John Ray III, the new Chief Executive Officer of the troubled cryptocurrency exchange, FTX, has described the running of the FTX Group under Sam Bankman-Fried, the Co-Founder and former CEO, as “a complete failure of corporate controls.” Ray III also described the business environment under Bankman-Fried as "unprecedented.”
The new FTX CEO, who has over 40 years of legal and restructuring experience, noted that he has been the Chief Restructuring Officer or CEO “in several of the largest corporate failures in history.”
Ray III stated this in a new FTX court filing dated Thursday and presented in the United States Bankruptcy Court for the District of Delaware. Ray emerged as the new CEO of the beleaguered crypto exchange last Friday after FTX's liquidity crisis pushed it to file for bankruptcy protection, forcing Bankman-Fried to resign. The FTX Group kicked off voluntary proceedings under Chapter 11 of the United States Bankruptcy Code in the District of Delaware on the same day.
In the new filing, Ray III criticized the governance structure, cash and human resources management, disbursement controls, record-keeping of digital asset custody, investment activities and decision-making of the FTX Group under Bankman-Fried.
“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” Ray III said, adding “From compromised systems integrity and faulty regulatory oversight abroad to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”
I read the 30 page FTX Bankruptcy court filing.
— Genevieve Roch-Decter, CFA (@GRDecter) November 17, 2022
How bad were FTX's internal controls?
Here are the worst examples 👇
‘Pervasive Failures'
According to the new CEO, FTX Trading Limited, the operator of Antigua-incorporated crypto exchange platform FTX.com, the Bahamas-based subsidiary FTX Digital Market, and other companies in the FTX Group “did not have appropriate corporate governance.” Many of them never held Board meetings, he noted. On top of that, the FTX Group did not maintain centralized control of its cash, Ray III added.
“Cash management procedure failures included the absence of an accurate list of bank accounts and account signatories, as well as insufficient attention to the creditworthiness of banking partners across the world,” he further explained.
Furthermore, the new CEO described the absence of lasting records of decision-making as “one of the most pervasive failures of the FTX.com business in particular.”
“Mr Bankman-Fried often communicated by using applications that were set to auto-delete after a short period of time, and encouraged employees to do the same,” he noted.
Additionally, Ray III stated that the FTX Group combined employees of its various subsidiaries and outside contractors “with unclear records and lines of responsibility.” As a result, the firm has been unable to prepare a complete list of employees that worked for the FTX Group up until when it filed for bankruptcy protection. Moreover, it could not determine their terms of employment. "Repeated attempts to locate certain presumed employees to confirm their status have been unsuccessful to date," Ray III said.
On disbursement, the Chief Executive noted that many of the subsidiaries did not have appropriate controls, adding that supervisors approved financial disbursements with “personalized emojis” through an online ‘chat’ platform.
Furthermore, the new top executive disclosed that corporate funds were used to buy homes and other personal items for employees and advisors without being documented as loans. He added that “certain real estate was recorded in the personal name of these employees and advisors on the records of the Bahamas.”
