FTX’s new chief executive, an insolvency practitioner who oversaw the liquidation of Enron, said the crypto group’s bankruptcy is the worst case of corporate bankruptcy he’s seen in more than 40 years.
John Ray III, who was appointed to handle FTX’s bankruptcy, said in a US court filing that he had never seen “such a complete failure of corporate controls and such a complete lack of ‘reliable financial information’.
The statement highlighted the chaos and mismanagement at the heart of the collapse of Sam Bankman-Fried’s $32 billion crypto exchange, which plunged digital asset markets into crisis. Bankman-Fried did not immediately respond to a request for comment on the new filing.
Ray said he found in FTX international, FTX US and Bankman-Fried trading firm Alameda Research “compromised systems integrity,” “flawed overseas regulatory oversight,” and “concentration of control.” in the hands of a very small group of inexperienced, unsophisticated and potentially compromised people”.
The scathing filing in federal bankruptcy court in Delaware painted a picture of Bankman-Fried’s gross mismanagement at FTX, which raised billions of dollars from top venture capitalists such as Sequoia, SoftBank and Temasek.
FTX failed to maintain proper books, records or security checks for the digital assets it held for clients, used software to “conceal misuse of client funds” and given special treatment to Alameda, Ray said. He added that FTX did not have an accounting department and instead outsourced “this function”.
The company did not have an “accurate list” of its own bank accounts, or even a complete file of the people who worked for it. FTX used “an insecure group email account” to manage security keys for its digital assets, he added.
The group’s funds had been used “to buy houses and other personal items” for staff and advisers, and payments were approved through the use of “personalized emojis” in an online chat, according to Ray.
Ray said that “one of the most common failures” at FTX’s main international exchange was the lack of decision-making documents. He said Bankman-Fried often used messaging platforms with an auto-delete feature “and encouraged employees to do the same.”
Among the assets listed in the document were $4.1 billion in loans from Alameda, including $3.3 billion to Bankman-Fried both personally and to an entity he controlled.
Bankman-Fried previously told the Financial Times that FTX “accidentally” donated $8 billion in FTX client funds to Alameda.
Ray said that among the main objectives of the bankruptcy proceedings was a “thorough, transparent and deliberate investigation into [potential legal] claims against » Bankman-Fried.
Several academic and industry experts told the FT that creditors may seek to appoint a “trustee” to take over management of FTX, given the extent of the alleged misconduct that led to the bankruptcy.
Ray added that the fair value of crypto assets held by international exchange FTX was only $659,000 as of September 30. The filing does not include an estimate of the crypto assets owed to customers, but says they should be “significant.”
Ray said FTX was able to move $740 million worth of cryptocurrency to offline “cold” wallets where it could be safe. The company had also suffered a hack of almost $400 million worth of crypto right after filing for bankruptcy.
The bankruptcy process has been hampered by the lack of reliable information kept by the company, according to Ray, who warned that even the balance sheet figures provided in the filing may not be reliable as they were prepared when Bankman- Fried ran FTX.
At the initial bankruptcy filing on Friday last week, the combined assets and liabilities of FTX international, FTX US and Alameda were estimated to be between $10 billion and $50 billion.
Amid Ray’s early statements about FTX’s collapse, a jurisdictional fight over the company’s legal proceedings emerged. Earlier in the week, Bahamian officials filed for Chapter 15 bankruptcy in federal court in New York asking a judge to respect a liquidation effort that had begun in the island nation.
At issue is an FTX subsidiary known as “FTX Digital” that is not involved in the US Chapter 11 case in which the Bahamas claims significant client assets reside. Ray wrote in a court filing on Thursday that the Chapter 15 case is expected to be consolidated in Delaware bankruptcy court.