Before he took charge of the collapsed cryptocurrency exchange FTX last week, John Jay Ray III helped manage the aftermath of some of the largest corporate failures in history, including the implosion of energy trading firm Enron after an accounting fraud scandal in 2001.
But the corporate dysfunction at FTX, he said Thursday, is the worst he has ever seen.
In a blistering court filing, Ray described an astonishing level of disarray and said he had never seen “such a complete failure of corporate control.” He listed a series of “unacceptable management practices,” including the use of an unsecured group e-mail to access sensitive data, and said the financial information maintained by FTX was deeply untrustworthy.
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“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,” he wrote in the filing in the US Bankruptcy Court for the District of Delaware.
FTX collapsed last week after a run on deposits exposed a deep financial hole in the business. Last Friday, the company filed for bankruptcy, and its chief executive, Sam Bankman-Fried, resigned. The collapse has kicked off investigations by the Justice Department and the Securities and Exchange Commission focused on whether FTX improperly used customer funds to prop up Alameda Research, a trading firm that Bankman-Fried also founded.
The collapse has jeopardized the savings of hundreds of thousands of customers who deposited their crypto holdings on the FTX platform. FTX had a wide reach across cryptocurrency companies, and its collapse has sent shock waves through the industry. Last week, crypto lender BlockFi — a firm that was closely linked to Bankman-Fried’s crypto empire — said it was suspending operations. On Wednesday, crypto firm Genesis announced that its lending arm was halting withdrawals.
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Bankman-Fried did not respond to a request for comment.
The bankruptcy filing Thursday offered the first detailed look at FTX’s business. And it describes a level of dysfunction that goes beyond even some of the most pessimistic assessments offered over the past week and a half.
In rich detail, Ray walked through the company’s many corporate missteps and suspicious management, including the use of software to “conceal the misuse of customer funds.” He said there was “an absence of independent governance” between FTX and Alameda, which was owned almost entirely by Bankman-Fried.
He also said he could not trust that financial statements assembled under Bankman-Fried’s leadership were accurate. “The FTX Group did not keep appropriate books and records, or security controls, with respect to its digital assets,” he wrote.
Alameda’s quarterly financial statements were never audited, he said. But according to financial information in the filing, Alameda made loans totaling about $3.3 billion to Bankman-Fried and an entity he controls, and about $600 million to two other FTX executives, Nishad Singh and Ryan Salame.
Since taking over last week, Ray said that his team has secured about $740 million worth of cryptocurrency belonging to various parts of FTX’s business. But he called that sum “only a fraction” of what he hopes to recover, saying the company has hired forensic analysts and blockchain experts to assist in locating any remaining funds. The run on FTX left the company owing an estimated $8 billion, according to people familiar with the matter.
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In Ray’s telling, the mismanagement permeated the entire company.
Ray said FTX’s human resources department was so disorganized that his team had been unable to prepare a complete list of who worked at FTX. And he said corporate funds were used to buy homes and other personal items for employees and advisers, without proper documentation. Employees would make payment requests through a chat portal, where supervisors approved disbursements using “personalized emojis,” the filing said.
According to the filing, FTX lacked lasting records of corporate decisions, partly because Bankman-Fried relied on communications platforms that were set to automatically delete messages after a short time and encouraged employees to use the same applications.
Ray, 63, took over FTX on Friday. A veteran of several famous corporate implosions, he has a reputation as something of a turnaround artist — an executive who specializes in making the most of distressed situations. He’s best known for serving as Enron’s chief executive during its bankruptcy and has also been involved in several other prominent corporate restructurings, earning praise for his dogged efforts to recover funds for creditors.
The collapse of FTX was a shocking fall for Bankman-Fried, who was widely considered one of the most reliable figures in the freewheeling, loosely regulated crypto industry.
Since resigning, Bankman-Fried has started to speak more publicly about the collapse of his company. In an interview with The New York Times on Sunday, he claimed that he was unaware of how much money Alameda had borrowed from FTX. He expressed deep regrets over his management of the firm. But at other moments, he seemed almost flippant, describing the video game he had been playing during the crisis and outlining a bizarre plan to post a series of cryptic tweets.
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Later, in a series of Twitter messages to a reporter at Vox, he said he regretted allowing the company to file for bankruptcy and added that regulators “make everything worse.”
The bankruptcy filing Thursday went to great lengths to distance Ray and the rest of FTX’s current leadership from the former chief executive, who is in the Bahamas. “Mr. Bankman-Fried is not employed by the Debtors and does not speak for them,” the filing said, calling his public statements “erratic and misleading.”