New CEO says FTX is worst case of corporate failure with unreliable financial data and unacceptable practices

FTX’s new CEO, appointed after the crypto-currency exchange filed for bankruptcy, blamed the company under former CEO Sam Bankman-Fried.”Never in my career have I seen such a complete failure of corporate controls and such a complete lack of trustworthy financial information as has happened here” he said in a court filing.

Complete failure of corporate controls

John Ray III, the new CEO of FTX and a veteran insolvency professional who oversaw the liquidation of Enron, revealed in a court filing Thursday that FTX is the worst case of corporate failure he has seen in his more than 40-year career.

John Ray, who was appointed to replace Sam Bankman-Fried (SBF) when FTX filed for Chapter 11 bankruptcy on November 11, wrote:

Never in my career have I seen such a complete failure of corporate controls and such a total absence of reliable financial information as has occurred here.

“From compromised system integrity and flawed regulatory oversight abroad to the concentration of control in the hands of a very small group of inexperienced, unsophisticated, and potentially compromised individuals, this is unprecedented“, he described.

Unacceptable management practices

“Many FTX Group companies, particularly those organized in Antigua and the Bahamas, lacked proper corporate governance“Ray explained, noting that many entities never held board meetings.

In addition, “the FTX Group did not maintain adequate books and records, or security controls, with respect to its digital assets“, detailed the new CEO:

Unacceptable management practices included[…]failure to reconcile positions on the blockchain on a daily basis, use of software to conceal misuse of client funds, Alameda’s secret exemption from certain aspects of FTX.com’s self-liquidation protocol, and lack of independent governance.

He added that the crypto company under Bankman-Fried used “an unsecured group email account as a root user to access confidential private keys and sensitive data critical to FTX companies worldwide.“

Bankman-Fried “continues to make erratic and misleading public statements.”

“One of the most widespread failures of the FTX.com business in particular is the lack of sustainable records of decision making“, said John Ray, adding:

Bankman-Fried often communicated using applications that were set to automatically delete after a short period of time, and encouraged employees to do the same.

In addition, he noted that “Bankman-Fried, currently in the Bahamas, continues to make erratic and misleading public statements.“

FTX’s 4 commercial silos

Ray divided FTX’s businesses into four groups, which he called “silos,” as shown in the court record.

One is the WRS silo, which includes the FTX US crypto-currency exchange that is registered with the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) as a money services business and holds a series of state money transmission licenses in the US.

The next silo is the Alameda Silo, which includes Alameda Research LLC, organized in the state of Delaware. The others are the Ventures silo, which includes FTX Ventures Ltd, and the Dotcom silo, which includes the crypto trading platform FTX.com. FTX Trading Ltd, the parent company of FTX.com, is organized in Antigua.

According to John Ray, most of the financial statements of FTX’s four silos, including the balance sheets, do not appear to have been audited. Pointing out that each financial statement was created while the company was controlled by Bankman-Fried, the executive said:

I do not trust this document, and the information it contains may not be correct as of the date shown.