“Half a truth is often a good lie.” – Benjamin Franklin
If you want to try and mitigate the damage a disaster the size of FTX can cause, you bring in a CEO who knows a thing or two about corporate disasters.
He oversaw Enron’s bankruptcy, Nortel’s bankruptcy, Residential Capital, and Fruit of the Loom.
His name is John J. Ray III.
He’s a fixer. He’s a surgeon. He’s a repairman. He fixes the shit that people break. 😷
During his 3+ hour testimony to Congress on Tuesday, Congress, the public, and the cryptocurrency community were made aware of some revelations that were previously just rumors – but some others were just mind-boggling.
All The Things We’ve Learned
“The FTX Group collapse appears to stem from absolute concentration and control from a small group of grossly inexperienced and unsophisticated individuals.” – John J. Ray III
Some of the “unacceptable management practices” Ray’s team found so far: 🤬
- Use of computer infrastructure that gave individuals in senior management access to systems that stored customer assets without security controls to prevent them from redirecting those assets.
- Storing certain private keys with access to hundreds of millions of dollars in crypto assets without effective security controls or encryption.
- The ability of Alameda to borrow funds held on FTX.com to be utilized for its own trading or investments without any effective limits whatsoever.
- The commingling of assets.
- Lack of complete documentation of transactions involving nearly 500 separate investments made with FTX group funds and assets.
- The absence of audited or reliable financial statements.
- Lack of personnel in financial and risk management functions.
- The absence of independent governance throughout the FTX Group.
“While many things are unknown, many questions remain – we know the following:” – John J. Ray III
- Customer assets at FTX.com were comingled with assets from the Alameda trading platform – that much is clear. 😱
- Alameda used client funds to engage in margin trading, which exposed customer funds to massive losses.
- The FTX Group went on a spending binge in 2021 – 2022. During which $5 billion was spent on a myriad of businesses and investments. Many may only be worth a fraction of what they paid for them.
- Loans and other payments were made to insiders in excess of $1.5 billion dollars.
- Alameda’s business model as a market maker required funds to be deployed to various third-party exchanges, which were inherently unsafe, further exacerbated by the limited protections offered in certain foreign jurisdictions.
Mr. Ray explained that his team sorted all of FTX’s entities into four silos.
- Silo One – a US silo which was the FTX US exchange for US investors. 🚜
- Silo Two – the International exchange called FTX.com for non-US persons.
- Silo Three – Alameda Research, which is purely a crypto hedge fund that made other investments, and VC type investments.
- Silo Four – is purely made up of other investments.
Representative Henry asked Mr. Ray, “…who owned those silos?”
Mr. Ray’s answer: “All of those silos were owner controlled by Sam Bankman-Fried.”
He confirmed a big chunk of cryptocurrency assets had been recovered and that more continues to be found. “We’ve secured over a billion dollars in assets into cold storage wallets – it’s an ongoing process.”
One day after bankruptcy was announced
A day after Chapter 11 was filed, assets were moved from FTX. Once via a hack and another by the Bahamian authorities. Representative Steil asked: 🤔
Representative Steil: “Do you have any indications as to why the Bahamian authorities made that request (to move assets)?”
Mr. Ray: “It wasn’t a request; they just took it.”
Representative Steil: “The Bahamian authorities took the funds that were at FTX through their own actions? Was no action required by FTX employees?”
Mr. Ray: “They were aided by the ex-employees.”
Mr. Steil: “They were aided by former employees of FTX?”
Mr. Ray: “Yes. Mr. Wang and Mr. Fried. “
Mr. Steil: “Do you believe at that time that Mr. Bankman-Fried was attempting to undermine Chapter 11 bankruptcy cases by expanding the scope, by moving assets under the control of the Bahamian authorities?”
Mr. Ray: “It appears so.”
Mr. Ray: “The pushback that we’ve gotten (from Bahamian authorities) is kind of extraordinary in the context of bankruptcy, it raises questions, it seems irregular to me.”
Other important revelations:
- Not all of the assets are in bankruptcy; some, like LedgerX, are solvent and regulated and will be sold.
- Ray reported that employees would communicate expenses and invoices on Slack, with no record keeping.
- FTX used Quickbooks – a service entirely inappropriate for a multi-billion dollar firm.
- No independent board.
- No list of employees and/or a lack of any description of what employees did.
- U.S. clients’ exposure from FTX US was in the hundreds of millions of dollars.
- The majority of the creditors are from the FTX.com entity.
- Keys not stored in a central location, don’t know where all the wallets were, passwords were kept in plain text format, and transactions were sent without a valid recipient (in other words, lost). 😖
This isn’t complete accounting of that hearing, but some of the most important major points. If you want to watch the whole hearing, The Guardian has a complete recording.