FTX Run Worse Than Enron, Says New CEO

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  • The new CEO of FTX has delivered a scathing first report which he said the failures were worse than he saw at Enron
  • John J. Ray III pointed out multiple flaws that could well be judged illegal in time
  • He lambasted a “complete failure of corporate controls” and the “complete absence of trustworthy financial information”

The new CEO of FTX, John J. Ray III, yesterday filed a scathing initial report into the goings on at the exchange under Sam Bankman-Fried, laying bare the scale of the multi-billion-dollar mess. In his First Day Affidavit, Ray lamented the “complete failure of corporate controls” at the company, as well as the “complete absence of trustworthy financial information”, saying that the mess left by Bankman-Fried and his team was worse than Ray had found when deadline with Enron.

Ray Lambasts “Unprecedented” Situation

Ray’s report made stunning reading, crystallizing what was already suspected by the crypto world following two weeks of fallout, with some barely believable nuggets thrown in. His opening salvo was enough to give a firm impression of what was to come next:

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. 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.

Ray described four ‘silos’ of money, each controlled by Bankman-Fried, but added that he had no confidence in the amounts that were reported to be in these silos “because this balance sheet was produced while the Debtors were controlled by Mr. Bankman-Fried”.

FTX Didn’t Record Cash Holdings

Ray added that FTX didn’t even know how to manage its cash, saying that “cash management procedural 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 around the world.” This means that the team of liquidators aren’t able to work out how much cash FTX actually has, although they put the estimate at $564.4 million as of November 14.

Ray was also scathing about the audits that took place, saying he had “substantial concerns” over the company used, Prager Metis, which prides itself as being the “first-ever CPA firm to officially open its Metaverse headquarters in the metaverse platform Decentraland.”

Things got no better when Ray discussed the human resources side of FTX:

At this time, the Debtors have been unable to prepare a complete list of who worked for the FTX Group as of the Petition Date, or the terms of their employment. Repeated attempts to locate certain presumed employees to confirm their status have been unsuccessful to date. 

Payments were requested through the company’s Slack forum, with approvals granted “ by responding with personalized emojis.”

Private Keys Kept in Unsecured Group Email Account

Worse was to come when Ray discussed FTX’s digital asset storage, revealing that, “The FTX Group did not keep appropriate books and records, or security controls, with respect to its digital assets,” and also that Bankman-Fried and co-founder Gary Wang had access to almost all the cryptocurrency held by FTX.

Ray then reeled off a list of further transgressions in this arena:

Unacceptable management practices included the use of an unsecured group email account as the root user to access confidential private keys and critically sensitive data for the FTX Group companies around the world, the absence of daily reconciliation of positions on the blockchain, the use of software to conceal the misuse of customer funds, the secret exemption of Alameda from certain aspects of FTX.com’s auto-liquidation protocol, and the absence of independent governance as between Alameda […] and the Dotcom Silo.

Here we find several incredible pieces of information – the private keys to billions in user funds were kept in an unencrypted group email account, FTX used purpose-made software to hide misuse of customer funds and Alameda, the FTX trading arm, was exempt from being automatically liquidated when all other users weren’t. This information alone could be enough to elicit criminal proceedings against Bankman-Fried.

Bankman-Fried Could Have Broken the Law

This report, which let’s not forget is just the first to come out of the FTX dumpster fire, paints the picture of a company run by a bunch of kids who had no idea what they were doing, making things up as they went along and ensuring that they were earning billions with no regard to any of their million or so customers.

The kickback from this report has made Bankman-Fried and others in the FTX executive committee (if it can be called that) look even worse in the public eye (if that were possible), and gives a firm idea of what could be coming down the line for them.