FTX CEO blames ‘grossly inexperienced’ owners for meltdown, says client money funded risky Alameda trades

Current FTX CEO John Ray III blamed founder and former CEO Sam Bankman-Fried and his top executives for the collapse of the cryptocurrency exchange, telling Congress that they gambled with customers’ money without safeguards to protect theirs investments.

Ray testified before the House Financial Services Committee on Tuesday as angry lawmakers demanded explanations and promised to make heads roll after the company lost billions of dollars in customer funds.

“The collapse of the FTX Group appears to have resulted from the absolute concentration of control in the hands of a small group of grossly inexperienced and inexperienced individuals who have failed to implement virtually every system or control required for a business to operate who is trusted with someone else’s money or assets,” Rey said.

His opening statement followed fairly closely his written testimony previously submitted to the committee.

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FTX CEO John Ray III testifies before the House Financial Services Committee

John Ray, Chief Executive Officer of FTX Cryptocurrency Derivatives Exchange, speaks during a hearing of the House Financial Services Committee investigating the collapse of FTX in Washington, Tuesday, December 13, 2022. (Al Drago/Bloomberg via Getty Images/Getty Images)

Ray – who took over after Bankman-Fried’s resignation and has worked on several major corporate failures, including Enron – said in his testimony before the committee that nearly all of the cases he has worked on for alleged criminal activity “share common characteristics,” but ” never in my career have I seen such a complete failure of corporate controls at all levels of an organization, from the absence of financial statements to the complete failure of any internal controls or governance.”

The new FTX CEO said his investigation is still ongoing but has so far found several “unacceptable management practices” involving the “very small group of grossly inexperienced and inexperienced individuals” who run the exchange.

The veteran restructuring officer revealed that senior FTX management had access to client assets they could reroute, holding hundreds of millions of dollars in crypto access without security controls or encryption, pointing out:[the] Lack of audited or reliable financial statements.”

Ray acknowledged that his new leadership team has been in close contact with US authorities and lawmakers, and that there are still questions about what happened to FTX and its crypto hedge fund Alameda. However, he said they already know that FTX has been playing with client assets by merging them with Alamedas and trading on margin.

Additionally, according to Ray, from late 2021 through this year, FTX Group embarked on what he called a “spending frenzy,” spending around $5 billion on a series of deals and investments that “may only be one are worth a fraction of what was paid for them.” He also wrote that “over a billion dollars in loans and other payments were made to insiders.”

Ex-CEO Sam Bankman-Fried agreed to testify remotely before the committee but was arrested Monday night in the Bahamas. He faces charges from federal prosecutors in New York and another fraud charge from the Securities and Exchange Commission (SEC).

The SEC Complaint, filed Tuesday, accused Bankman-Fried of “conducting a scheme to defraud investors in FTX Trading Ltd, its cryptocurrency trading platform. The court filing describes the alleged operation as “a massive, years-long fraud.”

Breck Dumas and Anders Hagstrom of FOX Business contributed to this report.

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