“In my 40-year career, I have never seen such a complete failure of corporate control mechanisms and such a complete absence of financial information. reliable as it happened [avec FTX]”, a centralized cryptocurrency exchange platform that went bankrupt this November. It is with these unusual, even shocking words that John Ray III, expert in the restructuring of bankrupt companies, who takes over the reins of FTX, summarizes, in a judicial report published Thursday, November 17, the situation of the company.
In this report filed Thursday in a Delaware bankruptcy court, Mr. Ray, who managed the liquidation of energy giant Enron from 2001, reveals startling details about the managerial behavior of Sam Bankman-Fried, founder of the platform, and his close collaborators. Use of chat applications to validate transactions, transfer of large sums to the personal accounts of the founder and his advisers or even the purchase, with company funds, of private goods… The list is long!
Ray’s report refers to a “unprecedented failure“. From all his experience in corporate restructuring, he says “never seen anything so bads”. The American expert underlines a “compromised system integrity“, a “faulty regulatory oversight“, a “concentration of control in the hands of a small group of inexperienced, simplistic and potentially corrupt individuals”. John Ray III was appointed just prior to FTX’s bankruptcy and the resignation of its chief executive, Sam Bankman-Fried, who is currently in the Bahamas, where FTX was headquartered.
“Historical failure in cash management”
The report of the American expert, who expressed “substantial concerns” on the company’s financial statements, reveals that a significant portion of the assets held by FTX would be “missing or stolen”.
John Ray explains that “theAdvisors don’t yet know how much money FTX Group had when the company filed for bankruptcy”. He says he has found, so far, about $560 million belonging to various FTX entities. The Financial Times rather reports a sum of 740 million dollars, but this remains all the same only a “fraction of the $10 billion to $50 billion in liabilities the company disclosed in its bankruptcy filing”.
John Ray states “don’t trust” in the information provided so far in the audited financial statements. The liquidators were still trying to trace the various balance sheets of the FTX entities. He cites the example of the latter’s hedge fund, Alameda Research LLC and its financial statements made on a quarterly basis. “To my knowledge, none of these financial statements have been audited. Alameda’s September 30, 2022 balance sheet shows total assets of $13.46 billion as of its date. However, since this balance sheet has not been audited and has been produced while the debtors were controlled by Mr. Bankman-Fried, I do not trust him and the information it contains may not not be correct on the date indicated”, he explains again.
The fault of a “historical failure of cash management”. Its report says that the exact amount of cash held by FTX Group is unknown, as the platform has not conducted a “centralized cash control” et “not even keeping an accurate list of bank accounts and account signatories, or paying sufficient attention to the creditworthiness of banking partners”.
Mr Ray also denounced the statements “inconsistent and misleading” of Sam Bankman-Fried since his resignation, pointing out that he no longer spoke on behalf of FTX.
Approved disbursements… on chat applications
A behavior that does not allow the liquidators or John Ray to know how many assets FTX Group held at the time of filing for bankruptcy. Especially when we learn, through this report, that “company payments were authorized via an online chat platform where a disparate group of supervisors approved disbursements by responding with personalized emojis“.
Cash management isn’t the only dark spot in Bankman-Fried’s management of the company. The complete list of people who work for the group is non-existent.
Many employees and senior executives of the bankrupt group were unaware of the management shortcomings, or even the potential mix of digital assets. Yet they could be some of the people most impacted by this bankruptcy. In addition, Bankman-Fried communicated with them using apps configured to delete messages automatically after a short period of time.
Some transactions are also suspicious, according to John Ray, who refers to the granting by Alameda of a 1 billion dollar loan to Bankman-Fried, in his own name. The court report also cites the purchase, with group funds, of homes and other personal items for employees and councillors.
Fraud and serious mismanagement
Ray’s report comes after Bahamian-based FTX liquidators filed for bankruptcy. The text asserts that the findings to date “involves fraud and serious mismanagement” by the leaders of the group.
It also lists other amazing facts. These include the many entities with which FTX has never had a board meeting.
The collapse of the FTX company had shaken the cryptocurrency market. International regulatory inquiries have been launched and investigations against the company and the celebrities who have promoted it – including tennis player Naomi Osaka, model Gisele Bündchen and NBA legend Shaquille O’Neal – are in class.
Bankman-Fried, meanwhile, says the company is still solvent. He also gave interviews in which he said he regretted filing for bankruptcy and attacking regulators. US authorities are reportedly considering extraditing him to the United States.