FTX’s new leader reveals the chaos left behind by Bankman-Fried

(Bloomberg) — Advisors overseeing the wreckage of Sam Bankman-Fried’s FTX Group filed a stunning list of indictments against the company’s former chief on Thursday, alleging non-existent oversight and misappropriation of client funds as they struggle to recover billions of dollars. missing goods

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“Never in my career have I seen such a complete breakdown of corporate controls and unreliable financial reporting,” said John J. Ray III, the new chief executive of the group that oversaw Enron Corp.’s liquidation. Affidavit filed in bankruptcy court.

To view the full declaration filed in FTX’s bankruptcy case, click here

Read the craziest parts of the new bankruptcy filing

“From compromised systems integrity and flawed regulatory oversight overseas to the concentration of control in the hands of a small group of inexperienced, unsophisticated and potentially vulnerable individuals, this situation is unprecedented,” he added.

The documents depict a free-wheeling crypto company with almost every policy and practice that would be the norm for almost every other corporation. What’s more, they will likely help spur any criminal and regulatory action against Bankman-Fried, given that the FTX is already under investigation by US prosecutors.

Bankman-Fried did not immediately respond to a request for comment.

Record keeping and lack of organization will make it even more difficult for FTX advisors working around the clock to recover billions of dollars owed to their clients.

Ray pulled no punches in the statement, calling Bankman-Fried’s recent public statements “erratic and misleading.” In FTX’s attempts to raise money, advisers have told financial institutions to freeze withdrawals and ignore Bankman-Fried instructions.

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Advisers have located “only a fraction” of the digital assets they hope to recover in Chapter 11 bankruptcy, Ray said. So far they have secured about $740 million worth of cryptocurrency in offline cold wallets, a storage method designed to prevent hacking.

The company’s audited financial statements — some of which were prepared by a firm that claimed to be the first CPA to open an office in the metaverse — shouldn’t be trusted, Ray said. Consultants are working to build the balance sheets of FTX entities from the bottom up, he added.

FTX “failed to maintain centralized control of its cash” and did not maintain an accurate list of bank accounts and account signatories, or pay sufficient attention to the creditworthiness of bank partners, according to Ray. Consultants still don’t know how much cash the company had when it filed for bankruptcy, but so far they’ve found about $560 million owed to various FTX entities.

The company’s record-keeping was so lax, Ray said, that consultants “were unable to prepare a complete list of those who worked for the FTX Group from the date of the application, or their terms of employment.”

Among other troubling claims in the filing: software was allegedly used to hide the misuse of customer funds; Alameda Research, Bankman-Fried’s trading company, was secretly exempt from certain aspects of FTX.com’s trading policies; and a single group email was used to access private keys and sensitive data from around the world, according to court documents.

Ray also noted that obtaining permanent records of decision-making is difficult: Bankman-Fried often communicated through applications that were automatically deleted and asked employees to do the same.

FTX Group’s corporate funds were used to purchase housing and other personal items for employees, Ray said. Some of the properties were registered in the personal names of employees and FTX consultants, he wrote, and the company’s payment controls were not appropriate for a business.

“For example, FTX Group employees submitted payment requests through an online ‘chat’ platform where a diverse group of supervisors accepted payments by responding with custom emojis,” the statement said.

A footnote in the documents indicates that Alameda Research Ltd., a subsidiary of the crypto trading house, lent $1 billion to Bankman-Fried and more than $500 million to FTX co-founder Nishad Singh as of September 30. the transactions were unaudited, produced while Bankman-Fried controlled the business, and Ray insisted he has no confidence in their accuracy.

FTX Bankman-Fried is fighting over whether his empire should fall under the jurisdiction of US courts, where more than 100 related companies are in bankruptcy, or in the Bahamas, his preferred location. FTX’s legal team blamed the breakdown, in part, on poor oversight by non-US regulators.

The case is FTX Trading Ltd., 22-11068, U.S. Bankruptcy Court for the District of Delaware.

–With help from Kyle Kim.

(Updates paragraph 11 with details on consultants’ inability to determine FTX staff)

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