FTX’s new chief executive officer has submitted a sworn statement to the bankruptcy court hearing FTX’s case, saying he has never seen such a “complete failure of corporate controls and such a complete absence of trustworthy financial information which occurred here.”
The statement is made by John Ray, who was appointed after Sam Bankman-Fried resigned in disgrace last week, ostensibly to take the company through its bankruptcy proceedings. Ray wasn’t appointed for his knack for saving dying cryptocurrency exchanges; rather, he’s a corporate heavyweight known for taking the reins of companies facing enormous criminal and civil liability. To give you a clear picture, it was Ray who led Enron through its own notorious multi-billion-dollar bankruptcy proceedings.
THE FTX FIRST DAY DECLARATION
New CEO John Ray is scathing about Sam Bankman-Fried's management.
"Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information."https://t.co/iTGlCA9olr pic.twitter.com/Bd3Pjg4s7L
— kadhim (＾ｰ^)ノ (@kadhim) November 17, 2022
If the person who helmed Enron through the most infamous corporate collapse in history says FTX is the worst case of corporate malfeasance he’s ever seen, you know things must have been bad. Ray describes an organization with very little accounting controls of corporate governance, which went out of its way to use software to obscure the misuse of customer assets.
He said that control of the FTX network was concentrated in the hands of a “very small group of inexperienced, unsophisticated and potentially compromised individuals,” primarily Sam Bankman-Fried.
Further, Ray said he has “substantial concerns” about the reliability of the financial statements produced by the FTX group of companies. He highlights that many of the financial statements prepared for the FTX group were not audited: “Because such balance sheet was produced while the Debtors were controlled by Mr Bankman-Fried, I do not have confidence in it, and the information therein may not be correct as of the date stated,” later writing that “as a practical matter, I do not believe it appropriate for stakeholders or the Court to rely on the audited financial statements as a reliable indication of the financial circumstances” of the companies.
Of the audits that did take place, Ray highlights they were partly done by a firm he’s never come across in his professional experience: Prager Metis, which Ray went out of his way to point out that their website “indicates they are the ‘first ever CPA firm to officially open its Metaverse headquarters in the metaverse platform Decentraland.’”
FTX apparently did not maintain centralized control of its cash, either: “insufficient” attention was paid to the creditworthiness of its banking partners, and did not keep accurate list of bank accounts and associated signatories.
“Because of historical cash management failures, the Debtors do not yet know the exact amount of cash that the FTX Group help as of the Petition Date.”
“Effective cash management also requires liquidity forecasting, which I understand was also generally absent from the FTX Group historically.”
The statement also reveals that FTX did not keep an accounting department. Disbursements were apparently effected by an on-line ‘chat’ platform, where “a disparate group of supervisors approved disbursements by responding with personalized emojis.”
Corporate funds were also apparently used to purchase homes in the Bahamas and other personal items for employees and advisors, seemingly confirming speculation that Bankman-Fried was sending his ill-gotten gains not to effectively altruistic causes, but to build an FTX commune in the island nation.
And that’s just the corporate funds: as for customer assets, the group apparently “did not keep accurate books and records, or security controls, with respect to its digital assets.” FTX apparently went as far as using software to conceal the misuse of customer funds. These factors are apparently making it difficult for the new management to identify the assets it hopes to recover in the bankruptcy proceedings. There supposedly exists a number of ‘new cold wallets’ which contain approximately $740 million in digital assets which management believe belongs to one of the FTX companies, but can’t determine how such ownership should be allocated.
Among the assets they have been able to identify is approximately $300 million worth of FTT tokens that were minted by an ‘unauthorized source’ after bankruptcy proceedings began.
Nor did it keep an accurate list of who worked for FTX, something that Rey and the incoming management team are still trying to source: “Repeated attempts to locate certain presumed employees to confirm their status have been unsuccessful to date.”
“One of the most pervasive failures of the FTX.com business in particular is the absence of lasting records of decision making. Mr Bankman-Fried often communicated by using applications that were set to auto-delete after a short period of time, and encouraged employees to do the same.”
Ray closes his sworn statement by remarking on the behavior of Bankman-Fried since he was ousted from the company:
“Mr Bankman-Fried, currently in the Bahamas, continues to make erratic and misleading public statements. Mr Bankman-Fried, whose connections and financial holdings in the Bahamas remain unclear to me, recently stated to a reporter on Twitter: ‘F*** regulators they make everything worse’” and suggested the next step for him was to “win a jurisdictional battle vs Delaware”—which seems to indicate Bankman-Fried is not on board with FTX’s decision to launch bankruptcy proceedings.
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