New FTX CEO John Ray’s statement on bankruptcy case tells tale of an unmitigated disaster Samuel Wan · 29 mins ago · 6 min read
A bankruptcy statement by new FTX CEO John Ray said he has never in his career seen “such a complete failure” of corporate controls.
6 min read
Updated: November 17, 2022 at 10:39 pm
Cover art/illustration via CryptoSlate
FTX’s fall from grace this week culminated in the company filing for Chapter 11 bankruptcy on Nov. 11. The filing includes all 130 companies under the umbrella, as well as the trading firm Alameda.
On announcing the news, Sam Bankman-Fried resigned from his position as CEO. John Ray, who oversaw Enron following its accounting scandal in 2007, took charge following SBF’s resignation.
Commenting on the bankruptcy, Ray said the Chapter 11 filing would provide relief and allow for a thorough assessment of the situation to maximize recoveries for all stakeholders.
Chapter 11 filings enable a company to continue trading and are usually implemented in business restructuring cases.
A ‘complete failure’
Ray filed the Chapter 11 Petitions and First Day Pleadings with the Bankruptcy Court of Delaware on Nov. 17.
Having gone through FTX’s books, Ray blasted the previous company administration, saying he has never come across “such a complete failure of corporate controls and such a complete absence of trustworthy financial information.”
In particular, he pointed out compromised systems integrity, faulty regulatory oversight abroad, and concentration of control in the hands of a very small group – all of which were inexperienced and incapable of running an operation the scale of FTX.
“The FTX Group did not maintain centralized control of its cash. 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. Under my direction, the Debtors are establishing a centralized cash management system with proper controls and reporting mechanisms.”
The businesses were divided into four groups or silos to manage the bankruptcy process. For each Silo, Ray included an unaudited balance sheet as of Sep. 30, 2022. A summary is as follows:
West Realm Shires Inc. Silo (WRS) includes FTX U.S., LedgerX, FTX US Derivatives, FTX U.S. Capital Markets and Embed Clearing, among other entities.
- The balance sheet showed $1.36 billion in Total Assets, of which $929.2 million is related to Current Assets. Total Liabilities are $316 million, with $235.9 million in Current Liabilities.
Alameda Silo refers to entities specializing in quantitative trading funds; it includes Alameda Research LLC and debtors based in Delaware, Korea, Japan, the British Virgin Islands, Antigua, Hong Kong, Singapore, Seychelles, the Cayman Islands, the Bahamas, Australia, Panama, Turkey, and Nigeria.
- The balance sheet showed $13.5 billion in Total Assets, of which $13.2 billion are Current Assets. Total Liabilities are $5.09 billion, all of which are current.
Ventures Silo companies relate to private investment entities, including Clifton Bay Investments, LLC, Clifton Bay Investments Ltd., FTX Ventures Ltd., and Island Bay Ventures Inc, among other entities.
- The combined balance sheet of Clifton Bay Investments LLC and FTX Ventures Ltd showed $2.014 billion in Total Assets, of which all are current. Likewise, total Liabilities come in at $2.012 billion, which is current.
Dotcom Silo holds specific marketplace licenses and registrations and includes the FTX digital trading platform and exchange.
- The balance sheet showed $2.259 billion in Total Assets, of which $1.98 billion is Current Assets. Total Liabilities are $466 million, and all but $46,000 is current.
In each case, current assets exceed total liabilities. However, given the improper corporate controls before his arrival, Ray said he did “not have confidence” in any of the financial statements.
Ray said the FTX Group of companies failed to keep centralized control of its cash, meaning there is no list of bank accounts to verify cash balances. Similarly, company controls were poor, with no cash management systems or the use of proper reporting mechanisms.
Ray said the audit firm for the WRS Silo was Armanino LLP, noting that he is “professionally familiar with the firm. He noted, however, that he was not familiar with the audit firm for the Dotcom Silo, Prager Metis, which touts itself as “the first-ever CPA firm to officially open its Metaverse headquarters in the metaverse platform Decentraland.”
The CEO said:
“I have substantial concerns as to the information presented in these audited financial statements, especially with respect to the Dotcom Silo. As a practical matter, I do not believe it appropriate for stakeholders or the Court to rely on the audited financial statements as a reliable indication of the financial circumstances of these Silos.”
Unchecked loans; company funds used to buy houses
The bankruptcy filing also revealed that Sam Bankman-Fried got $1 billion in personal loans from Alameda Research.
Also, Alameda gave a $543 million loan to FTX director of engineering Nishad Singh. The firm also gave Ryan Salame, the co-CEO of FTX, a $55 million loan.
In an apparent disregard for corporate process, Ray claimed,
“Corporate funds of the FTX Group were used to purchase homes and other personal items for employees and advisors.”
The properties were based in the Bahamas, and the new CEO stated that “no documentation” is present to identify the purchases as loans. At the same time, the real estate was registered in the personal names of the employees and advisors.
Where are the digital assets and other investments
Bewilderingly, Ray further depicted a chaotic approach to bookkeeping and security. SBF and Co-Founder Gary Wang “controlled access to digital assets of the main businesses in the FTX Group.” The internal practices were described as “unacceptable” by Ray. A group email account was used as the “root user to access confidential private keys” in a remarkable example of improper security hygiene.
There was no regular cadence to the “reconciliation of positions on the blockchain,” while software was used to “conceal the misuse of customer funds.” Ray specifically highlighted the “secret exemption of Alameda” from specific documentation to prevent funds from being liquidated without manual intervention.
New wallets are allegedly still being discovered. One such cold wallet contains roughly $740 million, but the FTX group of companies is not yet sure of the origin of the funds. Further, it is unclear whether the funds should be split among multiple entities within the FTX Group.
At present, Ray confirmed that $372 million was transferred without authorization after filing the bankruptcy petition, while $300 million in FTT tokens was also minted after the deadline. In addition, the FTX companies believe there are other crypto wallets that SBF and the former leadership team have not yet disclosed.
Forensic analysts have been employed to search for missing funds and attempt to trace transactions to link crypto assets. Ray commented that the analysts might discover “what may be very substantial transfers of company property. Court assistance was mentioned as a potential direction to resolve the issue.
Ray stated the overview of the investigation in its current state.
“It is my view based on the information obtained to date, that many of the employees of the FTX Group, including some of its senior executives, were not aware of the shortfalls or potential
commingling digital assets.”
The new CEO believes that “current and former employees” may be the “most hurt” by the failure of FTX and SBF’s alleged actions.
Astonishingly, Ray claimed that the leading companies related to Alameda and FTX Ventures “did not keep complete books and records of their investments and activities.” A balance sheet is being finalized for the affected companies from “the bottom-up” through cash records.
No paper trail
A lack of records for SBF’s critical decisions was described as one of “the most pervasive failures” by the acting CEO. Communication applications used by SBF were set to “auto-delete” messages, and employees were encouraged to do the same.
In a seemingly basic task, Ray detailed that the companies, now, “are writing things down.”
The team involved in the bankruptcy procedures includes former directors of the SEC and CFTC, along with members of the Cybercrime Unit of the U.S. Attorney’s Office. “Dozens of regulators” have been contacted by Ray and his staff as he posited a need for transparency.
SBF’s current role
Ray took the opportunity to state that SBF “does not speak for them” about the FTX companies involved in the bankruptcy process. He further confirmed that SBF is currently in the Bahamas and described his communication as “erratic and misleading.”
Ray noted that due to these cash management failures, exact cash positions are not known at this time. However, the companies are working with turnaround consultants Alvarez & Marsal to resolve this situation.
Any funds located by the FTX group of companies will be “deposited into financial institutions in the United States.” Each “silo” of funds will be segmented so that Ray’s team can allocate “costs across the various Silos and Debtors.”
A Cash Management Motion will be filed “promptly” to detail how cash will be managed going forward.
Insights on Sam Bankman-Fried’s ‘dark’ Republican political donations
Insights on Sam Bankman-Fried’s ‘dark’ Republican political donations Samuel Wan · 40 mins ago · 2 min read
YouTuber Coffeezilla gives his take on a Tiffany Fong interview with Sam Bankman-Fried, in which he claimed to be a secret Republican donor.
2 min read
Updated: November 30, 2022 at 2:09 pm
Cover art/illustration via CryptoSlate
Former FTX CEO Sam Bankman-Fried (SBF) gave his first interview with “citizen journalist” Tiffany Fong post-collapse.
The pair discussed multiple aspects of the FTX saga, including the “backdoor,” FTT as collateral, and his regrets. But of particular interest were SBF’s comments on dark money donations made to Republican politicians.
It is widely known SBF was a significant supporter of the Democrat administration. His $37 million donations made him the party’s second-biggest donor, after investor George Soros.
Some speculate this link is a factor in the lack of criminal proceedings against him. For example, lawyer John E. Deaton questioned why authorities have failed to respond, calling the criminal justice system “compromised.”
Let me make this clear if SBF isn’t arrested and charged with fraud, wire-fraud, theft, and possibly money laundering before and instead gets to spew out his bullshit narrative, our system of justice has been compromised. @ewarren you claim to be for the little guy, where are you https://t.co/cdmOa7U0an
— John E Deaton (@JohnEDeaton1) November 23, 2022
However, based on Fong’s interview, it seems SBF has more political clout than first thought.
Sam Bankman-Fried played both sides
In recent months, Fong’s investigations into Celsius, and now FTX, have earned her a reputation for sound investigative journalism.
During the 20-minute interview, the issue of political donations cropped up, with SBF saying he donated “about the same amount” of money to both parties. Further, donations to the Republican party were “dark.”
“I donated to both parties, I donated about the same amount to both parties… All my Republican donations were dark.”
Explaining why he chose this route, SBF said it was not for regulatory reasons. Rather, it was to quell the potential backlash from left-biased news outlets.
“It’s because reporters freak the f*ck out if you donate to Republican. They’re all secretly liberal and [I] didn’t want to have that fight, so I made all the Republican ones dark.”
Chiming in on the disclosure, YouTuber Coffeezilla aka Stephen Findeisen, said there was a lot to unpack with SBF’s comments.
Firstly, referring to SBF’s now infamous tweet in which he said “FTX is fine,” Coffezilla said he is skeptical about whether the former CEO is telling the truth. Nonetheless, whether he is lying or not, it is a lose-lose situation for SBF.
Sharing his insights, Coffeezilla said it goes to show that SBF has no political agenda, only that he wanted to be powerful and to be seen to care, “that’s why he played both sides.”
“If he’s lying, this looks bad for him. But if he’s telling the truth it looks worse. It shows you how cynical Sam was. He never cared about politics. He cared about power and perception”
Coffeezilla continued by saying this mindset is about “trying to craft an image.” With the generous billionaire image in tatters, SBF is now trying to deflect the criminal narrative into one of “the smart guy who made an embarrassing mistake.”
Crypto Exchange Bitfront Shuts Down Amid Industry Challenges
Cryptocurrency exchange Bitfront has announced its intention to cease operations in the coming months, citing challenges facing the industry. The U.S. trading platform, backed by Japan’s social media giant Line, indicated the decision is unrelated to the collapse of FTX.
Line-Supported Digital Asset Exchange Bitfront Suspends New Sign-ups
Bitfront, a crypto exchange operating in the United States, has suspended new sign-ups and credit card payments while planning to cease operations in a few months’ time. The move comes despite efforts to overcome the current challenges in the “rapidly evolving” crypto industry, the company announced, quoted by Reuters and Bloomberg.
In the statement published on its website, the exchange explained it has “regretfully determined that we need to shut down Bitfront in order to continue growing the Line blockchain ecosystem and Link token economy.” The U.S.-based platform, which launched in 2020, is backed by the Japanese social media firm Line Corp.
Bitfront also pointed out that the decision to close down is not related to the problems of “certain exchanges that have been accused of misconduct,” an indirect reference to FTX, one of the largest global players in the market before it collapsed and filed for bankruptcy protection on Nov. 11 amid liquidity issues.
Other companies in the space, like Blockfi for example, have been hurt by exposure to FTX. The crypto lender announced on Monday it has petitioned for Chapter 11 bankruptcy protection along with eight of its affiliates. When Blockfi paused withdrawals earlier this month, it specifically cited the “lack of clarity” regarding the state of FTX at the time.
With a 24-hour volume of less than $94 million, only a dozen trading pairs and six coins, according to Coingecko, Bitfront has a small share of a market with a total trading volume of almost $57 billion over the same period, the Bloomberg report noted.
The exchange informed users that new sign-ups and card payments have been suspended on Nov. 28 while deposits in cryptocurrency and U.S. dollars will be halted on Dec. 30. It also urged customers to withdraw all their assets by March 31, 2023, when all withdrawals will be suspended as well.
Tags in this story
Bankruptcy, Bitfront, Challenges, collapse, Crypto, crypto exchange, Cryptocurrencies, Cryptocurrency, Exchange, ftx, Issues, Japan, Line, operations, Services, shutdown, Social Media, suspension, U.S.
Do you expect other crypto trading platforms to go out of business? Let us know in the comments section below.
Lubomir Tassev is a journalist from tech-savvy Eastern Europe who likes Hitchens’s quote: “Being a writer is what I am, rather than what I do.” Besides crypto, blockchain and fintech, international politics and economics are two other sources of inspiration.
Image Credits: Shutterstock, Pixabay, Wiki Commons
Disclaimer: This article is for informational purposes only. It is not a direct offer or solicitation of an offer to buy or sell, or a recommendation or endorsement of any products, services, or companies. Bitcoin.com does not provide investment, tax, legal, or accounting advice. Neither the company nor the author is responsible, directly or indirectly, for any damage or loss caused or alleged to be caused by or in connection with the use of or reliance on any content, goods or services mentioned in this article.
Ripple general counsel calls BlockFi bankruptcy another success for SEC’s ‘regulation by enforcement’ approach
Ripple general counsel calls BlockFi bankruptcy another success for SEC’s ‘regulation by enforcement’ approach Oluwapelumi Adejumo · 2 hours ago · 2 min read
Ripple CTO David Schwartz said BlockFi might have gotten a loan from FTX to pay off the SEC’s settlement.
2 min read
Updated: November 29, 2022 at 12:07 pm
Cover art/illustration via CryptoSlate
Ripple general counsel Stuart Alderoty described BlockFi’s bankruptcy as another success for the U.S. SEC and its regulation-by-enforcement approach.
Another SEC “regulation by enforcement” success story.
Months after $100M BlockFi/SEC deal BlockFi in b/cy. $275M loan outstanding to FTX from BlockFi. Unknown amounts owed to BlockFi from FTX. Nothing ever registered. Fines paid? With whose money? Consumers decimated. https://t.co/XWflfRDIMk
— Stuart Alderoty (@s_alderoty) November 28, 2022
Alderoty referenced the SEC’s $100 million settlement with BlockFi, asking whose money was used to pay the settlement. The Ripple lawyer noted that nothing was ever “registered” in the deal, wondering if BlockFi made the first two payments to the regulator.
Nothing was ever “registered” per the BlockFi/SEC deal. What about the first two payments on the $100M fine? If they were made, did the SEC confirm BlockFi’s ability to pay and/or the source of funds? FTX b/cy shows a $250M loan to BlockFi and now customer funds are blocked.
— Stuart Alderoty (@s_alderoty) November 27, 2022
Alderoty also questioned whether the SEC confirmed the crypto lender’s “ability to pay and/or the source of funds” if BlockFi made the payments.
In February, BlockFI agreed to pay the US SEC a $100 million fine for its failure to register its lending product with the regulator. The SEC’s top officials repeatedly highlighted how this enforcement action was a major win for the commission.
In July, BlockFi received a $400 million line of credit from FTX. The Sam Bankman-Fried-led exchange would later file for bankruptcy, forcing the crypto lender to halt withdrawals for its customers.
Ripple CTO alleges SEC fine made BlockFi financially weak
Ripple CTO David Schwartz said BlockFi might have gotten a loan from FTX to pay off the SEC’s settlement. He added that this might have forced the lender to store its assets on FTX in order to continue operating.
“In other words, the SEC may have made BlockFi so weak financially that it had no choice but to store crypto at FTX to continue operating, possibly the cause of their collapse.”
SEC among BlockFi’s largest creditors
Meanwhile, Nov. 28 court filings have shown the SEC listed among BlockFi’s creditors. According to the court document, the firm owes the financial regulator $30 million.
The bankruptcy filing showed that the lender has over 100,000 creditors, owing over $1 billion to its top 3 creditors.
Its largest creditor is Ankura Trust Company, which is owed more than $729 million. Its second-largest creditor is FTX-related West Realm Shires Inc. which is owed $275 million. An unnamed customer is owed $48 million.
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