FTX’s new CEO will testify to ‘total failure of corporate controls’

John Ray, managing director of FTX Cryptocurrency Derivatives Exchange, arrives at bankruptcy court in Wilmington, Delaware, U.S., Tuesday, November 22, 2022.

Sarah Silbiger | Bloomberg | Getty Images

FTX CEO John J. Ray III plans to tell the House Financial Services Committee on Tuesday that the cryptocurrency exchange under Sam Bankman-Fried had “unacceptable management practices,” according to the executive. prepared remarks.

Although Ray only mentions Bankman-Fried by name twice in his seven-page opening remarks, it’s clear that many of his initial criticisms of the company are directed at the organization’s former leadership.

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“…never in my career have I seen such a total 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 all governance,” Ray said in his statement, echoing similar statements he did when the company filed for bankruptcy.

Ray, who led Enron’s restructuring, replaced Bankman-Fried last month when the company suddenly filed for bankruptcyfollowing a execute on assets and reports that he had transferred trillions of dollars in funds from FTX clients to Bankman-Fried’s hedge fund, Alameda Research. The committee released Ray’s opening testimony on Monday, a day before the hearing that will focus on FTX’s collapse.

Bankman-Fried said in a Twitter Spaces interview on Monday that he plans to testify at the next House hearing via video from his location in the Bahamas.

Ray lists what he found to be “unacceptable management practices” at FTX, including “asset bundling”. He also said the company does not have “complete documentation for transactions involving nearly 500 investments made with FTX Group funds and assets.”

Ray explains in his remarks that FTX went on a “spending spree” from late 2021 through 2022, when approximately “$5 billion was spent buying myriad businesses and investments, many of which may not be worth much.” be only a fraction of what was paid for them. “

He noted that “loans and other payments have been made to insiders for more than $1 billion.”

Other issues at FTX, according to Ray’s opening remarks:

  • The use of an IT infrastructure that allowed senior management access to systems that stored customer assets, with no security controls to prevent them from redirecting those assets.
  • Storing certain private keys to access hundreds of millions of dollars worth of crypto assets without effective security controls or encryption.
  • The ability of Alameda, the FTX Group’s crypto hedge fund, to borrow funds held on FTX.com to use for its own transactions or investments without any effective limit.
  • Lack of audited or reliable financial statements.
  • Understaffing in finance and risk management functions, which are typically present in any business approaching the size of FTX Group.
  • The lack of independent governance across the FTX Group.

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