Six days after cryptocurrency exchange FTX filed for bankruptcy, the secrets of the company, which was still worth $32 billion in February, are beginning to come to light.
John Ray, the new CEO in charge of restructuring, has just made an indictment of the Sam Bankman-Fried years. Bankman-Fried, 30, founded the company with two associates -- Zixiao "Gary" Wang and Nishad Singh. FTX started operating in May 2019.
Ray said that the three executives failed on several levels and portrayed a company where controls were absent and whose financial information was unreliable.
'Unacceptable'
The new Chief Executive Officer has also just asserted that there was software at FTX that allowed management to hide the misuse of customers' money.
"Unacceptable management practices included the use of an unsecured group email account as the root user to access confidential private keys and critically sensitive data for the FTX Group companies around the world," the seasoned restructuring veteran blasted in a 30-page document filed with the United States Bankruptcy court for the District of Delaware.
He continued by saying that there was "the use of software to conceal the misuse of customer funds."
Ray didn't provide further details. But his statement thus undermines Bankman-Fried's denials that there was a back door allowing him to alter the records without third parties, including auditors and investors, noticing.
Reuters reported last week that FTX's financials showed that there was a "back door" in the books, created with "bespoke software." It was described as a way that Bankman-Fried could cook the books without raising any alerts.
Ray's confirmation of this software is a damning accusation against Bankman-Fried, who was questioned by police in the Bahamas on November 12. Local authorities opened a criminal investigation because Bankman-Fried lives there and it was the headquarters of FTX.
Ray, who is a veteran of restructurings, also deplores different practices such as "the secret exemption of Alameda from certain aspects of FTX.com’s auto-liquidation protocol, and the absence of independent governance" between FTX and Alameda Research, Bankman-Fried's "crypto hedge fund."
Auto-Delete Apps
In addition, the former CEO was fond of messaging apps that automatically delete messages, making it impossible to find records about Bankman-Fried's decisions.
"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 set to auto-delete after a short period of time, and encouraged employees to do the same," Ray wrote.
On several occasions Ray also repeated that he did not trust the information and data he has found because they were collected under the supervision of Bankman-Fried.
The insolvency of FTX was the result of a liquidity shortfall when clients attempted to withdraw funds from the platform. The liquidity shortfall appears to have been the result of FTX’s founder reportedly transferring $10 billion of customer funds from FTX to Alameda Research.
FTX faces a shortfall of $1 billion to $2 billion.
As a crypto exchange, FTX executed orders for their clients, taking their cash and buying cryptocurrencies on their behalf. FTX acted as a custodian, holding the clients’ crypto currencies.
FTX then used its clients’ crypto assets, through its sister company’s Alameda Research trading arm, to generate cash through borrowing or market making. The cash FTX borrowed was used to bail out other crypto institutions in the summer of 2022.
At the same time, FTX was using the cryptocurrency it was issuing, FTT, as collateral on its balance sheet. This represented a significant exposure, due to the concentration risk and the volatility of FTT.
