FTX Leadership Borrowed Over $1B From Alameda
Incoming CEO John Ray Cites ‘Complete Absence of Trustworthy Financial Information’
By: Aleksandar Gilbert •FTX Crisis
Former FTX CEO Sam Bankman-Fried and other executives at the now-bankrupt crypto exchange were loaned more than $1B by sister company Alameda Research, according to a court document released Thursday.
Another $2.3B was loaned to Paper Bird Inc. Alameda, Paper Bird and FTX are largely or wholly owned by Bankman-Fried and are among the 100-plus companies in his empire to have filed for Chapter 11 bankruptcy in Delaware last week.
The report was prepared by corporate bankruptcy specialist John Ray, who took control of FTX upon Bankman-Fried’s resignation on Nov. 11. Despite four decades of experience restructuring insolvent companies, he described the financial mess he found at FTX as “unprecedented.”
‘Complete Failure of Corporate Controls’
“I have been the Chief Restructuring Officer or Chief Executive Officer in several of the largest corporate failures in history,” Ray said in the filing. “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.”
The issues found include “compromised systems integrity and faulty regulatory oversight abroad,” as well as “the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals.”
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The filing includes figures from various quarterly financial statements, though Ray doubts their accuracy due to their having been compiled under Bankman-Fried’s supervision.
According to a quarterly report detailing Alameda’s finances as of Sept. 30, Bankman-Fried was loaned $1B by the crypto hedge fund he founded and controlled.
FTX CTO Nishad Singh was loaned more than $500M, while Ryan Salame, co-CEO of FTX Digital Markets – which has not filed for bankruptcy – was loaned $55M.
Liquidation Exemption for Alameda
Among the other revelations in the affidavit are Ray’s belief there was a “secret exemption of Alameda from certain aspects of FTX.com’s auto-liquidation protocol”; that FTX had no semblance of an HR department or basic financial bookkeeping; and that Bankman-Fried communicated with other executives and employees via self-deleting messages, resulting in an “absence of lasting records of decision-making.”
Assisting FTX’s new leadership are firms Alvarez & Marsal, Sullivan & Cromwell, Nardello & Co., Chainalysis, Kroll and “a confidential cybersecurity firm” as well as former directors of enforcement at the SEC and CFTC.
The team has secured and placed $740M worth of assets in cold storage but estimates that figure is a fraction of assets to which FTX creditors are entitled. That figure does not include the $370M stolen in a hack last Friday, nor about $400M in FTT tokens that were minted without authorization and immediately transferred to an unidentified wallet a day later.
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FTX’s new management has even had trouble putting together a list of the company’s employees and the terms of their employment.
Approval By Emoji
“The Debtors did not have the type of disbursement controls that I believe are appropriate for a business enterprise,” Ray said. “For example, 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.”
Within the FTX Group – FTX and the hundred-plus affiliated companies that have declared bankruptcy – there are four “silos,” according to Ray: the US-based companies, the venture investing companies, Alameda and its subsidiaries, and FTX.com and its subsidiaries.
Audited financial statements exist for the US-based companies and FTX.com. Nevertheless, Ray said he cannot vouch for their accuracy.
“The FTX Group did not maintain centralized control of its cash,” he said. “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 around the world.”
Meanwhile, corporate money was used to buy homes “and other personal items” for employees.
Ray concluded the affidavit by distancing the company from Bankman-Fried, who, he said, “continues to make erratic and misleading public statements.”