A new court filing on bankrupt companies by Sam Bankman-Fried reveals a colossally mismanaged and potentially fraudulent crypto empire — a “complete failure of corporate controls” that eclipses even that of Enron.
“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,” FTX’s new CEO John J. Ray III wrote in a court filing Thursday. . He previously oversaw the liquidation of Enron in the 2000s, among other bankruptcy cases.
Now, Ray is overseeing an “unprecedented” mess, on his behalf, in the collapse of the cryptocurrency exchange, its sister hedge fund Alameda and dozens of affiliated entities. 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 balance sheets, mishandling of confidential data (including using an unsecured email account to manage private cryptographic keys), and the hijacking of company funds to purchase of employee homes in the Bahamas.
FTX also lacked centralized control of its cash, according to the filing. Fund mismanagement was so poor under Bankman-Fried that new management still doesn’t know how much cash FTX Group holds. Ray and his team were only able to approximate the amount of money available, about $564 million.
That compares with a roughly $8 billion shortfall that Bankman-Fried reportedly told investors last week that FTX would need.
“There are, at best, signs of absolute non-control and power in the hands of a couple of people,” said Eric Snyder, head of the bankruptcy department at Wilk Auslander, who is not involved in the FTX case. “At worst, there is billions of dollars of systemic fraud.”
Bankman-Fried has not been charged with any crimes. His attorney Martin Flumenbaum did not respond to CNN Business’s request for comment.
In the filing, Ray also tried to steer FTX’s new management team away from Bankman-Fried, who said continues to make “irregular and misleading” statements on Twitter and in press statements.
In an interview with Vox on Twitter this week, Bankman-Fried, who had built a reputation as an advocate for more regulatory oversight of the industry, told a reporter it was all “just PR.” He added: “Fuck regulators. They make everything worse.”
Bankman-Fried also has taken to Twitter to offer 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, evaporated.
Since losing control of his companies, Bankman-Fried has retained a white-collar criminal defense attorney from the Paul Weiss firm. The attorney, Flumenbaum, previously represented the sons of Ponzi schemer Bernie Madoff and junk bond trader Michael Milken, who spent two years in prison for securities fraud in the late 1980s.
Federal prosecutors in 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 a wire Of more than 30 tweets this week, Bankman-Fried said he would still try to raise money to make customers whole. In one, he lamented how “once, a month ago, FTX was a valuable business … and we were held up as examples of running an effective business.”
But Thursday’s filing from FTX’s new CEO paints an entirely different portrait of how the company has been run.
One of the more compelling elements of Ray’s assessment points to “the use of software to conceal misuse of client funds” and a “secret exemption” by Alameda from aspects of FTX’s self-liquidation protocol.
While Ray doesn’t explicitly accuse the company of fraud, Snyder says, the document contains what lawyers call “badges” or indications thereof.
“When you say you’re using backdoor software to misuse client funds and exempt one of your top affiliates from an auto-liquidation protocol, those are signs of fraud.”
Self-liquidation refers to when an exchange like FTX automatically sells traders collateral when they fall into the red. An exemption for Alameda would suggest the hedge fund had an extra measure of protection against high-risk bets.
One of the more pervasive failures, Ray said, was the lack of registration. Bankman-Fried frequently communicated about applications that were set to automatically delete after a short period of time and encouraged staff to do the same.
Ray also noted that the companies lacked sufficient “disbursement controls,” noting that some FTX employees were given company funds to purchase homes and other personal items in the Bahamas.
Few of the companies’ financial statements appear to have been audited, and Ray said he lacks confidence in their accuracy. In one example where an affiliate received audit opinions, the assessment came from “a company that I’m not familiar with and whose website indicates they are the” first CPA company ever to officially open its Metaverse headquarters in the Decentraland metaverse platform .’ “
Many of the FTX group companies “lacked proper corporate governance” and some “never held board meetings,” the filing said.
Other procedural errors include “the absence of an accurate list of bank accounts and account signatories, as well as insufficient attention to the creditworthiness of banking partners”.