FTX does not have an “accurate list” of bank accounts and fails at basic accounting

Sam Bankman Frying Failed FTX Business Empire Misused client funds and lacked reliable financial reporting or proper internal controls, says new official charged with bringing down $32 billion cryptocurrency exchange.

John Ray III, a veteran insolvency expert who oversaw the liquidation of Enron, said in a US lawsuit Thursday that FTX was the worst corporate bankruptcy he had witnessed in his more than 40-year career.

“Never in my professional life have I seen such a complete failure of corporate controls and such a complete absence of reliable financial information as here,” he wrote.

The statement highlights the chaos and mismanagement at the heart of what was once a major player in the cryptocurrency industry with deep ties to Washington, DC. The end of Bankman-Fried’s FTX empire has sent cryptocurrency markets into crisis. Bankman-Fried did not immediately respond to a request for comment about the new filing.

Ray said he found in the activities of Bankman Fried FTX International, FTX US and Alameda Research “system integrity”, “flawed regulatory oversight” and “concentration of control in the hands of a very small group of green, inexperienced and vulnerable individuals. . »

The scathing lawsuit in Delaware federal bankruptcy court painted a picture of Bankman-Fried’s gross mismanagement at FTX, a company that raised billions of dollars from major venture capitalists like Sequoia, SoftBank and Temasek.

FTX has failed to maintain adequate books, records or security controls of the digital assets it maintains for clients; software used to “hide misuse of client funds”; And he gave Alameda special treatment, Ray said, adding that “debtors don’t have an accounting department and they outsource that work.”

He said the company doesn’t have an “exact list” of its bank accounts, or even a complete record of who has worked at FTX. He added that FTX used an “insecure mass email account” to manage security keys for its digital assets.

The group’s money was used to “buy houses and other personal items” for employees and advisers, and payments were approved through the use of “personal emojis” in online chat, according to Ray.

Ray said that “one of the most widespread failings” of FTX’s leading international exchange was the lack of documentation of its decision-making process. He said Bankman-Fried often uses messaging platforms with auto-delete capabilities and “encourages employees to do the same.”

Among the assets listed in the filing are $4.1 billion in related-party loans made by Alameda, including $3.3 billion to Bankman Fried personally and an entity he controls.

Bankman-Fried previously told the Financial Times that FTX “accidentally” provided $8 billion of FTX client funds to Alameda.

One of the primary purposes of the bankruptcy proceedings, Wray said, is to conduct “a thorough, transparent and thoughtful investigation into this matter.” [potential legal] Complaints against “Bankman-Fried”.

Several academics and industry experts told the Financial Times that creditors may be looking to appoint a “trustee” to take over management of FTX given the extent of the alleged misconduct that led to the bankruptcy.

Ray added that the fair value of cryptocurrencies held by the FTX International Exchange was just $659,000 as of Sept. 30. The filing does not include an estimate of the crypto assets owed to customers, but says they should be “significant.”

He said FTX was able to transfer $740 million in cryptocurrency to offline “cold” wallets where it could be safe. The company also suffered a nearly $400 million cryptocurrency breach after filing for bankruptcy.

The bankruptcy process has been hampered by a lack of reliable information the company maintains, according to Ray, who cautioned that even the balance sheet data included in the filing may not be reliable as it was prepared when Bankman-Fried used FTX.

He noted that financial statements issued by FTX under Bankman-Fried’s direction did not include client liabilities and said he did not believe the company’s audited accounts for 2021 could be relied upon. In its initial bankruptcy filing on Friday , the combined assets and liabilities of FTX International and FTX US were estimated and Alameda was between $10 billion and $50 billion.

After Ray’s initial statements regarding the collapse of FTX, a legal battle erupted over the company’s lawsuits. Earlier in the week, Bahamian officials filed for Chapter 15 bankruptcy in New York federal court, asking a judge to honor a liquidation effort initiated in the island nation.

At issue is a subsidiary of FTX known as “FTX Digital” that is not involved in a US Chapter 11 case that the Bahamas claims is home to significant client assets. Ray wrote in a lawsuit Thursday that the Chapter 15 case should be merged in Delaware bankruptcy court.

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