FTX Was Worse Than Enron, New CEO Says

When the guy who cleaned up after Enron says “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” at FTX, you know things had to be really bad.

That assessment came in a court filing by FTX Group’s new CEO, restructuring expert John Ray III, who did the same thing when the energy trading giant failed in late 2001.

This sounds a little hard to believe until you get into the details of Ray’s statement to the court of how Sam Bankman Fried ran FTX, FTX US, Alameda research and the other approximately 130 companies in FTX Group, Ray said.

Here are a few choice comments, beginning with the company’s disbursement of funds:

• “Employees of the FTX Group submitted payment requests through an online ‘chat’ platform where a disparate group of supervisors approved disbursements by responding with personalized emojis.”
• “Because of historical cash management failures, the Debtors do not yet know the exact amount of cash that the FTX Group held.”
• “In the Bahamas, I understand that corporate funds of the FTX Group were used to purchase homes and other personal items for employees and advisors. I understand that there does not appear to be documentation for certain of these transactions as loans, and that certain real estate was recorded in the personal name of these employees and advisors on the records of the Bahamas.”

Then there are “unacceptable management practices” which include:

• “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.”
• “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).”

Cash management was another problem:

“The FTX Group did not maintain centralized control of its cash. Cash management procedural failures included the absence of an accurate list of bank accounts and account signatories, as well as insufficient attention to the creditworthiness of banking partners. Because of historical cash management failures, the Debtors do not yet know the exact amount of cash that the FTX Group held.”

The most startling failure regards record keeping:

“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.”