'A Complete Failure of Corporate Control': FTX Corporate Attacks Sam Bankman-Fried in Bankruptcy Filing The new CEO of disgraced cryptocurrency exchange FTX took the company to task in the company's "first-day" bankruptcy declaration.
By Gabrielle Bienasz •
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Cryptocurrency exchange company FTX was poorly run across its various subsidiaries and ventures — from recordkeeping to mismanaging its corporate assets — according to the company's new leader, John Ray III, in the company's "first-day" Chapter 11 filing Thursday. (A "first day" declaration explains how a company ended up in bankruptcy proceedings and discusses the company's operations.)
FTX's "unacceptable management practices" included a lack of security around sensitive data, "the use of software to conceal the misuse of customer funds," and an unethical leadership structure, the filing said. Founded by crypto celebrity of sorts Sam Bankman-Fried, the company is also now reportedly under investigation by both the U.S. Securities and Exchange Commission and the Department of Justice.
FTX's downfall happened after rumors and reports suggested that the company was not solvent. This hearkens back to crypto lender Celsius's collapse followed by bankruptcy filings in July, where users lost access to assets stored on the platform after the company paused withdrawals. In FTX's case, the concerns eventually led to a bank run of sorts on the platform and, after competitor Binance declined to save the company via acquisition, toppled confidence in the exchange.
It even tanked the value of the cryptocurrency ecosystem writ large through a phenomenon known as "contagion." People are "losing faith in crypto as a whole," crypto influencer Tiffany Fong, who has also reportedly spoken with Bankman-Fried, previously told Entrepreneur.
John Ray III, who is well-known for his bankruptcy expertise, took control of FTX last week from Bankman-Fried. Perhaps most notable in the Thursday filing was that Ray's hardline declaration that Bankman-Fried is persona non grata at the company.
"Finally, and critically, 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" the filing stated. "Mr. Bankman-Fried, currently in the Bahamas, continues to make erratic and misleading public statements."
Bankman-Fried had previously been live-Tweeting as the company collapsed around his ears last week, seeking to reassure users on the platform.
2) I'm really sorry, again, that we ended up here.
— SBF (@SBF_FTX) November 11, 2022
Hopefully things can find a way to recover. Hopefully this can bring some amount of transparency, trust, and governance to them.
Ultimately hopefully it can be better for customers.
He was still Tweeting Wednesday and gave an interview to Vox published Wednesday in which he discussed his continued mistrust of regulators and admitted that he let his crypto hedge fund, Alameda Research, borrow money from FTX.
That kind of thing is a classic no-no in business management, crypto entrepreneur and Web3 founder Jonathan G. Blanco of Niftmint told Entrepreneur.
FTX was celebrated from the outside. But the filing made the case that FTX was engaged in more than a few corporate no-nos. Mant of the businesses' balance sheets were not audited, as the filing repeatedly says, and notes that employees and advisors used FTX Group "corporate funds" to "purchase homes and other personal items."
In one of its more surprising moments, Ray wrote that when FTX Group workers requested payments, they would be submitted via a "'chat' platform where a disparate group of supervisors approved disbursements by responding with personalized emojis."
The company "did not have the type of disbursement controls that I believe are appropriate for a business enterprise," Ray noted.
He also repeatedly decried the company's resource management structure, saying in one section it was difficult to figure out who actually worked at the company. "The FTX Group's approach to human resources combined employees of various entities and outside contractors, with unclear records and lines of responsibility. At this time, the Debtors have been unable to prepare a complete list of who worked for the FTX Group... or the terms of their employment. Repeated attempts to locate certain presumed employees to confirm their status have been unsuccessful to date."
Despite that, the team run by Ray has been able to connect with a "core team" of employees, the filing noted.
Ray is a known maven of bringing wrecked companies through bankruptcy processes, Axios notes. In the early 2000s, he helped clean up the energy company Enron, which went from a billion-dollar value company to one eponymous with corporate fraud and scandal.
For Blanco, who still has faith in the crypto space, the filing is difficult because of its damage to the wider ecosystem. He said he was also shocked at many of the revelations about FTX's mismanagement outlined in the filing.
"I think what's really interesting about this is the amount of trust that Sam was able to develop somehow and the lack of oversight, plus the colossal mismanagement of funds," he said. That combination, "is just something that we don't see very often" in crypto or even in more regulated financial sectors, he argued.
Even Ray, a veteran of corporate scandal, said FTX was unique. "Never in my career have I seen such a complete failure of corporate controls," Ray wrote in the filing.
