The crypto exchange FTX collapsed into bankruptcy last week (opens in new tab), after a liquidity crisis exposed a financial black hole that no-one yet knows the full extent of. As the recriminations begin in the crypto world, the man who's been charged with overseeing FTX's bankruptcy, and working out just what this company has been up to, reckons this is even worse than Enron.
And he should know. John Ray III has over 40 years' experience of legal restructuring, including being CEO of Enron during its liquidation, and working on huge corporate bankruptcies like Nortel, Residential Capital, and Overseas Shipholding. He's now filed a declaration to Delaware bankruptcy court (opens in new tab) about his initial findings with FTX, which begins with the assertion that "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."
The filing goes on to outline FTX's "compromised systems integrity and faulty regulatory oversight abroad", and the concentration of power in the hands of "a very small group of inexperienced, unsophisticated and potentially compromised individuals", before adding "this situation is unprecedented".
Let's just pause to fully put that in context. The Enron scandal was, in 2001, the largest bankruptcy in US history. It remains to this day the emblematic corporate scandal, the ultimate example of what can happen when regulators are asleep at the wheel. So when the guy who took charge of restructuring Enron is blanching at the state of FTX, you know this is incredible.
There is a chart at the end of this filing that lists more than 100 companies associated with FTX spread across 27 countries (opens in new tab). This is how the firm's leaders were allegedly funneling money around and using customer cash to make financial bets, without it seeming to affect the balance sheet of FTX.
Going hand-in-hand with this, Ray notes "the absence of lasting records of decision-making", and that former CEO Sam 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." Tell me you're up to no good without telling me you're up to no good.
Other eyebrow raising moments include that company money was used "to purchase homes and other personal items for employees and advisors" in the Bahamas. There is no documentation suggesting that these were loans, and "certain real estate was recorded in the personal name of these employees and advisors" in Bahamian records. If only all jobs came with a free holiday home in the Bahamas, eh.
Ray said a "substantial portion" of FTX's supposed assets are either "missing or stolen". The bankruptcy process has so far secured around $740 million of cryptocurrency, though the filing notes that "at least $372 million of unauthorized transfers" took place on the same day FTX filed for bankruptcy. These transfers are being investigated.
Ray notes several times that he does not trust this company's accounts, now or historically, and warns creditors not to take FTX's information as accurate.
The filing ends on a withering note as regards FTX's former CEO Sam Bankman-Fried, the man more responsible than any other for this company, who's been giving interviews and saying he regrets filing for bankruptcy (opens in new tab). Ray emphasises that Bankman-Fried is no longer in control and doesn't speak for FTX. He says that Bankman-Fried is currently in the Bahamas (naturally), and "continues to make erratic and misleading public statements."
Ray says Bankman-Fried's "connections and financial holdings in the Bahamas remain unclear to me", and that the former CEO "recently stated to a reporter on Twitter: 'F*** regulators they make everything worse' and suggested the next step for him was to 'win a jurisdictional battle vs. Delaware'." Which of course is exactly the kind of thing a Delaware court wants to hear.
The collapse of FTX is another low point in what has been a terrible year for crypto, and cynics may well be wondering what's next. One of the things about these assets is how interconnected they all are, and the domino effect of FTX is still playing out. FTX is expected to have more than a million creditors (good luck to them) and, as well as the bankruptcy process, regulators globally are looking closely at the smoking ruins of what was until recently one of the biggest crypto exchanges on the planet.
In case you're wondering, yes: the Bahamas does have an extradition treaty with the United States.