A new court filing on Sam Bankman-Fried’s bankrupt companies reveals a crypto empire that was colossally mismanaged and potentially fraudulent — a “complete failure of corporate controls” that dwarfs even that of Enron.
“Never in my career have I witnessed such a complete failure of corporate controls and a complete lack of trustworthy financial information as here,” FTX’s new CEO, John J. Ray III, wrote in a court filing Thursday. Previously, he was responsible, among other things, for the liquidation of Enron in the 2000s.
Now, Ray says he’s overseeing an “unprecedented” mess in the collapse of the crypto exchange, its sister hedge fund Alameda, and dozens of affiliated companies. Ray, a restructuring specialist, took over as CEO of Bankman-Fried nearly a week ago when the group filed for Chapter 11.
Ray’s assessment offers one of the first definitive accounts of what went wrong at FTX and Alameda.
Among the many problems the new management has uncovered are unreliable financial reports, misuse of confidential data (including using an unsecured email account to manage private crypto keys), and the diversion of company funds to buy houses for employees in the Bahamas .
According to the filing, FTX also lacked centralized control over its cash holdings. The mismanagement of funds was so bad under Bankman-Fried that the new management does not yet know how much cash FTX Group holds. Ray and his team could only roughly estimate the amount of cash available – approximately $564 million.
That compares to a shortfall of around $8 billion that Bankman-Fried reportedly told investors last week that FTX would need.
“There are signs at best of total lack of control and power in the hands of just a few people,” said Eric Snyder, head of bankruptcy at Wilk Auslander, which is not involved in the FTX case. “The worst case scenario is trillions of dollars in systemic fraud.”
Bankman-Fried was not charged with a crime. His attorney, Martin Flumenbaum, did not respond to CNN Business’s request for comment.
In the filing, Ray also tried to distance FTX’s new management team from Bankman-Fried, he said continued “irregular and misleading” statements on Twitter and in statements to the press.
In an interview with Vox via Twitter this week, Bankman-Fried, who had built a reputation as an advocate for increased regulatory oversight of the industry, told a reporter it was all “just PR.” He added: “Fuck the regulators. You make things worse.”
Bankman Fried has too taken to twitter to express his thoughts on the events of the past week and a half, a time when his personal fortune, estimated at $16 million earlier this month, has evaporated.
Since losing control of his businesses, Bankman-Fried has hired a white-collar criminal attorney from the law firm of Paul Weiss. Attorney Flumenbaum has previously represented the sons of Ponzi schemer Bernie Madoff and junk bond dealer Michael Milken, who served two years in prison for securities fraud in the late 1980s.
Federal attorneys for the Southern District of New York are investigating the collapse of FTX Trading, a person familiar with the matter told CNN. Authorities in the Bahamas, where FTX is based, launched a criminal investigation into the company over the weekend.
in one threads Of more than 30 tweets this week, Bankman-Fried said he will still try to raise funds to get customers well. In one, he lamented that “FTX used to be – a month ago – a valuable company… and we were seen as paragons of running an effective company.”
But Thursday’s filing from FTX’s new CEO paints a very different picture of how the company has been run.
One of the most compelling elements of Ray’s assessment points to Alameda’s “use of software to conceal misuse of client funds” and a “secret exemption” from aspects of FTX’s auto-liquidation protocol.
Though Ray doesn’t specifically accuse the company of fraud, Snyder says the document contains what attorneys call “badges,” or evidence of it.
“If you say you’re using backdoor software to misuse customer funds and exempt one of your key subsidiaries from an automated liquidation protocol, that’s a scam.”
Auto-liquidation refers to when an exchange like FTX automatically sells traders’ collateral when it goes into the red. An exception for Alameda would indicate that the hedge fund had an extra safeguard against high-risk bets.
One of the most common mistakes, Ray said, was the lack of records. Bankman-Fried often communicated about applications being automatically deleted after a short period of time and encouraged employees to do the same.
Ray also noted that the companies lacked adequate “cashout controls,” noting that some FTX employees received company funds to buy homes and other personal items in the Bahamas.
Few of the companies’ financial statements appear to have been audited, and Ray said he has no confidence in their accuracy. In one example where an affiliate received audit opinions, the review came from “a company I am not familiar with and whose website states that it is the ‘first CPA firm ever to officially have its Metaverse headquarters on the Metaverse platform Decentraland launched .’ ”
Many of the FTX Group companies “did not have adequate corporate governance,” and some “never had board meetings,” the filing said.
Other procedural shortcomings include “the lack of an accurate list of bank accounts and account signers, and insufficient attention to the creditworthiness of banking partners.”