Former FTX CEO Sam Bankman-Fried received a $1 billion personal loan from one of the four siled companies deeply involved in the collapse of the FTX cryptocurrency exchange.
A formal statement in pending Chapter 11 bankruptcy filings from FTX’s new CEO, John Ray III, has revealed further misappropriation of funds by Bankman Fried.
According to the filing, Alameda Research loaned $1 billion directly to Bankman-Fried, while FTX director of engineering Nishad Singh also received a $543 million loan from the company.
Ray III, who was responsible for picking up the pieces after the infamous Enron collapse, is scathing in his first filing with the United States Bankruptcy Court for the District of Delaware.
In fact, he describes the situation as the worst he has seen in his corporate career, highlighting the “complete failure of corporate controls” and the lack of reliable financial information:
“From compromised system integrity and deficient regulatory oversight abroad to the concentration of control in the hands of a very small group of inexperienced, inexperienced and potentially compromised individuals, this situation is unprecedented.”
The Chapter 11 filing will aim to implement controls over accounting, auditing, cybersecurity, human resources, data protection and other systems for four groups of companies associated with FTX’s corporate organization.
Four silos formed FTX Group
Ray III identifies four “silos”, including many different companies that are part of the FTX Group. The “WRS” silo includes subsidiaries of West Realm Shires Inc., with FTX US, LedgerX, FTX US Derivatives, FTX US Capital Markets and Embed Clearing.
Alameda Research is a standalone silo in filing with its own subsidiaries, while Clifton Bay Investments LLC and Ltd, Island Bay Ventures Inc. and Debtor FTX Ventures Ltd fall under the “Ventures” silo. The latest “Dotcom” silo includes FTX Trading Ltd and exchanges that do business under the umbrella of FTX.com.
According to Ray III’s filing, all silos were controlled by Bankman-Fried, while minor equity stakes were held by former FTX chief technology officer Zixiao “Gary” Wang and Singh. The WRS and Dotcom silos had outside equity investors, including a large number of investment funds, endowments, sovereign wealth funds and families affected by the collapse of FTX.
The filing contains other damning charges against the inner workings of Bankman-Fried’s empire. The wider FTX Group did not maintain “centralized control” of its cash, did not maintain accurate bank account records, and paid “insufficient attention to the creditworthiness of banking partners”.
Ray III also notes that the WRS silo was the only arm to have performed a reliable audit of a notable accounting firm. He expresses concern about the audited financial statements of the Dotcom silo, while he cannot find audited financial statements for the Alameda and Ventures silos.
The disbursement of funds was also highly dysfunctional, according to the filing:
“For example, FTX Group employees submitted payment requests through an online ‘chat’ platform where a disparate group of supervisors approved payouts by responding with personalized emojis.”
Ray III also notes that corporate funds were used to purchase homes and personal items for employees and consultants, with a lack of documentation for transactions, including loans.
Crypto custody in disarray
Custody of cryptocurrency assets was also in disarray, according to the Chapter 11 filing, with inadequate records or security controls for FTX Group’s digital assets.
Bankman-Fried and Wang controlled access to the cryptocurrency holdings of key companies within the group. Ray III outlines “unacceptable practices” including using an unsecured group email account to access confidential private keys and critically sensitive data for the global network of companies.
The group also failed to conduct daily reconciliation of cryptocurrency holdings and used software to hide the misuse of client funds. This also allowed Alameda to be secretly exempt from certain aspects of FTX.com’s automatic liquidation protocol.
Perhaps most telling is the fact that the debtors pursuing bankruptcy proceedings secured only “a fraction of the digital assets” they had hoped to recover. Cold wallets containing $740 million worth of cryptocurrency have been obtained, but it’s not clear which silo the money belongs to.