CEO in Charge of FTX Restructuring Calls It an ‘Unprecedented’ Mess

The filing paints a vivid picture of the chaos that characterized the cryptocurrency company’s finances, accounting and leadership under founder and former CEO

Sam Bankman-Fried.

In Mr. Ray’s first detailed description of the state of FTX and related trading firm, Alameda Research, since taking over last Friday, he wrote that the company can’t trust prior financial information produced by Mr. Bankman-Fried. 

Lax controls over billions of dollars in cash and cryptocurrency assets under Mr. Bankman-Fried have left current management scrambling to establish just how much money the bankrupt crypto platform has today, the filing said.

Corporate funds were used to buy homes for employees in the Bahamas without any form of internal documentation, according to the court filing. Mr. Bankman-Fried often communicated decisions to his employees through messaging applications that auto-deleted his statements, the filing said.

“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,” Mr. Ray said in the filing. “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 filing was the most explosive development in the FTX bankruptcy case Thursday.

FTX lawyers working for Mr. Ray on Thursday said that Mr. Bankman-Fried and the government of the Bahamas have worked to siphon and transfer FTX assets into accounts outside the control of management, even after the company filed for bankruptcy in Delaware last week. Filing for bankruptcy usually ensures that a company’s assets are ringfenced and can’t be touched without court authorization. 

“The Bahamian government is responsible for directing unauthorized access to the debtors’ systems for the purpose of obtaining digital assets of the debtors—that took place after the commencement of these cases,” FTX’s lawyers said Thursday. The Securities Commission of the Bahamas didn’t immediately reply to a request for comment.  

The Bahamas-appointed liquidator also has requested that the New York court grant a request to move some of FTX’s legal proceedings from U.S. bankruptcy courts to local courts in the Bahamas. A New York judge has scheduled a hearing related to that request for Dec. 13. FTX has requested that any dispute over the company’s bankruptcy be handled inside Delaware courts, where the company voluntarily filed for chapter 11 last week. 

Meanwhile, Singapore’s investment company Temasek Holdings said it would write down its full $275 million investment in FTX in light of the crypto exchange’s financial position.

Temasek invested $210 million in FTX and $65 million in FTX US across two funding rounds from October 2021 to January this year. The government-owned company said it had conducted extensive due diligence on FTX over eight months, and believed the exchange had a “fee income model with no trading or balance-sheet risk.”

“It is apparent from this investment that perhaps our belief in the actions, judgment and leadership of Sam Bankman-Fried, formed from our interactions with him and views expressed in our discussions with others, would appear to have been misplaced,” Temasek said in a lengthy statement Thursday.

Mr. Bankman-Fried also attempted to walk back on Twitter comments he made that called into question his sincerity about regulators and his view that the company shouldn’t have filed for bankruptcy protection.

On Wednesday, the news website Vox posted an article featuring screenshots of direct messages exchanged on Twitter between Mr. Bankman-Fried and a reporter,

Kelsey Piper.

In a part of the exchange, he said “f— regulators” and asserted that “they make everything worse.” He also implied that his advocacy for better crypto regulation in Washington was “just PR.”

Mr. Bankman-Fried said to the reporter that he regrets filing for bankruptcy protection, saying that if he hadn’t done that, “withdrawals would be opening up in a month with customers fully whole.” Many FTX customers have been unable to withdraw funds since the firm’s troubles started in earnest this month. 

“Sometimes life creeps up on you,” he said in one of the DMs, according to Vox, when discussing how FTX and his separate trading firm, Alameda Research, became so intertwined.

In his Twitter thread following the release of the article, Mr. Bankman-Fried retreated from some of those comments. He said regulators have an “impossible job” and that some agencies have deeply impressed him.

“Some of what I said was thoughtless or overly strong—I was venting and not intending that to be public,” he tweeted.

In the bankruptcy court filing, Mr. Ray took aim at Mr. Bankman-Fried, who stepped down last week but has talked publicly about FTX and attempts to make FTX’s customers whole.

Mr. Bankman-Fried “continues to make erratic and misleading public statements,” Mr. Ray wrote. He added that the company has made clear to the public and employees that “Mr. Bankman-Fried is not employed by the Debtors and does not speak for them.”

The filing went on to detail many areas of apparent abuse at the crypto exchange. 

Mr. Ray said that while many of FTX’s balance sheets show the company holding substantial assets that exceed their liabilities, he has no confidence in those financial statements because many weren’t audited and said the court shouldn’t rely on them to be accurate.

For example, Alameda Research LLC, which acted as a “crypto hedge fund” inside of FTX, reported assets of over $13 billion and liabilities of over $5 billion, Mr. Ray said. Among its assets, Alameda lists a $1 billion direct loan to Mr. Bankman-Fried, the court filing shows.

The lack of audited financial statements is one among a list of such “unacceptable management practices” Mr. Ray lays out. Other failings he cites include no record of board meetings and inadequate internal controls over cash management. 

Mr. Ray said FTX didn’t have an accurate list of bank accounts holding its cash. The company has asked that the court give it until January to submit financial statements detailing assets and liabilities.

Mr. Ray added that FTX used the lack of oversight to help “conceal the misuse of customer funds” and keep little record over internal decision making. To date, FTX has only secured roughly $740 million in cryptocurrency that belongs to FTX entities including Alameda Research, which is only “a fraction” of FTX’s digital assets that the company hopes to recover.

FTX employees also “submitted payment requests through an online ‘chat’ platform,” and supervisors gave their approval “by responding with personalized emojis,” according to the filing. 

Mr. Ray alluded to an array of areas he could look to recover funds. He said there were $372 million in “unauthorized transfers” on the day the company filed for bankruptcy, while he had ordered a team of investigators to look into “what may be very substantial transfers of Debtor property in the Case days, weeks and months” before the filing.

FTX’s new management said it is moving to protect and recover assets, “a substantial portion of which may be missing or stolen,” and investigate claims against the company’s founders and third parties. Moreover, it plans to implement oversight and audit controls over the company’s business, Mr. Ray said.

Mr. Ray said he has been working alongside advisers including Alvarez & Marsal, Sullivan & Cromwell LLP, Nardello & Co., and others to answer questions from regulators including the Securities and Exchange Commission, the Commodity Futures Trading Commission and the U.S. attorney’s office in the Southern District of New York. 

He has also brought on new independent directors for various FTX entities that he wrote will help provide “appropriate corporate governance for the first time.”

—Elaine Yu and Eric Wallerstein contributed to this article.

Write to Alexander Saeedy at [email protected], Soma Biswas at [email protected] and Eliot Brown at [email protected]

The filing paints a vivid picture of the chaos that characterized the cryptocurrency company’s finances, accounting and leadership under founder and former CEO

Sam Bankman-Fried.

In Mr. Ray’s first detailed description of the state of FTX and related trading firm, Alameda Research, since taking over last Friday, he wrote that the company can’t trust prior financial information produced by Mr. Bankman-Fried. 

Lax controls over billions of dollars in cash and cryptocurrency assets under Mr. Bankman-Fried have left current management scrambling to establish just how much money the bankrupt crypto platform has today, the filing said.

Corporate funds were used to buy homes for employees in the Bahamas without any form of internal documentation, according to the court filing. Mr. Bankman-Fried often communicated decisions to his employees through messaging applications that auto-deleted his statements, the filing said.

“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,” Mr. Ray said in the filing. “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 filing was the most explosive development in the FTX bankruptcy case Thursday.

FTX lawyers working for Mr. Ray on Thursday said that Mr. Bankman-Fried and the government of the Bahamas have worked to siphon and transfer FTX assets into accounts outside the control of management, even after the company filed for bankruptcy in Delaware last week. Filing for bankruptcy usually ensures that a company’s assets are ringfenced and can’t be touched without court authorization. 

“The Bahamian government is responsible for directing unauthorized access to the debtors’ systems for the purpose of obtaining digital assets of the debtors—that took place after the commencement of these cases,” FTX’s lawyers said Thursday. The Securities Commission of the Bahamas didn’t immediately reply to a request for comment.  

The Bahamas-appointed liquidator also has requested that the New York court grant a request to move some of FTX’s legal proceedings from U.S. bankruptcy courts to local courts in the Bahamas. A New York judge has scheduled a hearing related to that request for Dec. 13. FTX has requested that any dispute over the company’s bankruptcy be handled inside Delaware courts, where the company voluntarily filed for chapter 11 last week. 

Meanwhile, Singapore’s investment company Temasek Holdings said it would write down its full $275 million investment in FTX in light of the crypto exchange’s financial position.

Temasek invested $210 million in FTX and $65 million in FTX US across two funding rounds from October 2021 to January this year. The government-owned company said it had conducted extensive due diligence on FTX over eight months, and believed the exchange had a “fee income model with no trading or balance-sheet risk.”

“It is apparent from this investment that perhaps our belief in the actions, judgment and leadership of Sam Bankman-Fried, formed from our interactions with him and views expressed in our discussions with others, would appear to have been misplaced,” Temasek said in a lengthy statement Thursday.

Mr. Bankman-Fried also attempted to walk back on Twitter comments he made that called into question his sincerity about regulators and his view that the company shouldn’t have filed for bankruptcy protection.

On Wednesday, the news website Vox posted an article featuring screenshots of direct messages exchanged on Twitter between Mr. Bankman-Fried and a reporter,

Kelsey Piper.

In a part of the exchange, he said “f— regulators” and asserted that “they make everything worse.” He also implied that his advocacy for better crypto regulation in Washington was “just PR.”

Mr. Bankman-Fried said to the reporter that he regrets filing for bankruptcy protection, saying that if he hadn’t done that, “withdrawals would be opening up in a month with customers fully whole.” Many FTX customers have been unable to withdraw funds since the firm’s troubles started in earnest this month. 

“Sometimes life creeps up on you,” he said in one of the DMs, according to Vox, when discussing how FTX and his separate trading firm, Alameda Research, became so intertwined.

In his Twitter thread following the release of the article, Mr. Bankman-Fried retreated from some of those comments. He said regulators have an “impossible job” and that some agencies have deeply impressed him.

“Some of what I said was thoughtless or overly strong—I was venting and not intending that to be public,” he tweeted.

In the bankruptcy court filing, Mr. Ray took aim at Mr. Bankman-Fried, who stepped down last week but has talked publicly about FTX and attempts to make FTX’s customers whole.

Mr. Bankman-Fried “continues to make erratic and misleading public statements,” Mr. Ray wrote. He added that the company has made clear to the public and employees that “Mr. Bankman-Fried is not employed by the Debtors and does not speak for them.”

The filing went on to detail many areas of apparent abuse at the crypto exchange. 

Mr. Ray said that while many of FTX’s balance sheets show the company holding substantial assets that exceed their liabilities, he has no confidence in those financial statements because many weren’t audited and said the court shouldn’t rely on them to be accurate.

For example, Alameda Research LLC, which acted as a “crypto hedge fund” inside of FTX, reported assets of over $13 billion and liabilities of over $5 billion, Mr. Ray said. Among its assets, Alameda lists a $1 billion direct loan to Mr. Bankman-Fried, the court filing shows.

The lack of audited financial statements is one among a list of such “unacceptable management practices” Mr. Ray lays out. Other failings he cites include no record of board meetings and inadequate internal controls over cash management. 

Mr. Ray said FTX didn’t have an accurate list of bank accounts holding its cash. The company has asked that the court give it until January to submit financial statements detailing assets and liabilities.

Mr. Ray added that FTX used the lack of oversight to help “conceal the misuse of customer funds” and keep little record over internal decision making. To date, FTX has only secured roughly $740 million in cryptocurrency that belongs to FTX entities including Alameda Research, which is only “a fraction” of FTX’s digital assets that the company hopes to recover.

FTX employees also “submitted payment requests through an online ‘chat’ platform,” and supervisors gave their approval “by responding with personalized emojis,” according to the filing. 

Mr. Ray alluded to an array of areas he could look to recover funds. He said there were $372 million in “unauthorized transfers” on the day the company filed for bankruptcy, while he had ordered a team of investigators to look into “what may be very substantial transfers of Debtor property in the Case days, weeks and months” before the filing.

FTX’s new management said it is moving to protect and recover assets, “a substantial portion of which may be missing or stolen,” and investigate claims against the company’s founders and third parties. Moreover, it plans to implement oversight and audit controls over the company’s business, Mr. Ray said.

Mr. Ray said he has been working alongside advisers including Alvarez & Marsal, Sullivan & Cromwell LLP, Nardello & Co., and others to answer questions from regulators including the Securities and Exchange Commission, the Commodity Futures Trading Commission and the U.S. attorney’s office in the Southern District of New York. 

He has also brought on new independent directors for various FTX entities that he wrote will help provide “appropriate corporate governance for the first time.”

—Elaine Yu and Eric Wallerstein contributed to this article.

Write to Alexander Saeedy at [email protected], Soma Biswas at [email protected] and Eliot Brown at [email protected]