The man appointed as FTX’s Chapter 11 liquidator has told a US court he faces an “unprecedented situation,” with a total failure of corporate governance and a lack of reliable financial information.
Core items:
- FTX’s administrator told a US court he had never seen “such a complete failure of corporate controls.”
- John J. Ray III said most of the group’s accounts are unaudited and some subsidiaries have no financial accounts at all
- He said a “substantial part” of the property’s property may be missing or stolen
In a 40-year career in corporate restructuring and administration, John J. Ray III has previously overseen some of the most notorious US corporate failures, most notably of energy giant Enron.
“Almost every situation I have been involved in has been characterized by some sort of deficiencies in internal controls, regulatory compliance, human resources and systems integrity,” he told the Delaware District Bankruptcy Court in a filing.
“Never in my career have I seen such a complete failure of corporate controls and a complete lack of reliable financial information as here.
“From the compromised system integrity and flawed regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, inexperienced and potentially vulnerable individuals, this situation is unprecedented.”
FTX collapsed spectacularly in recent weeks, less than three years after the cryptocurrency exchange — founded by tech prodigy Sam Bankman-Fried and his partners Zixiao “Gary” Wang and Nishad Singh — began operations in May 2019.
The FTX.com platform quickly became one of the largest cryptocurrency exchanges in the world.
Mr. Ray pointed to Sam Bankman-Fried’s claim that by the end of 2021 there were around $15 billion in assets on the platform, which he said accounted for around 10 percent of global crypto trading volume at the time “Millions” transacted. from registered users.
“These numbers have not been verified by my team,” added Mr. Ray.
Chartered Accountant headquartered in the Metaverse
In fact, much remains unconfirmed about the man now appointed chief executive officer of FTX Group, who took Mr. Bankman-Fried’s place when the company entered Chapter 11 bankruptcy on November 11.
Mr Ray’s report is littered with the following sentence:
“As this balance sheet was prepared while Mr. Bankman-Fried’s debtors were being controlled, I have no confidence in it and the information contained herein may not be accurate as of the date shown.”
Mr Ray said most of the subsidiaries within the group had no audited accounts, some had no accounts at all and among the few that were audited were some that were audited by a company he had never heard of.
“The accounting firm for the dot-com silo was Prager Metis, a firm I am not familiar with and whose website states that it is the ‘first CPA firm ever to officially open its Metaverse headquarters on the Metaverse platform Decentraland .'”
The lack of corporate governance extended to the total absence of board meetings for many of the companies within the group, the lack of an accurate list of bank accounts and account signers, and the companies’ inability to provide a complete list of their employees as of the date the company went into bankruptcy protection.
“Repeated attempts to locate certain alleged employees to confirm their status have so far been unsuccessful,” added Mr. Ray.
The new CEO told the Delaware District Bankruptcy Court that his work is no longer sufficient, but that he is already well on the way to adopting fundamental financial and managerial practices that were not previously in place.
“The implementation of accounting, auditing, cash management, cyber security, human resources, risk management, data protection and other systems that did not exist or did not exist to a reasonable extent prior to my appointment,” he said of his main responsibilities.
Another task, Mr Ray said, is “to locate and secure estate property, a substantial part of which may be missing or stolen”.
Corporate funds were used to purchase homes in the Bahamas
Mr Ray said his initial inquiries made it clear that there was a significant risk that funds had been embezzled from the companies.
“The debtors didn’t have any disbursement controls, which I think are appropriate for a company,” he told the court.
“For example, employees at FTX Group submitted payment requests through an online ‘chat’ platform where a diverse group of managers approved withdrawals by responding with personalized emojis.
“As far as I know, FTX Group corporate funds have been used in the Bahamas to purchase houses and other personal items for employees and consultants.
“I understand that there appears to be no documentation for certain of these transactions as loans and that certain properties have been entered in the Bahamas records in the personal names of these employees and consultants.”
Mr Ray also noted “the use of software to conceal the misuse of client funds”.
Bankman-Fried criticized “irregular and misleading” statements
However, Mr Ray also commended the “extraordinary efforts” by a group of FTX staff who have supported him since he took office.
“Based on the information received so far, I believe that many employees of FTX Group, including some of its officers, were unaware of the deficiencies or the potential commingling of digital assets,” he told the court.
“In fact, I believe some of the people most hurt by these events are current and former employees and executives whose personal investments and reputations have suffered.”
However, Sam Bankman-Fried has been heavily criticized by his successor.
“One of the biggest failures of the FTX.com business in particular is the lack of a permanent record of decision-making,” Mr. Ray told the court.
“Mr. Bankman-Fried often communicated with applications that were set to automatically delete after a short period of time and encouraged employees to do the same.”
Mr Ray also accused Mr Bankman-Fried of making unhelpful comments since the collapse of the company he founded.
“The Debtors have made it clear to employees and the public that Mr. Bankman-Fried is not employed by the Debtors and does not speak for them,” Mr Ray told the court.
“Mr. Bankman-Fried, who is currently in the Bahamas, continues to make erratic and misleading public statements.
“Mr. Bankman-Fried, whose connections and financial interests in the Bahamas remain unclear to me, recently told a reporter on Twitter, ‘F*** regulators, they’re making things worse,’ and suggested the next step for him was ‘ to win a jurisdictional battle against Delaware’.”
At the time of its collapse, FTX’s corporate empire had expanded to include companies registered in the US state of Delaware, Korea, Japan, British Virgin Islands, Antigua, Hong Kong, Singapore, Seychelles, Cayman Islands, Bahamas, Australia, Panama, Turkey and Nigeria.
Its Australian subsidiaries FTX Express Pty Ltd and FTX Australia Pty Ltd appointed volunteer administrators of KordaMentha on 11 November.
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