Newly appointed FTX CEO John J. Ray III has explained in a court filing that the “complete failure of corporate controls” led the crypto exchange to its demise.
FTX filed for Chapter 11 last week following founder and former CEO Sam Bankman-Fried's misuse of customer funds to support his trading company, Alameda Research. Reports said that Bankman-Fried had transferred the fund secretly to Alameda using certain software.
“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," Ray said further.
A minimum of $1 billion in customer funds was reported missing. According to Ray, he has secured $740 million in tokens. He hoped to recover a fraction of FTX's assets in the bankruptcy.
FTX is also under scrutiny after on-chain data revealed $372 million in unauthorized transfers when the company filed for bankruptcy. Later after the filing, about $300 million worth of FTTs — FTX’s native tokens — were minted.
According to Ray, Bankman-Fried and other co-founders could not identify crypto wallets containing the company’s assets. Ray also explained that FTX Group’s subsidiaries, particularly the ones located in Antigua and the Bahamas, did not have proper corporate governance. Many of these companies reportedly never held board meetings.
FTX did not have an appropriate cash management system, and the company is not able to provide an accurate list of bank accounts and their signatories. Ray also said that FTX did not thoroughly check the creditworthiness of its banking partners.
In the court filing, Ray also discussed how FTX used corporate funds for employee housing and other “personal items.” The company, however, did not document these expenses as loans. Certain real estate assets that FTX owned in the Bahamas were also under the names of its employees and advisors.
Ray revealed that there were four “silos” within the FTX Group, which Bankman-Fried had held full control of, with minor investments by Zixiao "Gary" Wang and Nishad Singh. The silos are West Realm Shires Inc, Alameda Research LLC, Ventures and Dotcom.
There was no external investor holding more than two percent in any silo. However, Ray could not precisely confirm the fact as he did not have confidence in each silo’s balance sheet.
Contagion effect
Analysts have discussed the contagion effect of FTX’s collapse. Several companies reported that they had invested in FTX.
Crypto lending company BlockFi said it had “significant exposure to FTX and associated corporate entities.” Earlier this year, the company received a $250 million loan from FTX Group to save its operation.
Following FTX’s insolvency on November 11, BlockFi reduced its platform activities and froze customer withdrawals. BlockFi warned its clients against depositing funds into the company’s wallets or Interest Accounts.
Nexo, another crypto lending firm, also disclosed its exposure to FTX. The company admitted that it had borrowed funds from Alameda but asserted that the loan was less than 0.5 percent of the company’s total assets. Nexo also said it had been able to withdraw $219 million of assets from its FTX account.
Major investment firms also reported placing funds in FTX during its funding rounds in 2021 and early 2022. Sequoia Capital announced that it had written off funds invested in FTX, but assuring that the amount was minimal compared to its entire investment portfolio.
