FTX Bankruptcy News

The newly-appointed CEO of the complex FTX group of companies has made his first filing in the bankruptcy court for the district of Delaware. It makes grim reading for anyone who has run a business, from startups with a handful of customers to listed companies.

An unprecedented failure of trust and governance

The administrator, John J. Ray III, is a veteran of forty years of corporate failure including the Enron scandal of 2001. His verdict on the FTX bankruptcy is damning.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. 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.”

The horrors lurking in the full 30-page filing are a lesson in how not to run a company. As an accountant with more than 20 years of corporate experience and a further decade as a business advisor and director, it’s extraordinary to learn how many aspects of basic business practice were simply ignored. Here are some of the key takeaways.

Auditing matters

• Some of the companies (those related to West Realm Shires) were audited by a recognised firm. These include LedgerX, FTX Capital Markets, and others, and are the only businesses in the group that remain solvent.
• None of the financial statements for Alameda Research LLC and related companies were audited, and some are missing altogether.
• Alameda’s unaudited statements show a balance of $13.46 billion of assets – but the administrator cannot be sure this is correct, and finding the assets themselves is proving complicated, with around half a billion of cash identified to date.
• The amounts owed to customers who had trusted FTX with their crypto assets were not shown in any financial statements.

Who controls the cash?

• There was no accounting department in the group.
• “Cash management procedural failures included the absence of an accurate list of bank accounts and account signatories.”
• Alameda Research made huge loans to the founders – $1 billion to Sam Bankman-Fried,  $543 million to Nishad Singh, and $55 million to Ryan Salame.
• “Corporate funds of the FTX Group were used to purchase homes and other personal items.”

Corporate governance, anyone?

• No board meetings were held.
• There is no list of employees or their terms of employment, and some presumed employees cannot be located.
• Records of communications and decision making were set to auto-delete after a short period of time.

Were crypto assets ever safe?

• An unsecured group email account was the root user to access confidential private keys – this is the most incredibly lax security, and put everyone’s funds at risk.
• FTX.com’s anti-liquidation protocol was its big USP, but Alameda was secretly exempt, giving it market advantage.
• There are signs of “very substantial” transfers of assets out of FTX in the months leading up to its collapse.

This is just the first stage of what is going to be a complex and long-drawn-out investigation. It’s going to be fascinating to watch it unfold – and you can be sure that the new management is writing everything down, and keeping the receipts.