Never seen such a failure of controls

Sam Bankman-Fried, founder and chief executive officer of FTX Cryptocurrency Derivatives Exchange, speaks during the Institute of International Finance (IIF) annual membership meeting in Washington, DC, on Thursday, Oct. 13, 2022.

Ting Shen | Bloomberg | Getty Images

Newly appointed FTX CEO John Ray III minced no words in a filing with the US Bankruptcy Court for the District of Delaware, declaring that “in his 40 years of legal and restructuring experience,” he had never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

Ray formerly served as the CEO of Enron after the implosion of the energy titan. He promised to work with regulators to investigate FTX founder Sam Bankman-Fried.

In the filing, Ray disclosed that he did “not have confidence” in the accuracy of the balance sheets for FTX and its sister company Alameda Research, writing that they were “unaudited and produced while the Debtors [FTX] were controlled by mr. Bankman Fried.”

The document is a declaration from Ray in his new role as CEO of FTX and associated entities, which filed for bankruptcy last week in an implosion that left the crypto world reeling and investors shaken, possibly bereft.

Ray excoriated Bankman-Fried and his management team for what were described as lackadaisical controls on systems and regulatory compliance.

“The concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals” was unprecedented, the former Enron recovery boss said.

Ray said a “substantial portion” of assets custodied with FTX may be “missing or stolen,” following widespread reports on social media of the theft of hundreds of millions in cryptocurrencies.

Coordinating with regulators, Ray wrote, the chapter 11 bankruptcy process would examine the actions of Bankman-Fried in connection with FTX’s collapse.

Alarmingly, Ray wrote that part of his remit would be to implement controls and basic corporate standards such as “accounting, audit, cash management, cybersecurity, human resources, risk management, data protection and other systems that did not exist, or did not exist to an appropriate degree, prior to my appointment.”

Bankman-Fried and FTX had “management practices included the use of an unsecured group email account as the root user to access confidential private keys and critically sensitive data for the FTX Group companies around the world, the absence of daily reconciliation of positions on the blockchain , the use of software to conceal the misuse of customer funds.”

Sam Bankman-Fried wasn’t immediately available for comment.

Sophisticated software was similarly used to conceal mismarked and fraudulent customer positions in the 2008 collapse of Bernie Madoff’s Ponzi scheme.

FTX is presently working to account for an accurate statement of cash and crypto assets. Ray said that it would not be “appropriate for stakeholders or the Court to rely on the audited financial statements as a reliable indication of the financial circumstances” of FTX.

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