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The man appointed to administer FTX in chapter 11 bankruptcy has told a US court he is confronting an "unprecedented situation", with a total failure of corporate governance and lack of reliable financial information.
Key points:
- FTX's administrator told a US court he had never seen "such a complete failure of corporate controls"
- John J. Ray III said most of the group's accounts were unaudited and some subsidiaries did not have financial accounts at all
- He said a "substantial portion" of the estate's property may be missing or stolen
In a 40-year career in corporate restructuring and administration, John J. Ray III has previously overseen some of the highest profile US corporate collapses, notably of energy giant Enron.
"Nearly every situation in which I have been involved has been characterised by defects of some sort in internal controls, regulatory compliance, human resources and systems integrity," he told the Bankruptcy Court for the District of Delaware in a legal 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.
"From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented."
FTX collapsed spectacularly over the past few weeks, less than three years after the cryptocurrency exchange — set up by tech wunderkind Sam Bankman-Fried and his partners Zixiao "Gary" Wang and Nishad Singh — commenced operating in May 2019.
The FTX.com platform quickly became one of the largest cryptocurrency exchanges in the world.
Mr Ray noted Sam Bankman-Fried's claim that, by the end of 2021, around $US15 billion of assets were on the platform, which according to him handled approximately 10 per cent of global volume for crypto trading at the time, with "millions" of registered users.
"These figures have not been verified by my team," Mr Ray added.
Auditors headquartered in the metaverse
Indeed, much remains unverified by the man now appointed as chief executive officer of the FTX group, who took the place of Mr Bankman-Fried when the business entered chapter 11 bankruptcy on November 11.
Mr Ray's report is dotted with the following phrase:
"Because this balance sheet was produced while the debtors were controlled by Mr Bankman-Fried, I do not have confidence in it, and the information therein may not be correct as of the date stated."
Mr Ray said most of the subsidiaries within the group did not have audited accounts, some had no accounts whatsoever, and the few that were audited included some reviewed by a firm he had never heard of.
"The audit firm for the Dotcom Silo was Prager Metis, a firm with which I am not familiar and whose website indicates that they are the 'first-ever CPA firm to officially open its Metaverse headquarters in the metaverse platform Decentraland.'"
The lack of corporate governance extended to a total absence of board meetings for many of the companies within the group, the absence of an accurate list of bank accounts and account signatories, and an inability of the companies to provide a complete list of their employees as of the date the company entered bankruptcy protection.
"Repeated attempts to locate certain presumed employees to confirm their status have been unsuccessful to date," Mr Ray added.
The new CEO told the District of Delaware Bankruptcy Court that he has his work cut out, but is already well on the way to introducing basic financial and management practices that had been absent to date.
"The implementation of accounting, audit, cash management, cybersecurity, human resources, risk management, data protection and other systems that did not exist, or did not exist to an appropriate degree, prior to my appointment," he said of his main tasks.
Another task, Mr Ray said, was "the location and security of property of the estate, a substantial portion of which may be missing or stolen."
Corporate funds used to buy homes in the Bahamas
Mr Ray said his initial investigations made it clear that there was a great risk that money had been misappropriated from the firms.
"The debtors did not have the type of disbursement controls that I believe are appropriate for a business enterprise," he explained to the court.
"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 personalised emojis.
"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."
Mr Ray also noted "the use of software to conceal the misuse of customer funds".
Bankman-Fried slammed for 'erratic and misleading' statements
However, Mr Ray also praised the "extraordinary efforts" of a group of FTX employees who have assisted him since he took over.
"It is my view based on the information obtained to date, that many of the employees of the FTX Group, including some of its senior executives, were not aware of the shortfalls or potential co-mingling of digital assets," he told the court.
"Indeed, I believe some of the people most hurt by these events are current and former employees and executives, whose personal investments and reputations have suffered."
Sam Bankman-Fried, however, has come in from strong criticism from his successor.
"One of the most pervasive failures of the FTX.com business in particular is the absence of lasting records of decision-making," Mr Ray told the court.
"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."
Mr Ray also accused Mr Bankman-Fried of making unhelpful comments since the company he founded collapsed.
"The debtors have made clear to employees and the public that Mr. Bankman-Fried is not employed by the debtors, and does not speak for them," Mr Ray told the court.
"Mr Bankman-Fried, currently in the Bahamas, continues to make erratic and misleading public statements.
"Mr Bankman-Fried, whose connections and financial holdings in the Bahamas remain unclear to me, recently stated to a reporter on Twitter: "F*** regulators they make everything worse" and suggested the next step for him was to "win a jurisdictional battle vs Delaware'."
By the time of its collapse, FTX's corporate empire had expanded to include companies registered in the US state of Delaware, Korea, Japan, the British Virgin Islands, Antigua, Hong Kong, Singapore, the Seychelles, the Cayman Islands, the Bahamas, Australia, Panama, Turkey and Nigeria.
Its Australian subsidiaries, FTX Express Pty Ltd and FTX Australia Pty Ltd, appointed voluntary administrators from KordaMentha on November 11.