New FTX CEO Identifies Funds Abuses, Untrustworthy Records By Reuters


© Reuters. FILE PHOTO: FILE PHOTO: The FTX logo is seen at the entrance to the FTX Arena in Miami, Florida, US, November 12, 2022. REUTERS/Marco Bello/file photo/file photo

(Reuters) – The CEO appointed to guide FTX Group through bankruptcy made its first findings of improper money transfers and misaccounting at the collapsing cryptocurrency exchange on Thursday, calling it a “total failure” of controls.

John Ray, who was named CEO of FTX after the company filed for bankruptcy Nov. 11, said in a lawsuit that the lapses in oversight, security and corporate governance he identified were greater than any other operation he has run in his 40 years. Years as a bankruptcy specialist, including at Enron.

“Never in my career have I witnessed such a complete failure of corporate controls and such complete absence of trustworthy financial information as here,” Ray said in filing with Delaware County Bankruptcy Court.

FTX collapsed after its founder, Sam Bankman-Fried, used $10 billion in client funds to prop up his Alameda Research hedge fund, which suffered losses when its bets on crypto projects soured, Reuters previously reported. That left FTX with insufficient funds to cover withdrawals when a drop in the value of one of its currencies, FTT, sent a bank run aground.

While The Ray Files does not give a full account of FTX’s demise, it does detail several lapses that contributed to its downfall.

An Alameda entity provided $2.3 billion in loans to the FTX entity, while Bankman-Fried and FTX founders and CEOs Nishad Singh and Ryan Salame collectively borrowed $1.6 billion from Alameda, according to the filing. More such “related party” transactions are listed in the filing, although details are not given.

Bankman Fried, Singh and Salama did not respond to requests for comment on Thursday.

Ray writes that FTX funds were also used to purchase homes and other personal items for employees and consultants. Ray added that some of these money transfers were not documented as loans to companies, while the homes were registered in the names of the employees.

According to the filing, appropriate checks and balances were absent. Employees submitted payment requests through an online “chat” platform and supervisors approved them with custom emojis, the filings say.

Ray wrote that Bankman-Fried often communicated through apps that were set to automatically delete after a short period of time and encouraged employees to do the same.

Most of the financial statements reviewed by Ray are not audited. He said he had “significant concerns” about the statements he found were audited because they relied on Prager Metis, a virtual accounting firm, on the Metaverse Decentraland platform.

Ray also wrote that Bankman-Fried made “erratic and misleading public statements,” citing a conversation with a reporter on Twitter.

Vox on Wednesday published an interview with Bankman-Fried in which he said he regretted his decision to file for bankruptcy protection and criticized regulators.

He later tried to backtrack, saying he was “breathing” and thought it was his exchange of letters with the reporter that made the basis of the interview private.

According to the filing, FTX had 1 million users in the US and many more worldwide. It is unclear how many people will be able to recover their money through bankruptcy.

“incorrect”

Singaporean state investor Temasek Holdings, an investor in FTX, also criticized Bankman-Fried on Thursday as it announced it would write down the value of its $275 million stake.

“It is clear from this investment that it may appear that our belief in Sam Bankman Fried’s actions, judgment and leadership … was misplaced,” Temasek said.

Other investors, including Softbank’s (OTC:) Group Corp.’s vision fund and Sequoia Capital, have reduced their investments in the stock exchange to zero, as ripples from FTX’s bankruptcy are still being felt around the world.

Major cryptocurrency firm Genesis Global Capital suspended customer refunds in its lending business on Wednesday, in response to “extreme market disruption and loss of industry confidence caused by FTX’s implosion.”

Financial and market authorities around the world scrambled on Thursday to craft responses to the FTX fiasco, with Singapore’s finance minister saying its collapse had raised “very serious allegations amounting to possible fraud”.

Indonesia has ordered cryptocurrency exchanges to stop trading FTX tokens. Brazilian crypto advocates have cited FTX implosion trying to persuade lawmakers to finally approve a bill to strengthen oversight of the cryptocurrency industry.



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