FTX's new chief executive said that the crypto exchange underwent a «complete failure of controls», adding that he had no confidence in the latest available financial statements.
John J Ray III, the new CEO of FTX Group, has authorized a Chapter 11 filing to the Delaware Federal Court. The 40-year of legal and restructuring veteran said the firm had a «complete failure of controls and absence of trustworthy financial information».
«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 in the filing.
Controlled Silos
Within the group, Ray identified money flows connected to four silos: the WRS Silo, which includes debtor West Realm Shires and its subsidiaries; Alameda Silo which includes debtor Alameda Research and subsidiaries; Ventures Silo which includes debtor Clifton Bay Investments LLC, Clifton Bay Investments Ltd, Island Bay Ventures and FTX Ventures; Dotcom Silo which includes debtor FTX Trading and subsidiaries.
Each of the silos was controlled by ex-FT CEO Sam Bankman-Fried while minority equity interests were held by the co-founders Gary Wang and Nishad Singh.
No Confidence
The filings made showed a web of financial links between the silos and various entities, including a $1 billion loan from Alameda to Bankman-Fried. According to Ray, he had no confidence in the unaudited financial statements produced during Bankman-Fried’s reign.
«These figures have not been verified by my team,» Ray said.
Unacceptable Practices
In addition to financial worries, Ray also mentioned «unacceptable management practices» including the use of an unsecured group email account as the root user to access confidential private keys and critically sensitive data.
Other concerns include the absence of daily reconciliation of positions on the blockchain, the use of software to conceal the misuse of customer funds and a secret exemption for Alameda from certain aspects of FTX.com’s auto-liquidation protocol.
Five Objectives
Under his oversight, Ray underlined five core objectives at FTX: implementation of controls, asset protection and recovery, transparency and investigation, efficiency and coordination, as well as maximization of value.
The firm will also appoint new independent directors including Mitchell I Sonkin for WRS Silo, Matthew R Rosenberg for Alameda Silo, Rishi Jain for Ventures Silo. For the Dotcom Silo, the group appoints Joseph J Farnan as the lead independent director and Matthew A Doheny as independent directors.
«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,» Ray said.
