John Ray III, the lawyer who represented plaintiffs after the collapse of Enron and is now overseeing the bankruptcy proceedings of defunct cryptocurrency exchange FTX, revealed that the company led by Sam Bankman-Fried is the worst failure he has seen in his career.
The seasoned attorney, who was appointed chief executive of FTX to manage the company’s restructuring, remarked in a court filing with the United States Bankruptcy Court for the District of Delaware that the team overseeing the company was utterly inept, noting that a substantial portion of the company’s assets are missing or stolen.
“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 wrote. “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 filed for bankruptcy last week after users discovered that firms controlled by Bankman-Fried and his associates were allegedly fraudulently intertwined, causing a liquidity crisis as users rushed to withdraw funds. The fallout has provoked calls for greater regulations on the cryptocurrency sector and will be the subject of a bipartisan hearing hosted by the House Financial Services Committee next month.
Ray added in the court document that his current objectives are implementing cybersecurity, risk management, data protection, and “other systems that did not exist,” as well as locating missing or stolen property and cooperating with relevant regulatory agencies in multiple jurisdictions.
The lawyer described four “silos” within the cryptocurrency empire and noted that each was effectively controlled by Bankman-Fried, although some had a handful of smaller investors. Ray said that he does not “have confidence” in the balance sheets he provided to the court, as the documents were produced when Bankman-Fried was still in control of the enterprise.
FTX was founded three years ago and became an overnight success. Alameda Research, a trading firm launched by Bankman-Fried and led by Caroline Ellison, with whom he had been romantically linked, allegedly borrowed customer holdings from FTX to make trades. Bankman-Fried, whose $15 billion net worth evaporated amid the bankruptcy proceedings, claimed that he underestimated the amount FTX needed to keep in reserves should customers want to remove their funds.
Among the eyebrow-raising management practices included “the use of an unsecured group email account as the root user to access confidential private keys and critically sensitive data,” a lack of independent governance between FTX and Alameda Research, and “the use of software to conceal the misuse of consumer funds,” according to Ray.
Bankman-Fried had recruited a number of influential cultural figures to promote FTX among the general public. A class-action lawsuit filed in the Southern District of Florida named Bankman-Fried and brand ambassadors such as Tampa Bay Buccaneers quarterback Tom Brady, supermodel ex-wife Gisele Bündchen, celebrity investor Kevin O’Leary, and comedian Larry David as alleged participants in the “fraudulent scheme” against unsophisticated investors.
Officials in the United States and the Bahamas are reportedly working to transport Bankman-Fried out of the island nation as regulators seek to address the crisis. The young entrepreneur and his associates are presently under supervision by Bahamian law enforcement since they reportedly considered fleeing the country for Dubai.