John Ray, the current CEO of FTX, blamed the collapse of the digital currency exchange on “grossly inexperienced and unsophisticated individuals” who failed to implement any checks, in testimony prepared for the House Financial Services Committee.
Ray has released his prepared testimony ahead of Tuesday’s House Financial Services Committee hearing, which will feature him and disgraced former FTX CEO Sam Bankman-Fried.
After Bankman-Fried stepped down as CEO following the collapse of FTX, Ray became the CEO. Ray served as Director of Restructuring or CEO in several significant and vexing corporate bankruptcies involving allegations of criminal activity and wrongdoing, including the Enron bankruptcy.
In his testimony, he explained how the collapse of FTX could overshadow his decades of work on bankruptcy proceedings:
Almost all of these situations share common characteristics, ranging from gross mismanagement, excessive indebtedness, internal control failures, external control failures following audit firm failures or insufficient governance of the board of directors. But never in my career have I seen such a complete failure of corporate controls at all levels of an organization, from no financial statements to a complete failure of any internal controls or governance.
Although our investigation is ongoing and detailed conclusions will have to await its conclusion, the collapse of the FTX group appears to stem from the absolute concentration of control in the hands of a a very small group of grossly inexperienced and unsophisticated individuals who have not implemented virtually any of the systems or controls necessary for a business in which another’s money or assets are entrusted. [Emphasis added]
Ray explained that many of FTX’s “unacceptable management practices” include:
- Senior management had access to client assets without security controls to prevent them
- Storing digital currency private keys worth hundreds of millions of dollars without effective security measures
- Allowing Alameda, the trading arm of FTX, to borrow funds held at FTX for trading without any “effective limits”
- Asset grouping
- No documentation for transactions involving around 500 assets made with FTX Group funds and assets
This led Ray to five conclusions about FTX:
- “First, FTX.com client assets were commingled with assets from the
Alameda trading platform.
- Second, Alameda used customer funds to engage in margin trading that exposed
client funds to massive losses.
- Third, FTX Group went on a spending spree in late 2021 through 2022,
during which approximately $5 billion was spent buying up a myriad of businesses and investments,
many of which may be worth only a fraction of what was paid for them.
- Fourth, loans and other payments have been made to insiders for more than $1 billion.
- Fifth, Alameda’s business model as a market maker required the deployment of funds to
various third-party exchanges that were inherently dangerous, and further exacerbated by the
limited protections offered in certain foreign jurisdictions.
Bankman-Fried will also testify to his knowledge of FTX’s collapse. However, Bankman-Fried agreed to appear under threat of a subpoena after a week of dodging.