By Tom Hals
(Reuters) – John J. Ray III, the new chief executive of bankrupt cryptocurrency exchange FTX, on Thursday laid out his assessment of the failures that led to the biggest collapse in the world of digital assets.
LACK OF CONTROLS
– “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 said in a declaration filed with the U.S. Bankruptcy Court in Delaware.
– FTX filed for bankruptcy on Nov. 11, with an estimated $10 billion to $50 billion in both liabilities and assets, after founder Sam Bankman-Fried secretly used $10 billion in customer funds to prop up his trading business. At least $1 billion in client funds are thought to be missing.
– Ray said he had secured $740 million in cryptocurrency, a “fraction” of what he hopes to recover during the bankruptcy.
– At least $372 million in unauthorized transfers were initiated when FTX filed for bankruptcy and about $300 million in the company’s FTT tokens were minted after the filing, Ray said. Bankman-Fried and his co-founders failed to identify wallets that might contain FTX assets, he added.
– FTX used software to conceal the misuse of customer funds, according to Ray, and he said many senior executives were unaware of fund shortfalls or comingling of customer and company assets.
– Bankman-Fried communicated using apps that automatically deleted messages and he encouraged staff to do the same.
– Workers submitted payment requests in an online chat and supervisors approved them with personalized emojis and employees in the Bahamas used corporate funds to purchase homes and personal items without documentation, the filing says.
– Record keeping was so lax that Ray said he was unable to compile a complete list of FTX employees.
– Ray said FTX did not have an accurate list of its bank accounts and banks have been instructed to freeze cash and not accept instructions from Bankman-Fried or other signatories.
– Ray said he identified four “silos” in the FTX corporate family, each controlled by Bankman-Fried with minority investments by Zixiao “Gary” Wang and Nishad Singh.
– No outside investor owned more than 2% of any silo, according to Ray, who said he did not have confidence in the balance sheet information for each silo.
-The West Realm Shires Inc or WRS silo includes FTX US and subsidiaries that acted as a broker-dealer and offered custodial services and it had $1.36 billion in assets, which included a loan of FTT tokens to BlockFi Inc valued at $250 million.
– The second silo is Alameda Research LLC, which Ray described as a crypto hedge fund owned by Bankman-Fried and Wang with assets of $13.46 billion. The assets included a loan between one of Alameda’s subsidiaries to an entity controlled by Bankman-Fried, Wang and Singh and separate loans of $1 billion to Bankman-Fried, $543 million to Singh and $55 million to Ryan Salame, who is co-chief executive of FTX’s Bahamian business.
– The other silos were Ventures, which manages private investments and had around $2 billion in assets, and Dotcom, which owned non-U.S. exchanges with $2.25 billion in assets.
– Ray said the Dotcom silo’s financials were audited by Prager Metis, which touted itself as the first accounting firm to officially open headquarters in the Metaverse platform Decentraland.
(Reporting by Tom Hals in Wilmington, Del.; Editing by Matthew Lewis)