It’s the Wild West.
A place where everything is acceptable.
Everything is allowed and there is no control to call to order those who go too far. No red line.
The CEO reportedly considers the funds of one of his companies to be his personal bank. Employees allegedly dipped into company money to buy houses in the Bahamas and none of these transactions were recorded anywhere.
There may even be fictitious employees. The board of directors that is supposed to control everyone’s instincts reportedly never met.
Welcome to the cryptocurrency empire of Sam Bankman-Fried, 30, the fallen king of the cryptosphere, who filed for Chapter 11 bankruptcy on November 11. This empire primarily includes cryptocurrency exchange FTX and Alameda Trading, a crypto hedge fund.
‘Potentially Compromised Individuals’
John Ray, the new CEO in charge of restructuring the empire, gave this scathing description in a 30-page document filed with the United States Bankruptcy Court for the District of Delaware. The document was made public on Nov 17.
Page after page, Ray describes a company whose practices seem real. What dominates here is the lawless cowboy.
“Never in my career have I seen such a complete failure of corporate control and an absence of reliable financial information as here,” Ray wrote. “From compromised system integrity and faulty regulatory oversight overseas, to the concentration of control in the hands of a small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”
Ray is not new. He was the liquidator of Enron, the brokerage whose collapse remains one of the greatest financial failures of modern times.
Every page is a bombshell, an indictment of the Bankman-Fried regime. For Ray, the former trader and his two friends — Zixiao “Gary” Wang and Nishad Singh — failed on several levels.
“Many companies in the FTX Group, especially those organized in Antigua and the Bahamas, do not have proper corporate governance. I understand that many entities, for example, never hold board meetings,” said the new chief executive officer.
He added that there was “the use of software to hide the misuse of client funds.”
Ray did not provide further details. But his statement clearly undermined Backman-Fried’s denial that there was a backdoor, allowing him to change records without the knowledge of third parties, including auditors and investors.
FTX Finance indicated that there was a “backdoor” in the books, created with “bespoke software,” Reuters reported last week. It was described as a way Bankman-Fried could cook the books without raising any alarm.
$1 Billion in Personal Loans
“Unacceptable management practices include the use of unsecured group email accounts as root users to access confidential private keys and critical sensitive data for FTX Group companies around the world,” the seasoned restructuring veteran wrote.
FTX insolvency is caused by a lack of liquidity when customers try to withdraw funds from the platform. The lack of liquidity appears to be the result of FTX’s founder reportedly transferring $10 billion of client funds from FTX to Alameda Research.
FTX faces a shortfall of $1 billion to $2 billion.
As a crypto exchange, FTX executes orders for their clients, takes their cash and buys cryptocurrencies on their behalf. FTX acts as a custodian, holding the client’s cryptocurrency.
FTX then uses its clients’ crypto assets, through its sister company’s Alameda Research trading arm, to generate cash through borrowing or market making. The borrowed FTX cash was used to bail out other crypto institutions in the summer of 2022.
At the same time, FTX uses its issued cryptocurrency, FTT, as collateral on its balance sheet. This represents a significant exposure, due to the risk of concentration and volatility of FTT.
Bankman-Fried received a $1 billion personal loan from Alameda, according to Ray,. The firm also provided personal loans of $543 million to Singh, and $55 million to Ryan Salame, co-CEO of FTX Digital Markets, one of FTX’s affiliates.
Buying a House
“In the Bahamas, I understand that corporate funds of the FTX group have been used to purchase houses and other personal items for employees and advisors,” Ray said.
“I understand that there appears to be no documentation for this particular transaction as a loan, and that certain properties were recorded in the personal names of these employees and advisors in the Bahamas records.”
He went on to state that, to reimburse business expenses, employees only need to submit a request via chat and supervisors will immediately approve with a personalized emoji.
“The debtor does not have the type of production control that I believe is appropriate for a business enterprise,” Ray wrote. “For example, FTX Group employees send payment requests through an online ‘chat’ platform where different groups of supervisors approve withdrawals by replying with personalized emojis.”
Finally, Ray said he still hasn’t been able to track down some of the alleged workers, suggesting some either ran away or simply don’t exist.
“Currently, the debtor is unable to provide a complete list of those who work for the FTX Group,” he said. “Repeated attempts to locate certain presumed employees to confirm their status have so far been unsuccessful.”