FTX: Deposit reveals startling mismanagement within crypto empire

New York
CNN Business

A new court filing on the bankrupt Sam Bankman-Fried companies has exposed a once massively managed and potentially fraudulent crypto empire — a “complete failure of corporate controls” that trumps even Enron’s.

“Never in my career have I seen such a complete failure of corporate controls and such complete absence of trustworthy financial information as happened here,” FTX’s new CEO, John J. Ray III, wrote in a filing Thursday. He previously oversaw the liquidation of Enron in the 2000s, among other bankruptcy cases.

Now, Ray is overseeing the “unprecedented” mayhem, by his own account, of the collapse of cryptocurrency exchange, sister hedge fund Alameda, and dozens of affiliated entities. Ray, a restructuring specialist, took over as CEO from Bankman-Fried about a week ago, when the group filed for Chapter 11.

Ray’s assessment provides one of the first definitive accounts of what went wrong at FTX and Alameda.

Among the many problems exposed by the new administration are unreliable financial data, mishandling of confidential data (including the use of an unsecured email account to manage private encryption keys), and diversion of corporate funds to buy homes for employees in the Bahamas.

FTX also lacked central control over its funds, according to the filing. The mismanagement of funds has been so bad under Bankman-Fried that the new management does not yet know how much cash the FTX Group is holding. Ray and his team were only able to estimate the amount of cash available – about $564 million.

That compares to a shortfall of about $8 billion Bankman-Fried reportedly told investors last week that FTX will need it.

“There are, at best, indications of a lack of control and absolute power in the hands of just two people,” said Eric Snyder, head of bankruptcy at Wilk Auslander, who is unrelated to the FTX case. “At worst, there is a systemic fraud of billions of dollars.”

Bankman Fried has not been charged with any offences. His attorney, Martin Flumenbaum, did not respond to CNN Business’ request for comment.

In the filing, Ray also sought to distance FTX’s new management team from Bankman-Fried, he said He continues to make “erratic and misleading” statements on Twitter and in statements to the press.

In an interview with Vox via Twitter this week, Bankman-Fried, who has built a reputation as an advocate for more regulatory oversight of the industry, told a reporter that it was all “just PR.” He added, “The regulators are F**ck. They just make everything worse.”

Bankman Fried also did I moved to Twitter To express his thoughts on the events of the past week and a half, during which time his personal fortune, estimated at about $16 million, evaporated earlier this month.

Since Bankman-Fried lost control of his companies, he has hired a white-collar criminal defense attorney from Paul Weiss. Attorney Flumenbaum had previously represented the children of Ponzi conspirator Bernie Madoff and junk bond trader Michael Milken, who served 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 headquartered, launched a criminal investigation into the company over the weekend.

in thread Among more than 30 tweets this week, Bankman-Fried said he will still try to raise money to get customers full. In one, he lamented how “once upon a time – a month ago – FTX was a valuable institution … and we were held up as a model for effective corporate management.”

But Thursday’s filing of FTX’s new CEO paints a very different picture of how the company is run.

One of the more convincing elements of Ray’s assessment points to Alameda’s “use of software to conceal misuse of client funds” and Alameda’s “secret exemption” from aspects of FTX’s auto-liquidation protocol.

Although Ray does not explicitly accuse the company of fraud, Snyder says, the document does contain what attorneys refer to as “badges,” or clues.

“When you say you are using backdoor software to misuse customer funds and exempt a major affiliate from the auto-liquidation protocol, those are signs of fraud.”

Autoliquidation refers to when an exchange such as FTX automatically sells traders collateral when they fall into the red. Alameda’s exemption may indicate that the hedge fund has an extra measure of protection against high-stakes bets.

One of the most prevalent failures, Ray said, is not keeping records. Bankman-Fried often communicated with apps that were set to auto-delete after a short period of time, and encouraged employees to do the same.

Ray also noted that the companies lack adequate “exchange controls,” noting that some employees at FTX obtained money from the companies to purchase homes and other personal belongings in the Bahamas.

Few companies’ financial statements appear to have been audited, and Ray said he had no confidence in their accuracy. In one example where an affiliate received audit opinions, the rating came from “a company I am not familiar with whose website states that it is “the first CPA firm ever to officially open their Metaverse headquarters in the Metaverse Decentraland platform.”

Many of the companies in the FTX group “did not have proper corporate governance,” the filing said, and some “did not hold board meetings.”

Other procedural failures include “lack of an accurate list of bank accounts and account signers, as well as insufficient attention to the creditworthiness of banking partners”.

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