Never seen such a failure of the controls

Sam Bankman-Fried, Co-Founder and CEO of FTX, in Hong Kong, China on Tuesday May 11, 2021.

Lam Yik | Bloomberg | Getty Images

Newly appointed FTX CEO John Ray III, in a filing with the U.S. Bankruptcy Court for the District of Delaware, didn’t mince his words, saying that “in his 40 years of legal and restructuring experience” he has never presented a “more complete failure of corporate controls” and such a complete lack of reliable financial information as has occurred here.”

Ray was ex-CEO of Enron after the energy giant imploded. He vowed to work with regulators to investigate FTX founder Sam Bankman-Fried.

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In the filing, Ray disclosed that he had “no confidence” in the accuracy of the financial statements of FTX and its sister company Alameda Research, writing that they were “unaudited and prepared while the debtors [FTX] were controlled by Mr. Bankman-Fried.”

The document is a statement from Ray in his new role as CEO of FTX and related companies, which filed for bankruptcy last week in an implosion that rocked the crypto world and rocked investors.

Ray chided Bankman-Fried and his management team for what has been described as lax controls over systems and regulatory compliance.

“The concentration of control in the hands of a very small group of inexperienced, inexperienced and potentially compromised individuals” was unprecedented, said the former Enron chief of recovery.

Ray said that a “significant portion” of assets held at FTX could be “missing or stolen” following widespread reports on social media of hundreds of millions in cryptocurrencies being stolen.

In coordination with regulators, Ray wrote, the Chapter 11 bankruptcy proceedings would investigate Bankman-Fried’s actions related to the collapse of FTX.

Alarmingly, Ray wrote that part of his job would be to implement controls and basic company standards such as “accounting, audit, cash management, cybersecurity, human resources, risk management, data protection and other systems that didn’t exist or didn’t exist to a reasonable extent.” before my appointment.”

Bankman-Fried and FTX management practices included using an unsecured group email account as the root user to access confidential private keys and critically sensitive data for the FTX group companies around the world, the lack of a daily reconciliation of positions on the blockchain, the use of software to conceal the misuse of customer funds.”

Bankman-Fried was not immediately available for comment.

When Bernie Madoff’s Ponzi scheme collapsed in 2008, similarly sophisticated software was used to hide mislabeled and fraudulent client positions.

FTX is currently working to produce an accurate breakdown of cash and crypto assets. Ray said it was “not appropriate for stakeholders or the court to rely on FTX’s audited financial statements as a reliable indication of its financial condition.”

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