FTX bankruptcy: A complete failure, worse than Enron

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FTX chief exec, John J. Ray III, has filed his first declaration in the bankruptcy of FTX, FTX US, Alameda Research, and related entities. Ray, who had served as Chairman of Enron during its bankruptcy, stated that he’d never seen “such a complete failure of corporate controls and such a complete absence of trustworthy financial information.”

Preston J. Byrne, a cryptocurrency lawyer and partner at Brown Rudnick LLP, described it to Protos as “one of the most scathing court filings I’ve ever read.”

What’s contained in the filing?

Exhibit A from the filing.

For the purpose of this bankruptcy, more than 130 companies have been divided into the following four silos.

  • The WRS Silo is made up primarily of the US entities including FTX US, LedgerX, and the FTX US Derivatives business.
  • The Alameda Silo contains the corporations that made up Alameda Research.
  • The Ventures Silo includes FTX Ventures and other structures used for venture investing.
  • The Dotcom Silo comprises the remaining companies which made up the non-US FTX exchanges.
Exhibit B from the filing.

Read more: Panic and resignations reign over FTX’s final days

The filing makes it very clear that “Each of the Silos was controlled by Mr. Bankman-Fried,” contradicting Sam’s repeated claims that Alameda Research was independent and that he didn’t control it.

The WRS Silo

This filing reveals that several parts of the US-focused business do still appear to be solvent. These include LedgerX, the securities clearing and broker-dealer firms, and the custody offering.

FTX US had received a loan from BlockFi for $250 million against FTX Token (FTT).

The filing also makes clear that the consolidated balance sheet for this silo is unaudited, and that, “because this balance sheet was produced while the debtors were controlled by Mr. Bankman-Fried, I do not have confidence in it.” This is echoed for the other silos.

The Alameda Silo

The Alameda Research portion of the business was almost entirely controlled by Sam Bankman-Fried (SBF), with him owning 90% and the remaining 10% being owned by co-founder Gary Wang.

Alameda Research was loaning to a variety of related parties including:

  • $2.3 billion to Paper Bird Inc., an entity controlled entirely by SBF.
  • $1 billion to SBF specifically.
  • $1 billion to Nishad Singh, former director of engineering, first for Alameda Research and then FTX.
  • $55 million to Ryan Salame, former co-CEO of FTX Digital Markets.

The Ventures Silo

The bankruptcy team has not been able to locate any financial statements for one of the entities, Island Bay Ventures. The Ventures Silo also owes several related parties:

  • $1.4 billion to Alameda Research.
  • $68.6 million to a different Alameda Research entity.
  • $38.5 million to Alameda Ventures.
  • $2.25 million to West Realm Shires.

The Dotcom Silo

The total value for non-customer cryptocurrency remaining at FTX is about $659,000.

Notably, the books shared in this filing don’t seem to include among the FTX receivables the funds that were supposedly lent to Alameda Research, suggesting they’re deeply inadequate.

What was going on?

FTX had no serious accounting system and these entities didn’t have their own accounts department and were doing a very poor job of tracking their cash. They lacked “an accurate list of bank accounts and signatories” and paid “insufficient attention to the creditworthiness of banking partners.” The result of this is that they don’t currently know how much cash is remaining at FTX.

Furthermore, this filing also claims that they have “substantial concerns as to the information presented in these audited financial statements.” The WRS Silo, comprised of the US side of the business was audited by Armanino LLP, and the Dotcom Silo was audited by Prager Metis, the first metaverse auditing firm. The filing continues that they “do not believe it appropriate for stakeholders of the court to rely on audited financial statements as a reliable indication of the financial circumstances.”

The employment situation at FTX is similarly chaotic, with the debtors being unable to compile a complete list of employees or detail on what terms they worked. People seemed to have responsibilities across different entities.

FTX lacked many internal and financial controls, including for its disbursement of assets, with requests being approved in a chat channel with supervisors responding with emojis.

Corporate funds belonging to FTX Group were used to purchase homes and other items for employees, and many of these transactions lack documentation and were recorded in the personal names of FTX employees and advisors.

FTX’s digital assets were not appropriately secured, with SBF and Wang both having access to assets across all businesses with the exception of LedgerX.

Furthermore, an “unsecured group email account” was used as the “root user to access confidential private keys and critically sensitive data,” potentially contributing to the ‘hack’ that has resulted in lost FTX assets.

Nor was there daily reconciliation of blockchain positions and FTX used the previously reported backdoor to hide “misuse of customer funds.” Alameda Research was also secretly exempted from FTX’s automatic-liquidation protocol.

Ray also cites the “failure of the co-founders… to identify additional wallets” as one of the major impediments to locating all of the digital assets for FTX. This suggests the company isn’t cooperating with the bankruptcy.

Furthermore, “FTX Group had billions in investments other than cryptocurrency… however, the main companies in the Alameda Silo and the Ventures Silo did not keep complete books and records.” The lack of financial recordkeeping for these firms will further lengthen and complicate recovery for FTX creditors.

It continues with additional failures of FTX corporate governance including: “One of the most pervasive failures of the FTX.com business, in particular, is the absence of lasting records of decision-making. Mr. Bankman-Fried often communicated by using applications that were set to auto-delete after a short period of time, and encouraged employees to do the same.”

It also seems that the new CEO is still unable to access certain information from FTX, and because of that the firm is currently “unable to create a list of its top 50 creditors.”

Read more: Bahamian rhapsody: FTX users exploit loophole to withdraw crypto

The final point, which FTX official Twitter accounts also felt the need to make exceptionally clear, is that SBF is no longer employed and does not speak for the combined entities. This is increasingly important as he’s taken to messaging journalists “f**k regulators” and to describing his ethics statement as “mostly PR.”

An emergency motion filing related to this bankruptcy claims that there’s “credible evidence that the Bahamian government is responsible for directing unauthorized access to Debtor’s systems for the purpose of obtaining digital assets of the Debtors.”

Previously, FTX had announced that withdrawals were staying open for Bahamas-based users at the request of regulators, to which the Bahamas Securities Commission responded that it had not “authorized or suggested… the prioritization of withdrawals for Bahamian clients.”

The filing also references SBF’s previous direct message in which he talked about winning a jurisdictional battle with Delaware as an important step to restoring FTX. This, it said, was evidence that the Bahamian bankruptcy proceedings would be far more favorable.

What led to the collapse?

Related party transactions led directly to the collapse of his empire: SBF-controlled FTX sent customer deposits to SBF-owned Alameda Research to fund its continued cryptocurrency speculation. This was in addition to sending billions of dollars in loans to himself and entities he controls. SBF led to the collapse and bankruptcy of FTX, FTX US, Alameda Research, FTX Ventures, and 130 related entities.

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