FTX CEO Blames Exchange’s Collapse on SBF's Mismanagement
"Old-fashioned Embezzlement," John Ray Tells Congress
By: Aleksandar Gilbert •FTX Crisis
Several lawmakers slammed crypto during a widely publicized hearing on the collapse of FTX Tuesday. But to the company’s new CEO, appointed to clean up the mess left by Sam Bankman-Fried, the exchange’s demise was simply a case of “old-fashioned embezzlement.”
“This is just taking money from customers and using it for your own purposes,” the CEO, John Ray, said. “Not sophisticated at all. Sophisticated, perhaps, in the way, they were able to sort of hide it from people — frankly, right in front of their eyes.”
Bankman-Fried was scheduled to testify before the Financial Services committee of the U.S. House of Representatives on Tuesday. Those plans were stymied when Bahamian authorities arrested the company’s disgraced co-founder on Monday after federal prosecutors in the U.S. indicted him on several charges, including wire fraud and money laundering.
SBF to Face U.S. Charges as Ray Prepares to Share Autopsy of FTX
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That left Ray, a corporate turnaround specialist who led Enron through its bankruptcy, as the committee’s sole witness Tuesday.
Ray took over on Nov. 11, shortly after Bankman-Fried relinquished control of the company. His first act as CEO was to file for bankruptcy.
In his opening statement, Ray echoed comments made in earlier court filings.
“But never in my career have I seen such an utter failure of corporate controls at every level of an organization,” he told lawmakers. “The FTX Group’s collapse appears to stem from the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals who failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people’s money or assets.”
Alameda Had Full Access To FTX Customers’ Funds
That lack of standard controls included the storage of private keys protecting hundreds of millions in digital assets “without effective security controls or encryption” and the ability of Alameda Research, Bankman-Fried’s hedge fund, to borrow FTX customers’ money “without any effective limits.”
“They had almost a complete ability to lose money beyond their collateral,” Ray later added.
In a media tour preceding his arrest, Bankman-Fried insisted he had not knowingly commingled assets and that he was not privy to operations at Alameda, which was helmed by his on-and-off girlfriend Caroline Ellison.
Ray said those assertions couldn’t be further from the truth.
“Customer assets at FTX.com were commingled with assets from the Alameda trading platform,” he said. They and most of the other companies under the FTX umbrella “really operated as one,” he added.
Asked to explain his prior assertion that the mess at FTX was without precedent, Ray said there was “literally … no record-keeping whatsoever.”
“Employees would communicate expenses and invoices on Slack,” he told lawmakers. “They use QuickBooks [bookkeeping software]…nothing against QuickBooks, it’s a very nice tool, just not for a multibillion-dollar company.”
Tracing Crypto Assets
That lack of record keeping has made it very difficult to track and recover assets, he added. In that regard, the fact that most of the assets were cryptocurrencies has helped.
“The record-keeping wasn’t very clean in the company, but we should be able to trace the movement of crypto assets,” he told Rep. Lee Zeldin, R-NY. “I mean, inherently, in the nature of crypto, you should be able to see the movement, where it started and where it ended up.”
Ray said he hand his team have secured more than $1B in assets since taking over Nov. 11. He put the ballpark figure for the amount lost by Bankman-Fried and associates at more than $7B, but said that number was subject to change.
Some lawmakers took their allotted time to tar the crypto industry.
Rep. Brad Sherman, D-CA., likened cryptocurrencies to “pet rocks” useful only for money laundering and sanctions evasion.
‘Garden of Snakes’
“My fear is that we will view Sam Bankman-Fried as just one big snake in a crypto Garden of Eden,” he said. “The fact is, crypto is a garden of snakes.”
Rep Juan Vargas, D-CA., echoed the sentiment.
“I really don’t get the point of blockchain and cryptocurrency,” he said. “It’s like keeping track of how many times you chew gum. Like, who cares?”
Rep. Tom Emmer, R-MN., was one of the few to stand up for the industry Tuesday.
‘Failure of Centralization’
FTX’s collapse “is the exact problem that open and permissionless technology like crypto and blockchains solve,” he said. “I encourage my colleagues to understand Sam Bankman-Fried’s con for what it is: a failure of centralization, a failure of business ethics and a crime. It is not a failure of technology.”
In the statement, Bankman-Fried said he had secured billions in commitments from prospective investors and “substantially more strong interest than what it would have taken to make all customers immediately whole.”
But he allegedly folded under “extreme pressure” to get him to file for bankruptcy and hand control of the company to John Ray. Ryne Miller, general counsel at FTX US, and law firm Sullivan & Cromwell, a firm representing FTX, led that pressure campaign.
In his statement, Bankman-Fried said Ray had rebuffed his offer to help and noted that Ray and his team had been paid about $700M when working for Enron’s bankruptcy estate. Bankman-Fried suggested Ray was trying to draw out a lucrative gig rather than do right by creditors.
But the committee may not have appreciated his testimony. Rep. Emanuel Cleaver, D-M.O., honed in on Bankman-Fried’s opening: “I f!@ked up.”
“I don’t know him personally and probably don’t want to, but this testimony is so disrespectful,” Cleaver said. “Absolutely insulting. This is the Congress of the United States.”