s legal proceedings has emerged. Earlier in the week, Bahamian officials filed a Chapter 15 bankruptcy in a New York federal court asking a judge there to respect a liquidation effort that had commenced in the island nation.
At issue is an FTX subsidiary known as “FTX Digital” not involved in the US Chapter 11 case in which the Bahamas says significant customer assets reside. Ray on Thursday wrote in a court filing that the Chapter 15 case should be consolidated in the Delaware bankruptcy court.
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