by Yves Smith at Naked Capitalism
It was really hard to get the most important stunningly bad findings from the latest FTX bankruptcy filing in a headline. So read on for more thrills and chills!
John J. Ray III, the newly appointed CEO of bankrupt crypto player FTX’s sprawling empire who played the same role in the then-biggest-evah Enron bankruptcy and other big corporate implosions, filed his formal initial assessment with the Delaware bankruptcy court in the form of declaration, embedded below.
The document makes clear that FTX was an unprecedented steaming mess of lack of controls and plenty of what looks like fraud, although Ray pointedly just sets forth bad facts and lets knowledgeable readers draw inferences. The record-keeping failure is so extensive that it sounds as if Ray is going to have to build a significant new company, from the ground up, to try to figure out what is what. Yet it’s also clear that much will wind up missing, particularly money. Ray said right at the top that a “substantial portion” of FTX assets may be stolen or missing.
At the stage of this filing, Ray could only make an approximate description of the business, putting operations into four “silos” and describing the major legal entities and activities in each.
Let us look at the things FTX did not have:
Balance sheets that showed crypto customer funds as liabilities1. The only customer holding on the consolidated balance sheets are fiat currencies!
Digital asset controls: “The FTX Group did not keep appropriate books and records, or security controls, with respect to its digital assets.”
An accounting department
Audited financials for all businesses. Only one “silo” used a recognized audit firm. The biggest customer-facing silo had its books prepared by a no-name flake (office in the Metaverse, you cannot make this up), two had no audited statements2
Record of bank accounts and signers on those accounts
Centralized cash management
Record of employees and their employment terms
Meaningful disbursement controls
Board meetings and/or “audited by flaky auditor” financials for many FTX entities
Records of most decisions
So far, Ray has found only $564 million of cash and have moved $760 million of crypto to cold wallets.
However, four entities appear to be solvent! And guess what, three were regulated ones: LedgerX LLC, d/b/a FTX US Derivatives, regulated by the CFTC; FTX
Capital Markets LLC, an SEC-registered broker-dealer; Embed Financial Technologies Inc., and its wholly-owned non-Debtor subsidiary Embed Clearing LLC, which are also SEC-registered broker-dealers. The fourth was “FTX Value Trust Company, a South Dakota Trust Company, which provides custodial services.” It appears that this custodian handled only fiat assets.
Oh, and as to that $1 billion loan to Bankman-Fried personally, it’s in a footnote, along with a $2.3 billion loan to a Bankman-Fried solely-owned entity:…Continue Reading