FTX’s New Chief Says ‘Complete Failure’ of Oversight Contributed to Firm’s Downfall
The crypto exchange’s new CEO in a court filing said he has no confidence in FTX financial statements because many weren’t audited
FTX’s new chief executive said lax controls over the company’s billions of cash and cryptocurrency assets under the leadership of Sam Bankman-Fried has left current management scrambling to establish just how much money the bankrupt crypto platform has today.
The declaration made in a Delaware bankruptcy court on Thursday marks the first attempt by FTX’s new chief executive, appointed shortly before the company filed for bankruptcy, to explain what went wrong at the company. John J. Ray, who acted as Enron’s chairman in the years after the company collapsed, took over as CEO last week and his first official act was to authorize the company’s bankruptcy filing, he said.
“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,” Mr. Ray said in the court filing. “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.”
Mr. Ray said that while many of FTX’s balance sheets show the company holding substantial assets that exceed their liabilities, he has no confidence in those financial statements because many weren’t audited and said the court shouldn’t rely on them to be accurate.
For example, Alameda Research LLC, which acted as a “crypto hedge fund” inside of FTX, reported assets of over $13 billion and liabilities of over $5 billion, Mr. Ray noted.
The lack of audited financial statements is one among a list of such “unacceptable management failures” Mr. Ray lays out. Other failings include no record of board meetings and inadequate internal controls over cash management. Mr. Ray noted that FTX didn’t have an accurate list of bank accounts holding its cash.
He added that FTX used the lack of oversight to help “conceal the misuse of customer funds” and keep little record over internal decision making. To date, FTX has only secured roughly $740 million in cryptocurrency that belongs to FTX entities including Alameda Research, which is only “a fraction” of FTX’s digital assets that the company hopes to recover.
Mr. Ray’s and the board’s immediate goals are to protect and recover assets, “a substantial portion of which may be missing or stolen,” and investigate claims against the company’s founders and third parties. Moreover, they plan to implement oversight and audit controls over the company’s business, Mr. Ray said.
Mr. Ray said he has been working around the clock alongside advisers including Alvarez & Marsal, Sullivan & Cromwell LLP, Nardello & Co., and others to answer questions from regulators including the Securities and Exchange Commission, the Commodity Futures Trading Commission and the U.S. attorney’s office in the Southern District of New York.