A new court filing involving Sam Bankman-Fried’s bankrupt corporations 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 seen such a complete failure of corporate controls and such a complete absence of reliable financial reporting as has occurred here,” wrote FTX’s new CEO John J. Ray. III, in a file filed Thursday. He previously oversaw the liquidation of Enron in the 2000s, among other bankruptcy cases.
Now Ray is overseeing an “unprecedented” mess, according to his own account, in the collapse of the crypto exchange, its sister hedge fund Alameda, and dozens of affiliated entities. Restructuring specialist Ray 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 new management uncovered are unreliable financial statements, mishandling of confidential data (including the use of an unsecured email account to manage private cryptographic keys), and embezzlement of company funds. company to buy houses for employees in the Bahamas.
FTX also lacked centralized control over its cash flow, according to the filing. Mismanagement of funds was so bad under Bankman-Fried that new management does not yet know how much cash FTX Group holds. Ray and his team could only estimate the amount of cash available, which is approximately $564 million.
This compares to a shortfall of around $8 billion that Bankman-Fried would have told investors last week which FTX would need.
“There are, at best, signs of absolute non-control and power in the hands of just a few people,” said Eric Snyder, head of Wilk Auslander’s bankruptcy department, which is not involved in the dispute. FTX case. “At worst, there is systemic fraud of billions of dollars.”
Bankman-Fried has not been charged with any crime. His attorney Martin Flumenbaum did not respond to CNN Business’ request for comment.
In the filing, Ray also sought to steer FTX’s new management team away from Bankman-Fried, who he says continues to make “erratic and misleading” statements on Twitter and in statements to the press.
In an interview with Vox On Twitter this week, Bankman-Fried, who had earned a reputation as an advocate for greater regulatory scrutiny of the industry, told a reporter that it was all “public relations only.” He added: “F**ck regulators. They make everything worse.
Bankman-Fried has also taken to Twitter to express his thoughts on the events of the past week and a half, a period during which his own personal fortune, estimated at $16 million at the start of the month, has evaporated.
Since losing control of his businesses, Bankman-Fried has retained the services of a white-collar criminal defense attorney from the Paul Weiss firm. The lawyer, 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 thread of more than 30 tweets this week, Bankman-Fried said he will always try to raise funds to make clients whole. In one, he lamented that “once upon a month ago, FTX was a valuable company…and we were seen as models of running an efficient business.”
But Thursday’s filing by FTX’s new CEO paints a starkly different picture of how the company was run.
One of the most compelling elements of Ray’s assessment points to “the use of software to conceal the misuse of customer funds” and a “covert exemption” from Alameda of aspects of the self-dealing protocol. liquidation of FTX.
Although Ray doesn’t explicitly accuse the company of fraud, Snyder says, the document contains what attorneys call “badges,” or indications.
“When you say you’re using backdoor software to misuse customer funds and exempt one of your major affiliates from an automatic liquidation protocol, those are badges 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 added measure of protection against high-risk bets.
One of the most common failures, Ray said, was lack of record keeping. Bankman-Fried often communicated about apps set to be automatically deleted 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 received corporate funds to purchase homes and other personal items in the Bahamas.
Few companies’ financial statements appear to have been audited, and Ray said he has no confidence in their accuracy. In an example where an affiliate received audit notices, the rating was from “a firm I don’t know and whose website says it’s the ‘first CPA firm to officially open’ its Metaverse headquarters on the Decentraland metaverse platform.’ ”
Many FTX Group companies “did not have proper corporate governance” and some “never held board meetings,” the filing said.
Other procedural failings include “the absence of an accurate list of bank accounts and account signatories, as well as insufficient attention to the creditworthiness of banking partners”.