The first House hearing on the collapse of FTX didn’t have the company’s disgraced founder and former CEO, Sam Bankman-Fried, who was arrested on the eve of his highly anticipated testimony. But lawmakers still drew crucial revelations about the company’s demise from John J. Ray III, a veteran of corporate bankruptcies tapped to clean up the mess left by Bankman-Fried.
Ray, who has shepherded Enron and other high-profile companies through bankruptcy, laid out the stunning lack of oversight, experience and scruples that led to FTX’s demise. He also explained how hard it would be to make customers whole and how Bankman-Fried’s lengthy apologies were simply a cover for “old-fashioned embezzlement.”
FTX collapse was Enron-like in scale but not sophistication
Ray and lawmakers frequently compared the demise of FTX to that of Enron, the Texas energy company that collapsed in 2001 and caused $11 billion in losses after years of inflating and lying about its financial holdings. While Ray said he’s unsure of FTX’s total losses, he estimated the company has already lost $8 billion of customer money.
The big difference, Ray said, was how conspicuously FTX leaders were ripping off customers and mismanaging money.
“Enron was really a different company. Crimes that were committed there were highly orchestrated financial machinations by highly sophisticated people to keep transactions off balance sheets,” Ray said.
“This is really just old-fashioned embezzlement. This is just taking money from customers and using it for your own purpose,” Ray continued. “Sophisticated, perhaps, in the way they were able to sort of hide it from people, frankly, right in front of their eyes.”
We don’t know how much money FTX lost or has
FTX’s lack of adequate record-keeping helped lay the groundwork for its collapse, Ray said, and has made it incredibly difficult to figure out the company’s total assets and outstanding debts.
“Even in the most failed companies, you have a fair roadmap of what happened. We’re dealing with literally a paperless bankruptcy in terms of how they created this company,” Ray said, calling the lack of documentation “unprecedented.”
FTX did not have a formal accounting department, Ray explained, despite the billions of dollars in customer money it was responsible for protecting. He added that FTX leaders used Slack, an online messaging system, to handle invoices and QuickBooks, an online bookkeeping program popular among small-business owners, to handle its assets.
“Nothing against QuickBooks — very nice tool — just not for a multibillion-dollar company,” Ray said.
No walls between FTX leaders, Alameda, customers’ money
Ray said FTX lacked basic controls any major company would impose to protect customer money, uphold terms of service and ensure FTX executives were not abusing their power.
“This small group of grossly inexperienced, non-sophisticated individuals [did not] implement virtually any of the systems or controls that are necessary for a company entrusted with other people’s money or assets,” Ray said.
Despite promising FTX customers that their money would not be used to support Alameda Research — Bankman-Fried’s defunct crypto trading firm — the company treated Alameda both as its bank and as a customer, Ray said. Because FTX did not have a board of directors, no one stepped in to stop it.
“I find it difficult to believe that we’re dealing with conscientious stupidity,” said Rep. Al Green (D-Texas).
“It seems to me that you have to be rather talented to do all of these things to the extent that they were done,” he said.
While a normal investment platform would have a bank to hold company and customer funds, FTX used Alameda to collect customer money. FTX leaders would then use that money to fund Alameda’s operations or even their own personal investments, he explained, violating their pledges to customers and investors in both firms.
“In order for these companies to exist, they’ve got to be able to change their digital assets into hard U.S. dollars at some point, so you need a bank account. And so they needed Alameda to be able to do that,” said Rep. Blaine Luetkemeyer (R-Mo.)
“This should be a really big red flag for all of us who are in the financial services world,” he continued.
SBF got millions of dollars in loans from FTX — and himself
Bankman-Fried’s unfettered access to FTX and Alameda funds allowed him to take millions of dollars in personal loans from the companies he owned, Ray said. While FTX executives took roughly $1.5 billion in payments from the company, it is unclear where all that money went and for what purposes.
“In one instance, [Bankman-Fried] signed as both the issuer of the loan and the recipient of the loan,” Ray said.
Ray added that FTX executives had “unlimited ability” to borrow or take customer funds “and deploy them for their own use,” taking more than $1 billion for their own use.
FTX customer money may be too mixed up to fully sort out
Any customers of a bankrupt company will face trouble getting money back from the firm as it goes through restructuring. But FTX customers may have even slimmer odds of being compensated for their losses given the company’s lack of internal controls and reliance on volatile crypto assets.
FTX spent at least $5 billion on “myriad businesses and investments,” Ray said, that may be worth “only a fraction” of what the company paid. The crypto assets of customers for its U.S. platform were held in the same database as those of its international clients, and the steep decline in crypto prices over the past few months may make it impossible to sort out enough to make customers whole.
Ray said his team has recovered roughly $1 billion worth of crypto assets so far and now has control of company bank accounts. But he said securing cash and other crypto assets has been “an ongoing adventure.”
Rep. Ed Perlmutter (D-Colo.), who was a bankruptcy attorney before he joined Congress, warned Ray he may need to spend “100 years” finding and disbursing FTX’s assets.
“That could be from some very innocent people who got paid money [by FTX],” Perlmutter warned.
“You’re gonna be dealing with so many preferences, so many fraudulent transfers,” he said.
Tensions are emerging between Ray and the Bahamian government
Ray and Bahamian government officials have sparred for days over what should happen to FTX assets that new company leaders may still be able to access.
Ray told lawmakers Tuesday that he was unsure why millions of dollars in assets from FTX were moved after he and the company filed bankruptcy on Nov. 11. He also criticized the decision to allow roughly 1,500 Bahamas-based FTX customers to withdraw a total of roughly $100 million one day before the company filed for bankruptcy within the U.S., which would have frozen those assets.
Ray suggested Bankman-Fried and the Bahamian government may have struck an agreement to allow such withdrawals, all while the founder knew bankruptcy proceedings would soon begin.
But the Securities Commission of the Bahamas, the country’s chief markets regulator, claimed Ray was misrepresenting its communications with Bankman-Fried and conflating Bahamian government officials with liquidators appointed by Bahamian courts to handle FTX’s dissolution.
The commission also said it was “securing the transfer” of FTX assets and holding them safely until a court decides how they should be distributed as per Bahamian law.
“Key misstatements made by [Ray] … do not appear to be concerned with facts but rather appear intended only to make headlines and advance questionable agendas,” the Securities Commission of the Bahamas said in a statement.