Earlier Thursday, FTX CEO John Ray III filed a declaration with a US bankruptcy court in the state of Delaware, the latest in the collapse of one of the world’s largest cryptocurrency exchanges.
Ray, who helped shepherd Enron through its bankruptcy, didn’t utter any words about the state of the company or the behavior of the previous executive team, calling it one of the worst examples of corporate controls he’d ever encountered. It was a damning note from someone with 40 years of legal and restructuring experience.
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Here are some of the most important revelations from the Ray file:
1. Complete lack of financial and corporate controls
“Never in my professional life have I seen such a complete failure of corporate controls and such complete absence of trustworthy financial information as here.”
Ray opened his file to burn previous management, including former CEO Sam Bankman-Fried, over the leadership’s failure to catch up and address a staggering multibillion-dollar hole in Alameda Research-FTX’s balance sheets. Investor losses could reach $8 billion. But with the ups and downs of the accounting, auditing, and disbursement systems, it will take Ray and his forensic investigators “some time” to uncover the truth.
2. Slipshod Accounting will require forensic analysis.
“I do not believe it is appropriate for stakeholders or the court to rely on audited financial statements as a reliable indicator of the financial conditions of these [companies]. “
The new FTX president said he had “substantial” concerns about the financial positions he was taking to court. FTX’s implosion exposed a massive hole in the company’s balance sheets, but until the blockchain analysis and forensic accounting was completed, Ray said it was not “appropriate for stakeholders or the court to rely” on the numbers provided.
Accurate financial data is a key metric for evaluating and investing in a company. Venture capital firms have poured billions into poster child Bankman Fried and his companies, valuing them in the tens of billions of dollars.
A standard aspect of any venture capital investment is the due diligence period, during which the books are opened and audited financial statements are shown to potential investors. Ray’s assertion that the financial statements of many of FTX’s subsidiaries are unreliable raises new questions about the due diligence of some of the world’s largest investment firms.
3. Penthouses, concessions and personal items
“In the Bahamas, I am aware that funds from FTX Group subsidiaries were used to purchase homes and other personal items for employees and consultants. I understand that there does not appear to be documentation of some of these transactions as loans, and that properties in the personal names of such employees and advisors are registered in Bahamas records.”
Other reports detailed lavish perks allegedly granted to FTX employees in the Bahamas. Ray’s dossier indicated that corporate money was used to purchase homes for employees and advisors, sometimes in their own name. Loans from FTX to these individuals are not recorded – as is usual with similar arrangements in other companies. Instead, individuals were given the titles to these properties, according to Ray, freely and clearly, in their own names.
Notably, Bankman Fried’s $40 million penthouse briefly hit the market in the wake of the bankruptcy. It has since been removed from the public list.
4. Expense emojis
“Debtors did not have the kind of disbursement controls that I think would be appropriate for a commercial enterprise. For example, FTX Group employees submitted payment requests through an online ‘chat’ platform where a disparate group of supervisors approved payments by responding with personalized emojis.”
Despite having an entire industry devoted to expense controls and reimbursement processes, the Bankman-Fried team used internal messaging to release the company’s money into the hands of employees around the world. It wasn’t immediately clear what platform FTX used, though the company is known to have used Slack for internal communications.
5. Advantage for Alameda
Unacceptable management practices included the use of unsecured bulk email […] To access private secret keys and highly sensitive data […] lack of daily settlement of positions on the blockchain, use of software to hide misuse of client funds, confidentiality exemption for Alameda from certain aspects of FTX.com’s automatic liquidation protocol, and absence of independent governance […]”
Alameda Research, the secret trading firm at the heart of the Bankman-Fried empire, executed trades on FTX alongside other institutional and retail traders. The two companies were closer than was publicly acknowledged, however, in light of Ray’s announcement that Alameda had been secretly exempt from “certain aspects” of FTX’s auto-liquidation protocol.
It is not immediately clear what aspects Ray meant. In cryptocurrency trading, liquidation is akin to a margin call, whereby a leveraged position is closed by the exchange due to a dramatic shift in the price of the underlying asset.
CNBC has filed multiple requests for comment from Bankman-Fried.