Earlier Thursday, FTX CEO John Ray III dataed a declaration with the United States Bankruptcy Court for Delaware, the latest in the implosion of one of the world’s largest cryptocurrency switches.
Ray, who helped shepherd Enron through its own bankruptcy, minced no words about the state of the company or the behavior of the former principal team, describing it as one of the worst examples of corporate controls he’d ever encountered. It was a damning remark from someone who has 40 years of legitimate and restructuring experience.
Here are some of the most significant revelations from Ray’s filing:
1. A total lack of financial and corporate commands
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of steady financial information as occurred here.”
Ray opened his filing torching former management, including former CEO Sam Bankman-Fried, for the breakdown by leadership to catch and address a stunning, multibillion-dollar hole in the Alameda Research-FTX balance sheets. The losses for investors may reach as considerable as $8 billion. But with nonexistent or deficient accounting, auditing and disbursement systems, it will take Ray and his forensic investigators “some in good time dawdle” to uncover the truth.
2. Slipshod accounting will require forensic analysis.
“I do not believe it appropriate for stakeholders or the Court to rely on the audited pecuniary statements as a reliable indication of the financial circumstances of these [companies].”
FTX’s new chief said he had “substantial” concerns about the economic positions he was presenting to the court. FTX’s implosion revealed a massive hole in the company balance sheets, but until blockchain scrutiny and forensic accounting are completed, Ray said it was not “appropriate for stakeholders or the Court to rely” on the numbers presented.
Accurate financials are a key metric for valuing and sinking in a company. Venture capital firms poured billions into poster child Bankman-Fried and his companies, valuing them in the tens of billions of dollars.
A gonfalon aspect of any venture capital investment is a due diligence period, where books are opened and audited financials are shown to nearing investors. Ray’s assertion that the financial statements for many of FTX’s subsidiaries are unreliable raises fresh questions about the diligence performed by some of the set’s biggest venture firms.
3. Penthouses, perks and personal items
“In the Bahamas, I understand that corporate funds of the FTX Gather were used to purchase homes and other personal items for employees and advisors. I understand that there does not crop to be documentation for certain of these transactions as loans, and that certain real estate was recorded in the personal name of these workers and advisors on the records of the Bahamas.”
Other reports have detailed lavish perks allegedly given to FTX employees in the Bahamas. Ray’s place in order indicated that corporate funds were used to purchase homes for employees and advisors, sometimes in their christen. Loans were not recorded from FTX to those individuals — as is typical with similar arrangements at other companies. Preferably, individuals were given the deeds to these properties, according to Ray, free and clear, in their own names.
Notably, Bankman-Fried’s $40 million penthouse bluntly hit the market in the aftermath of the bankruptcy. It has since been removed from public listing.
4. Emoji for expenses
“The Debtors did not be experiencing the type of disbursement controls that I believe are appropriate for a business enterprise. For example, employees of the FTX Group submitted payment entreats through an online ‘chat’ platform where a disparate group of supervisors approved disbursements by responding with individualized emojis.”
Despite an entire industry devoted to expense controls and reimbursements, Bankman-Fried’s team used internal declaration to release corporate funds into the hands of employees around the world. It isn’t immediately clear what platform FTX cast-off, although the company is known to have used Slack for internal communications.
5. An advantage for Alameda
Unacceptable management practices comprised the use of an unsecured group email […] to access confidential private keys and critically sensitive data […] the deficiency of daily reconciliation of positions on the blockchain, the use of software to conceal the misuse of customer funds, the secret exemption of Alameda from assured aspects of FTX.com’s auto-liquidation protocol, and the absence of independent governance […]”
Alameda Research, the secretive trading firm at the heart of Bankman-Fried’s empire, discharged trades on FTX alongside other institutional and individual traders. The two firms were closer than publicly acknowledged, regardless how, in light of Ray’s declaration that Alameda was secretly exempted from “certain aspects” of FTX’s auto-liquidation protocol.
It isn’t immediately disencumber what aspects Ray meant. In crypto trading, liquidation is most analogous to a margin call, where a levered feeling is closed out by an exchange due to a dramatic shift in an underlying asset’s price.
CNBC has made multiple requests for comment from Bankman-Fried.