Nov 17, 2022 - Economy

Bankrupt FTX’s new chief describes “unprecedented” failure of corporate controls

Illustration of an open briefcase with a "road work ahead" sign

Illustration: Sarah Grillo/Axios

We got our first glimpse of John Ray III as the new CEO of bankrupt crypto exchange FTX this morning.

  • One thing is clear: The adults have stepped in to clean up the mess.

Driving the news: FTX finally filed its "first day declaration," a court document in which a bankrupt company’s executives tell the full backstory about why it sought Chapter 11 protection.

The big picture: Ray confirms the broad strokes of the reporting that’s emerged over the last week — that FTX and its sprawling web of interconnected affiliates were run with seemingly zero governance or appropriate financial controls, which led to a conflagration now rippling across the industry.

What he's saying: "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," says Ray, who participated in the cleanup of some of the largest corporate failures in history — including Enron.

  • "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," he writes.

Between the lines: This document, while riveting, doesn't contain the play-by-play of the events leading up the bankruptcy filing that these declarations typically lay out. That's probably because founder and former CEO Sam Bankman-Fried (SBF) is now persona non grata.

  • Ray makes clear that SBF is not employed by FTX and doesn't speak for the company — and says numerous times that balance sheets created under SBF's watch are not to be trusted.

State of play: The declaration does lay out some of the existential problems that Ray has identified so far. In short, FTX's obligations were over-exposed to the whims of the cryptocurrency markets.

  • The document says that its $250 million line of credit to BlockFi was made in FTX's exchange token, FTT, which has lost 90% of its value since Nov. 1.
  • Ray accuses FTX of inadequate security control over its digital assets (a damning accusation for an exchange), which was evidenced by the $400 million lost as FTX crumbled.
  • SBF told Vox it was most likely a former FTX employee, which would mean they were able to walk out the door with keys to FTX's crypto wallets.
  • Further, "The Debtors have located and secured only a fraction of the digital assets of the FTX Group that they hope to recover in these Chapter 11 Cases," Ray writes.

Of note: If crypto assets are stored at blockchain addresses that the new company has no record of, someone could have just walked out the door with them.

A few other scary things Ray highlights, any one of which would be enough to sink a company:

  • There was no accounting department.
  • There was little evidence of an HR department.
  • SBF preferred to communicate with applications that auto-deleted, urging employees to do the same.
  • There was no appropriate disbursement process (payment requests were were approved via emoji (!) over chat).

The bottom line: The bad news for those owed money is that this is clearly going to take a while.

Read more: Ray's full declaration

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