John J. Ray III has 40 years’ experience restructuring distressed companies, most famously when he helped wind down Enron, one of the most famous cases of corporate malfeasance of all time. Now, he has been brought in as the new CEO of FTX, Sam Bankman-Fried’s imploding cryptocurrency exchange. And, in a filing Thursday, he told a bankruptcy court that he has never in his entire life seen anything this bad.
The entire 30-page declaration is worth reading simply because it is an astounding, scathing document that describes incredible levels of disorganization and chaos at a company that now owes more than a million people a total of several billion dollars: “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,” he begins his statement, noting that he cleaned up Enron's mess as well as many others in his 40-year career. “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.”
It does not get better from there. In his reserved and understated way, Ray isn’t so much describing the failures of a company as the absence of a company. Everything from how many people worked for the company to the basic records that would allow one to reconstruct that appears to be a black hole. Where all the money went is a question, he suggests, that may not be answerable at all.
Incorrect and missing balance sheets
Ray—who, again, is now the CEO of FTX—goes on to explain that FTX founder Sam Bankman-Fried had four “silos” of companies, and states, for example, that the most recent (and unaudited) balance sheets for some of the companies were from September 30. He says that “because this balance sheet was produced while [FTX was] controlled by Mr. Bankman-Fried, I do not have confidence in it, and the information therein may not be correct as of the date stated.”
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Ray goes on to note that financial sheets for some of Bankman-Fried’s companies are simply unavailable. He notes that one of FTX’s most important balance sheets does not have debts nor liabilities listed: “Such liabilities are not reflected in the financial statements prepared by these companies while they were under the control of Mr. Bankman-Fried.”
Improperly incorporated subsidiaries
Ray writes that many of FTX’s subsidiaries and companies (a highly complex org chart has gone viral since FTX imploded) were perhaps not real: “Many of the companies in the FTX Group, especially those organized in Antigua and the Bahamas, did not have appropriate corporate governance,” he wrote. “I understand that many entities, for example, never had board meetings.”
Missing cash
“The FTX Group did not maintain centralized control of its cash,” Ray wrote. “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.”
He notes that he is still unsure how much cash FTX has, what is was invested in, and notes that FTX has been calling up banks “that they believe hold or may hold Debtor cash.” He also stated that liquidity forecasting was “generally absent from the FTX Group historically.” This is seemingly one of the major reasons FTX crashed; its customers wanted to withdraw money, but FTX did not have the cash to cover those withdrawal requests.
Metaverse auditors, missing financial statements, no accounting department
Ray writes that FTX previously had two external firms audit some of the company’s financial information. One of these companies was Prager Metis, “a firm with which I am not familiar and whose website indicates that they are the ‘first-ever CPA firm to officially open its Metaverse headquarters in the metaverse platform Decentraland.’” Ray says he has “substantial concerns” with these financial documents and states that for certain parts of the corporate conglomerate, there are no audited documents whatsoever. He goes on to say that FTX “do[es] not have an accounting department and outsource this function.”
“Human Resources”
Under a subsection titled “human resources,” Ray writes that the company has been “unable to prepare a complete list of who worked for the FTX Group, or the terms of their employment. Repeated attempts to locate certain presumed employees to confirm their status have been unsuccessful to date.”
Nonetheless, Ray says that there is a core of FTX employees who will need to continue to work at the company to go through the bankruptcy process.
Expenses approved with emojis
“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 on-line ‘chat’ platform where a disparate group of supervisors approved disbursements by responding with personalized emojis,” Ray wrote. “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.”
Lost money and poor security practices
Ray writes that access to large portions of FTX’s digital assets were assigned to a shared group email. He also notes that there ws “the use of software to conceal the misuse of customer funds,” and that FTX has “located and secured only a fraction of the digital assets of the FTX Group that they hope to recover.” There is also this: “The Debtors have secured in new cold wallets approximately $740 million of cryptocurrency that the Debtors believe is attributable to either the WRS, Alameda and/or Dotcom Silos. The Debtors have not yet been able to determine how much of this cryptocurrency is allocable to each Silo, or even if such an allocation can be determined. These balances exclude cryptocurrency not currently under the Debtors’ control as a result of (a) at least $372 million of unauthorized transfers initiated on the Petition Date, during which time the Debtors immediately began moving cryptocurrency into cold storage to mitigate the risk to the remaining cryptocurrency that was accessible at the time, (b) the dilutive ‘minting’ of approximately $300 million in FTT tokens by an unauthorized source after the Petition Date and (c) the failure of the co-founders and potentially others to identify additional wallets believed to contain Debtor assets.”
Missing and unclear investments and records
It has been widely reported that FTX funds were used by Alameda, Bankman-Fried’s investing arm, to make investments in other companies. Ray writes that the FTX Group seemingly did not keep track of these investments in a coherent way: “The main companies in the Alameda Silo and the Ventures Silo did not keep complete books and records of their investments and activities.”
He says that “one of the most pervasive failures of the FTX.com business in particular is the absence of lasting records of decision-making. Mr. Bankman-Fried often communicated by using applications that were auto-delete after a short period of time, and encouraged employees to do the same.” Ray writes that, under his leadership, one of the core things FTX will do is “writing things down.”
Finally, FTX has faced hacking attempts and doesn’t know who it owes money to. (FTX is “unable to create a list of their top 50 creditors,” he wrote.)
A loose cannon founder
Ray notes that Bankman-Fried no longer works for FTX and that he would appreciate if he would shut up: “Mr. Bankman-Fried is not employed by the Debtors and does not speak for them. Mr. Bankman-Fried, currently in the Bahamas, continues to make erratic and misleading public statements. Mr. Bankman-Fried, whose connections and financial holdings in the Bahamas remain unclear to me, recently stated to a reporter on Twitter: ‘Fuck regulators they make everything worse’ and suggested the next step for him was to ‘win a jurisdictional battle vs. Delaware.’”