A new report filed in the ongoing autopsy of failed crypto exchange FTX reveals a litany of accusations against the company including executives who laughed about losing track of millions, a culture that cracked down on anyone who flagged potential problems, and a total disregard for normal accounting principals.
A group of FTXs debtors, led by current CEO and chief restructuring officer John Ray III, filed a 39-page report with the U.S. Bankruptcy Court for the District of Delaware Sunday detailing the demise of the exchange along with its trading arm Alameda Research. They allege that FTX was completely controlled by a small cabal of executives, helmed by co-founder and former CEO Sam Bankman-Fried (SBF), who failed to institute proper accounting, security, and management practices, putting the firms crypto assets and funds at risk from the outset.
While the FTX Groups failure is novel in the unprecedented scale of harm it caused in a nascent industry, many of its root causes are familiar: hubris, incompetence, and greed, they wrote.
SBF and his top execs, including co-founder Gary Wang and Alameda Researchs CEO Caroline Ellison, stifled dissent, commingled and misused corporate and customer funds, lied to third parties about their business, joked internally about their tendency to lose track of millions of dollars in assets, and thereby caused the FTX Group to collapse as swiftly as it had grown, the report says.
The allegations come after a swift fall from grace for cryptos former golden boy, SBF, and his once high-flying exchange. In early 2022, after cryptocurrency prices soared throughout the pandemic, FTX was valued at $32 billion and SBF himself was reportedly worth $16 billion. But less than a year later, in November, the company filed for Chapter 11 bankruptcy after a liquidity crisis eventually revealed a $7 billion hole in its balance sheet.
The legal fallout from FTXs collapse was swift. SBF was arrested by Bahamian authorities in December and has since pleaded not guilty to 13 Federal indictments against him for a variety of criminal charges including wire fraud and conspiracy to commit money laundering. The former CEOs trial is now scheduled to begin in October, but other top lieutenants including Gary Wang and Caroline Ellison, as well as former engineering chief Nishad Singh, all already pleaded guilty to fraud charges last year.
Now, FTXs debtors say theyve recovered over $1.4 billion in digital assets since the exchange went under and identified an additional $1.7 billion that can be recovered. In the process, theyve also uncovered numerous behind-the-scenes details about how SBF operated his crypto empire. And they say they are still gaining new information daily and will submit additional findings in due course.
Missing millions? Such is life
Revelations about the shoddy state of FTXs corporate controls before its collapse have flooded headlines over the past five months, but the latest court documents show just how out of hand the situation may have been.
There was a pervasive lack of records at the company, the debtors report alleges, noting execs didnt even have a list of all their employees. The lack of identifiable records for clients and employees led SBF and his team to lose track of millions in assets regularly.
FTX famously used the accounting software QuickBooks, which is meant for small businesses and consumers, to run what was then the worlds second-largest crypto exchange by volume. But the debtors report found that 56 entities within the FTX didnt produce financial statements at all, while 35 FTX entities used QuickBooks and a hodgepodge of Google documents, Slack communications, shared drives, and Excel spreadsheets and other non-enterprise solutions to manage their assets and liabilities.
The debtors also claimed that FTXs expenses and invoices were submitted on a Slack channel and approved via emoji. These informal, ephemeral messaging systems were used to procure approvals for transfers in the tens of millions of dollars, leaving only informal records of such transfers, or no records at all, they wrote.
The situation at Alameda was even worse, according to the report, which labels the firm a speculative crypto hedge fund. When putting together Alamedas June 2022 Portfolio summary, SBF reportedly told his staff to just come up with some numbers when it came to labeling certain token values. And in internal communications with fellow execs, SBF called Alameda hilariously beyond any threshold of any auditor being able to even get partially through an audit.
We sometimes find $50m of assets lying around that we lost track of; such is life, he wrote.
The report also alleged, as has been widely reported, that millions of dollars of FTXs holdings made their way into the hands of former insiders who lived lavish lifestyles and bought expensive real estate.
Numerous loans were executed between former insiders and Alameda without contemporaneous documentation, and funds were disbursed pursuant to those purported loans with no clear record of their purpose, the report says.
Stifling dissent and not so secure
FTX was not only mismanaging its accounting and risk controls. According to the debtors report, top executives led by SBF also attempted to silence any attempts to enhance compliance.
The president of FTX.US, Brett Harrison, resigned after a disagreement with SBF and his and engineering chief Singh about the companys opaque management structure, key hires, and other issues. [A]fter raising these issues directly with them, his bonus was drastically reduced and senior internal counsel instructed him to apologize to Bankman-Fried for raising the concerns, which he refused to do, the report says.
Even legal counsel wasnt safe from backlash from SBF and his team of top execs. The debtors allege that a lawyer hired by FTXs trading arm was fired after expressing concerns about a lack of corporate controls, capable leadership, and risk management.
The debtors report also found that while FTX advertised itself as a safe place to store cryptocurrencies, it kept most of its assets in hot-wallets which made them more susceptible to hacking, theft [and] misappropriation. And the firms tech was apparently hanging on by a thread, too. One former FTX employee said that if Nishad [Singh] got hit by a bus, the whole company would be done. Same issue with Gary [Wang].
