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John Ray III presided over the Enron bankruptcy, so he knows what a toxically troubled company looks like. That’s why Ray’s declaration that the bankrupt crypto exchange FTX was the result of “a complete failure of corporate controls” carries heavy weight.
In a 30-page FTX Chapter 11 bankruptcy filing submitted to a Delaware court Thursday, Ray also stated that an autopsy of the exchange’s records revealed “a complete absence of trustworthy financial information” and “compromised systems integrity and faulty regulatory oversight.”
He was just getting started. In this “unprecedented” situation, Ray wrote, there was a “concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals.” Later in the document, he described FTX’s sloppy security in searing terms:
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 absence of daily reconciliation of positions on the blockchain, the use of software to conceal the misuse of customer funds, the secret exemption of Alameda from certain aspects of FTX.com’s auto-liquidation protocol, and the absence of independent governance as between Alameda (owned 90% by Mr. Bankman-Fried and 10% by Mr. Wang) and the Dotcom Silo (in which third parties had invested).
Near the end of the declaration, Ray’s words seemed to make it clear that FTX’s actions under founder and former CEO Sam Bankman-Fried weren’t merely incompetence, writing, “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 autodelete after a short period of time,” according to Ray, “and encouraged employees to do the same.”
Debtors, Ray said, did write things down. And in his position as the new CEO, the attorney has begun an investigation led by himself and a team that includes “a former Director of Enforcement at the SEC, a former Director of Enforcement at the CFTC, and a former Chief of the Complex Frauds and Cybercrime Unit of the United States Attorney’s Office for the Southern District of New York.”
This is all in addition to investigations reportedly underway by the Dept. of Justice and the Securities Exchange Commission.
It may not be surprising to learn that in an interview with Vox, Sam Bankman-Fried reportedly revealed that he wished his company had been more careful with its accounting, he believes regulators “make everything worse,” and he regrets filing for Chapter 11.
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