Thursday Nov 17 2022

Here Are the Wildest Parts of the New FTX Bankruptcy Filing

“Never in my career have I seen such a complete failure of corporate controls…”

By Tracy Alloway

November 17, 2022 at 8:42 AM EST

Bloomberg

Lawyers for the bankrupt crypto exchange FTX filed today in Delaware, asking a federal judge to transfer a competing bankruptcy case filed in New York by Bahamian liquidators to the state.

The filing, led by new CEO and chief restructuring officer for FTX, John Ray, is quite something.

Here, for instance, is Ray blasting former FTX CEO Sam Bankman-Fried (our emphasis throughout):

I have over 40 years of legal and restructuring experience.  I have been the Chief Restructuring Officer or Chief Executive Officer in several of the largest corporate failures in history.  I have supervised situations involving allegations of criminal activity and malfeasance (Enron).  I have supervised situations involving novel financial structures (Enron and Residential Capital) and cross-border asset recovery and maximization (Nortel and Overseas Shipholding). Nearly every situation in which I have been involved has been characterized by defects of some sort in internal controls, regulatory compliance, human resources and systems integrity. 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.  From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.

FTX, once the world’s second biggest crypto-exchange, filed for Chapter 11 bankruptcy protection last week following a stunningly swift collapse that has sparked the unwinding of Bankman-Fried’s erstwhile crypto empire and an ongoing series of revelations about how it was run.

The first day bankruptcy filing paints a picture of a chaotically-run web of intertwined companies, including potentially serious lack of controls around spending both corporate and client money. 

Here is a footnote which reveals a tangled web of lending between Alameda Research and other entities, including potentially billions of dollars worth of loans made to Bankman-Fried himself:

There is some talk of FTX assets having been sent to the Bahamian government:

In addition, in connection with investigating a hack on Sunday, November 13, Mr. Bankman-Fried and Mr. Wang stated in recorded and verified texts that “Bahamas regulators” instructed that certain post-petition transfers of Debtor assets be made by Mr. Wang and Mr. Bankman-Fried (who the Debtors understand were both effectively in the custody of Bahamas authorities) and that such assets were “custodied on FireBlocks under control of Bahamian gov’t”  … The Debtors thus have credible evidence that the Bahamian government is responsible for directing unauthorized access to the Debtors’ systems for the purpose of obtaining digital assets of the Debtors—that took place after the commencement of these cases …

And here’s some color regarding spending controls within the crypto exchange FTX:

The Debtors did not have the type of disbursement controls that I believe are appropriate for a business enterprise.  For example, employees of the FTX Group submitted payment requests through an online ‘chat’ platform where a disparate group of supervisors approved disbursements by responding with personalized emojis. In the Bahamas, I understand that corporate funds of the FTX Group were used to purchase homes and other personal items for employees and advisors.  I understand that there does not appear to be documentation for certain of these transactions as loans, and that certain real estate was recorded in the personal name of these employees and advisors on the records of the Bahamas.

The crypto tokens held by FTX.com are now being valued at just $659,000, compared to the billions Bankman-Fried was valuing them at in a term sheet leaked last week. (The filing splits FTX’s businesses into two major units, the Dotcom Silo [which includes FTX.com] and the Ventures Silo which includes various companies managing investments.

 

It seems FTX.com wasn’t including customer liabilities in its financial statements:

To my knowledge, the Dotcom Silo Debtors do not have any long-term or funded debt.  The Dotcom Silo Debtors may have significant liabilities to customers through the FTX.com platform.  However, such liabilities are not reflected in the financial statements prepared by these companies while they were under the control of Mr. Bankman-Fried.  The chart below summarizes certain information regarding the Dotcom Silo’s consolidated liabilities as reflected in the September 30, 2022 balance sheet: 

Cash management also seems to have left something to be desired:

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 … Because of historical cash management failures, the Debtors do not yet know the exact amount of cash that the FTX Group held as of the Petition Date.  The Debtors are working with Alvarez & Marsal to verify all cash positions.  To date, it has been possible to approximate the following balances as of the Petition Date based on available books and records: 

 

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