When John Ray III testifies before the House Financial Services Committee on Tuesday about Sam Bankman-Fried’s FTX collapse, he will not be holding back punches. In a prepared statement to the House on Monday, Ray will be revealing what his team has found so far and it is not a pretty picture.
“While many things are unknown at this stage, and many questions remain, we know the following:
First, customer assets from FTX.com were commingled with assets from the Alameda trading platform.
Second, Alameda used client funds to engage in margin trading which exposed customer funds to massive losses.
Third, the FTX Group went on a spending binge in late 2021 through 2022, during which approximately $5 billion was spent buying a myriad of businesses and investments, many of which may be worth only a fraction of what was paid for them.
Fourth, loans and other payments were made to insiders in excess of $1 billion.
Fifth, Alameda’s business model as a market maker required deploying funds to various third party exchanges which were inherently unsafe, and further exacerbated by the limited protections offered in certain foreign jurisdictions.
“Never in my career have I seen such an utter failure of corporate controls at every level of an organization, from the lack of financial statements to a complete failure of any internal controls or governance whatsoever. Although our investigation is ongoing and detailed findings will have to await its conclusion, the FTX Group’s collapse appears to stem from the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals who failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people’s money or assets,” writes Ray.
Some of the unacceptable management practices Ray’s statement cites:
“The use of computer infrastructure that gave individuals in senior management access to systems that stored customer assets, without security controls to prevent them from redirecting those assets;
The storing of certain private keys to access hundreds of millions of dollars in crypto assets without effective security controls or encryption;
The ability of Alameda, the crypto hedge fund within the FTX Group, to borrow funds held at FTX.com to be utilized for its own trading or investments without any effective limits;
The commingling of assets;
The lack of complete documentation for transactions involving nearly 500 investments made with FTX Group funds and assets;
The absence of audited or reliable financial statements;
The lack of personnel in financial and risk management functions, which are typically present in any company close to the size of FTX Group; and
The absence of independent governance throughout the FTX Group.”
Ray has “hired a new Chief Financial Officer, a new Head of Human Resources and Administration and a new Head of Information Technology, all of whom have deep experience in their areas of core competency and have also managed other, large-scale corporate failures,” reads his statement. “In addition, I have engaged a team of independent third-party professionals in the necessary areas of restructuring, forensic accounting, tax disciplines, and cybersecurity, including Alvarez & Marsal, Alix Partners, Ernst & Young, respectively, along with a cybersecurity firm.”
As to what Ray thinks of Bankman-Fried’s public statements since the bankruptcy filing nearly 4 weeks ago, Ray poignantly dismisses him.
“Questions also have been raised about what I think of the many opinions expressed by former CEO Sam Bankman-Fried and his recent offers to assist in the recovery effort. I will not comment on his statements other than to say that this is a professional investigation that is proceeding in a professional manner. We have a fact-finding process in place, and we will seek information from Mr. Bankman-Fried and others through that process, as appropriate.”
Ray’s full statement can be read here.
Changes may be made in light of the arrest of Sam Bankman-Fried on Monday night in the Bahamas where he has resided since the bankruptcy filing. His two parents, who are lawyers, have been staying with him for the last month.
This story is developing.
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