"Never in my career have I seen such an utter failure of corporate controls at every level of an organization," John Ray will tell Congress later today.
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Sam Bankman-Fried may no longer be testifying to Congress, but we are still expecting to hear from FTX's new CEO today.
John Ray is set to warn that the embattled exchange was in "deep financial distress" when he took over one month ago.
He will note that he has over 40 years of experience in "several large and vexing corporate failures" — Enron among them — where there were allegations of criminal activity, gross mismanagement, excessive leverage, or insufficient board governance. But Ray will add:
"Never in my career have I seen such an utter failure of corporate controls at every level of an organization, from the lack of financial statements to a complete failure of any internal controls or governance whatsoever."
Echoing previously made remarks, Ray will warn that FTX'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."
Ray will also share with politicians some concrete examples of "unacceptable management practices" — with FTX using computer infrastructure that allowed senior management to access systems that stored customer assets. To make matters worse, a lack of security controls meant these self-same assets could be redirected.
The new CEO will reveal that certain private keys to access crypto worth hundreds of millions of dollars were stored "without effective security controls or encryption" — effectively meaning that they could have been susceptible to a hack.
Ray's other findings center on how Alameda Research — FTX's sister trading firm — was able to borrow funds from the exchange "for its own trading or investments without any effective limits." Assets between both businesses were also commingled.
There is also a lack of "audited or reliable financial statements" relating to the health of FTX, and up to 500 transactions lack complete documentation.
Ray's Objectives
Later in the speech, Ray will outline his five core objectives for navigating FTX through its Chapter 11 bankruptcy — which include "building accounting, audit, cash management, cybersecurity, human resources, risk management and other systems that did not exist." To this end, a new chief financial officer, head of HR and head of IT have been appointed.
The new CEO will declare that his team are "working around the clock to locate and secure the property of the estate, a substantial portion of which may be missing, misappropriated, or not readily traceable due to the lack of proper record keeping."
Third, work is underway to gather evidence of what led to the collapse — with investigative and cybersecurity teams liaising with law enforcement agencies. This is being overseen by a newly appointed board of directors.
And as well as coordinating with insolvency proceedings related to FTX companies in other jurisdictions, the "fifth and final objective" is maximizing value for all stakeholders "through the eventual reorganization or sale of the complex array of businesses, investments, digital assets and physical property of FTX Group."
Ray will warn that this is going to take time, adding:
"A fundamental, overarching challenge with each of these objectives is that we are, in many respects, starting from near-zero in terms of the corporate infrastructure and recordkeeping that one would expect to find in a multi-billion dollar international business."
But on a brighter note, he will stress that great strides have been taken so far — with the new management gaining a greater understanding of how FTX was run with every passing week.
"The scope of the investigation underway is enormous. It involves detailed tracing of money flows and asset transfers from the time of FTX’s founding, and highly complex technological efforts to identify and trace crypto assets. We are in the process of collecting and reviewing dozens of terabytes of documents and data, including records of billions of individual transactions, and we are leveraging sophisticated technology and expertise to identify and trace additional transactions and assets."
On the issue of why FTX US has been included in the Chapter 11 filing, Ray will explain this is because this company wasn't operated independently of FTX.com. And despite Bankman-Fried insisting the exchange's U.S. arm is fully solvent, the new CEO will say:
"Chapter 11 protection was necessary both to avoid a 'run on the bank' at FTX US and to allow our team the time to identify and protect its assets. Since the time of the filing, I have become even more confident this was the correct decision."
In an aside to SBF's continued statements regarding the reorganization process, Ray will say "this is a professional investigation that is proceeding in a professional manner" — but the founder's input may be required from time to time.
Skeletons in the Closet
Overall, Ray is going to warn that there are many unknowns as his team picks up the pieces — but it is certain that customer assets at FTX were commingled with Alameda Research's. He will confirm that Alameda used client funds to engage in margin trading — exposing them to massive losses. And he will highlight a "spending binge" that saw $5 billion spent on a plethora of businesses and investments — "many of which may be worth only a fraction of what was paid for them." The new CEO will also claim that loans in excess of $1 billion were made to insiders.
"I would like to especially say to regulators — in the U.S. and abroad — that I completely understand the depth of outrage and frustration with what happened. I have instructed my team to cooperate as comprehensively and completely as possible, and much of our time so far has been spent on the truly herculean task of gathering and organizing information responsive to the many requests we have received."
