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FTX Fraud: More Bombshell Revelations in New Bankruptcy Filing

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  • November 19, 2022

Key Takeaways

  • A filing from FTX’s new CEO has more thoroughly revealed the shocking state of the company’s finances.
  • New FTX CEO John J. Ray III, who oversaw Enron’s dissolution, wrote that he had never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” 
  • The document is likely the tip of the iceberg, but it has already revealed negligent accounting practices, regular deletion of corporate communications, secret loans from corporate accounts, substandard key security, and other instances of mismanagement.

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Lies, embezzlement, incompetence, and several instances of fraud are some of the subjects discussed in the new filing. 

“A Complete Failure of Corporate Controls”

Things are going from bad to worse for former FTX CEO Sam Bankman-Fried and his accomplices. 

A Thursday bankruptcy filing from new FTX CEO John J. Ray III has shed new light on the nefarious activities taking place at the now-bankrupt crypto exchange under its previous CEO, Sam Bankman-Fried. Ray is a 40-year veteran of the bankruptcy restructuring business with a resume that includes supervising Enron’s dissolution in 2001.

In the 30-page document, Ray reveals numerous instances of poor record-keeping, fraud, and malpractice at FTX. In his opening statement, he commented on the company’s overall state in uncompromising terms, stating, “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” 

Ray took over from Bankman-Fried after FTX and its affiliated companies filed for Chapter 11 voluntary bankruptcy on November 11. Despite his experience, Ray made it clear that he had never seen a company in such poor shape as FTX. “From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented,” he wrote.  

One of the most damning revelations from the document concerns loans made out to Bankman-Fried and senior FTX executives Nishad Singh and Ryan Salame. According to Ray, the FTX-affiliated trading firm Alameda research paid out a total of $3.3 billion to Bankman-Fried and his shell company Paper Bird Inc. along with $543 million to Singh and $55 million to Salame. 

Other bombshell revelations include FTX’s negligent approach to bookkeeping. The document asserts that FTX failed to keep appropriate account records and security procedures for digital asset holdings, which ultimately led to the user deposits on the exchange being hacked for $372 million shortly after it declared bankruptcy.

Also of note is the discrepancy in the value of FTX’s crypto holdings. A Financial Times article from November 12 reported that a leaked FTX balance sheet put the value of the firm’s crypto assets at around $5.5 billion. On the other hand, Ray pegged the “fair value” of the company’s crypto holdings at just $659,000. Other unacceptable management practices included using an unsecured group email account to access confidential private keys and critically sensitive data.

Ray also divulged that FTX didn’t hold a complete list of all the employees working for FTX and its affiliates. He also revealed that one reason for the company’s poor record-keeping was that most personal communications were conducted on applications set to auto-delete messages after a short period, a practice that Bankman-Fried reportedly encouraged. 

Elsewhere, Ray reported that corporate funds of the FTX Group were frequently used to purchase homes and other personal items for employees and advisors and that FTX secretly exempted Alameda Research from being liquidated on FTX well past the point where a normal user would have their position closed. This disregard for risk management may partly help explain how Alameda lost so much money in its trading strategies.  

Today’s bankruptcy filing has exposed numerous instances of malpractice within FTX, but it is likely not exhaustive. As FTX’s bankruptcy case proceeds, more information covering the company’s dodgy dealing will likely surface. Additionally, as Ray has called for a “comprehensive, transparent and deliberate investigation into claims against Mr. Samuel Bankman-Fried,” it’s possible the former FTX CEO could face his own legal battle in the not-too-distant future. 

Disclosure: At the time of writing this piece, the author owned ETH, BTC, and several other crypto assets. 

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