Never seen such failure of controls

Sam Bankman-Fried, co-founder and CEO of FTX, in Hong Kong, China on Tuesday, May 11, 2021.

Lam Yık | Bloomberg | Getty Images

New FTX CEO John Ray III was outspoken in a filing with the U.S. Bankruptcy Court for the District of Delaware, saying that “in his 40 years of legal and restructuring experience” , he had never seen “such a complete failure of corporate controls”. and a complete lack of trustworthy financial information as has happened here.”

Ray was previously CEO of Enron after the energy titan’s implosion. He promised to work with regulators to investigate FTX founder Sam Bankman-Fried.

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In the filing, Ray revealed he had “no confidence” in the accuracy of the balance sheets of FTX and its sister company Alameda Research, writing that they were “unaudited and produced while debtors [FTX] were controlled by mr. Bankman-Fried.”

The document is a statement from Ray in his new role as CEO of FTX and related entities, which filed for bankruptcy last week in an implosion that rocked the crypto world and rattled investors.

Ray criticized Bankman-Fried and his management team for what was described as lackadaisical checks on systems and regulatory compliance.

“The concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals” was unprecedented, the former Enron recovery boss said.

Ray said a “substantial portion” of assets held with FTX may be “missing or stolen”, following numerous social media reports of the theft of hundreds of millions of cryptocurrencies.

In coordination with regulators, Ray wrote, the Chapter 11 bankruptcy process would review Bankman-Fried’s actions in connection with the FTX collapse.

Alarmingly, Ray wrote that part of his mission would be to implement basic corporate controls and standards such as “accounting, auditing, cash management, cybersecurity, human resources , risk management, data protection and other systems that did not or did not exist”. to an appropriate degree, prior to my appointment.”

Bankman-Fried and FTX’s management practices “included the use of an unsecured group email account as the root user to access confidential private keys and highly sensitive data for FTX Group companies across the world, the lack of daily reconciliation of positions on the blockchain, the use of software to conceal the misuse of client funds.”

Bankman-Fried was not immediately available for comment.

Sophisticated software was also used to conceal erroneous and fraudulent client positions during the 2008 collapse of Bernie Madoff’s Ponzi scheme.

FTX is currently working to report an accurate statement of cash and crypto assets. Ray said it would not be “appropriate for stakeholders or the Court to rely on the audited financial statements as a reliable indication of the financial condition” of FTX.

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