‘Complete failure’: Filing reveals astounding mismanagement within the crypto giant

A new court filing revealed about Sam Bankman-Fried’s bankrupt businesses a crypto empire that was colossally mismanaged and potentially fraudulent — a “complete failure of corporate controls” that dwarfs even that of Enron.

“Never in my career have I witnessed such a complete failure of corporate controls and a complete lack of trustworthy financial information as here,” FTX’s new CEO, John J. Ray III, wrote in a court filing Thursday.

He was previously responsible for Enron’s liquidation in the 2000s, among other bankruptcy cases.

Sam Bankman-Fried, Co-Founder and Chief Executive Officer of FTX. (Bloomberg via Getty Images)

Now, Ray says he’s overseeing an “unprecedented” mess in the collapse of the crypto exchange, its sister hedge fund Alameda, and dozens of affiliated companies.

Ray, a restructuring specialist, took over as CEO of Bankman-Fried nearly a week ago when the group filed for Chapter 11.

Ray’s assessment offers one of the first definitive accounts of what went wrong at FTX and Alameda.

Among the many problems the new management has uncovered are unreliable financial reports, misuse of confidential data (including using an unsecured email account to manage private crypto keys), and the diversion of company funds to buy houses for employees in the Bahamas .

According to the filing, FTX also lacked centralized control over its cash holdings.

The mismanagement of funds was so bad under Bankman-Fried that the new management does not yet know how much cash FTX Group holds.

Sam Bankman-Fried, the crypto entrepreneur known for providing a financial lifeline to struggling companies in the industry, now needs a bailout of his own.
Sam Bankman-Fried, the crypto entrepreneur known for providing a financial lifeline to struggling companies in the industry, now needs a bailout of his own. (Getty)

Ray and his team could only roughly estimate the amount of cash available – approximately $843 million.

That compares to a shortfall of around $12 billion that Bankman-Fried reportedly told investors last week that FTX would need.

“There are signs at best of total lack of control and power in the hands of just a few people,” said Eric Snyder, head of bankruptcy at Wilk Auslander, which is not involved in the FTX case.

“In the worst case, there is a systemic fraud in the billions.”

Bankman-Fried was not charged with a crime.

His attorney, Martin Flumenbaum, did not respond to CNN Business’s request for comment.

Bitcoin, Ethereum and other cryptocurrencies have taken an almighty crash in the last few months
Bitcoin, Ethereum and other cryptocurrencies have suffered an almighty crash over the past few months. (AP/9News)

In the filing, Ray also sought to distance FTX’s new management team from Bankman-Fried, who he says continues to make “irregular and misleading” statements on Twitter and in statements to the press.

In an interview with Vox via Twitter this week, Bankman-Fried, who had built a reputation as an advocate for greater regulatory oversight of the industry, told a reporter that it was all “just PR.”

He added: “F—Regulators. You make things worse.”

Bankman-Fried has also taken to Twitter to express his thoughts on the events of the past week and a half, a time that has seen his personal fortune, valued at $23 billion earlier this month, evaporate.

The FTX logo appears on a home plate umpire's jacket at a baseball game with the Minnesota Twins on September 27, 2022 in Minneapolis.  Imploding cryptocurrency trading firm FTX is now missing billions of dollars after experiencing the crypto equivalent of a bank run.
The FTX logo appears on a home plate umpire’s jacket at a baseball game. (AP Photo/Bruce Kluckhohn)

Since losing control of his businesses, Bankman-Fried has hired a white-collar criminal attorney from the law firm of Paul Weiss.

Attorney Flumenbaum has previously represented the sons of Ponzi schemer Bernie Madoff and junk bond dealer Michael Milken, who served two years in prison for securities fraud in the late 1980s.

Federal prosecutors for the Southern District of New York are investigating the collapse of FTX Trading, a person familiar with the matter told CNN.

Authorities in the Bahamas, where FTX is based, launched a criminal investigation into the company over the weekend.

In a thread with more than 30 tweets this week, Bankman-Fried said he will still try to raise funds to get customers healthy.

In one, he lamented that “FTX used to be – a month ago – a valuable company… and we were seen as paragons of running an effective company.”

But Thursday’s filing from FTX’s new CEO paints a very different picture of how the company has been run.

“Unacceptable Management Practices”

One of the most compelling elements of Ray’s assessment points to “the use of software to conceal the misuse of client funds” and a “secret exception” by Alameda to aspects of FTX’s auto-liquidation protocol.

Though Ray doesn’t specifically accuse the company of fraud, Snyder says the document contains what attorneys call “badges,” or evidence of it.

“If you say you’re using backdoor software to misuse customer funds and exempt one of your key subsidiaries from an automated liquidation protocol, that’s a scam.”

Auto-liquidation refers to when an exchange like FTX automatically sells traders’ collateral when it goes into the red.

An exception for Alameda would indicate the hedge fund had an extra safeguard against risky bets.

One of the most common mistakes, Ray said, was the lack of records.

Bankman-Fried often communicated about applications being automatically deleted after a short period of time and encouraged employees to do the same.

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Ray also noted that the companies lacked adequate “cashout controls,” noting that some FTX employees received company funds to buy homes and other personal items in the Bahamas.

Few of the companies’ financial statements appear to have been audited, and Ray said he has no confidence in their accuracy.

In one example where an affiliate received audit opinions, the review came from “a company I am not familiar with and whose website states that it is the ‘first CPA firm ever to officially have its Metaverse headquarters on the Metaverse platform Decentraland launched.'”

Many of the FTX Group companies “did not have adequate corporate governance,” and some “never had board meetings,” the filing said.

Other procedural shortcomings include “the lack of an accurate list of bank accounts and account signers, and insufficient attention to the creditworthiness of banking partners.”

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