FTX Bankruptcy: A Failure Of Everyone

John J. Ray III has seen some things in his time. He oversaw the liquidation of Enron, for example.

But he’s never seen anything quite like the smoldering remains of Sam Bankman-Fried’s “empire,” which, let’s face it, was only an “empire” in the imagination of the star-struck financial media and, unfortunately, in the minds of FTX depositors and investors, all of whom are now in various states of distress, denial or frustration.

“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,” Ray said, in a sworn declaration submitted in bankruptcy court Thursday. His account was positively scathing. Ray described FTX’s management as “inexperienced, unsophisticated and potentially compromised,” and referred directly to Bankman-Fried’s ad hoc, midnight chat with Vox’s Kelsey Piper.

Read more: Sam Bankman-Fried’s Greatest Gift

“Mr. Bankman-Fried, currently in the Bahamas, continues to make erratic and misleading public statements,” Ray said. “Mr. Bankman-Fried… 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.'”

Ray was keen to convey the seriousness with which he’s conducting his search and rescue efforts beneath the rubble of Bankman-Fried’s collapsed pyramid. “The investigative effort underway is led by myself and a team at Sullivan & Cromwell that reports directly to me, including a former Director of Enforcement at the SEC, a former Director of Enforcement at the CFTC and a former Chief of the Complex Frauds and Cybercrime Unit of the United States Attorney’s Office for the Southern District of New York,” Ray wrote.

That sounds ominous. While Ray is plainly dedicated to the effort, he seems apprised that it may not be possible to determine precisely what happened. For example, Ray wrote that “Mr. 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.”

There was an allusion to — and I’ll be cautious in my wording — the desirability of facilitating an open exchange of information with employees, both current and former, who Ray said were “hurt by these events” and whose assistance “will be necessary to ensure the maximization of value for all stakeholders going forward.” I think it’s fair to suggest that, by and large, Bankman-Fried’s employees and executives aren’t the omertà-type. I’ll just leave that there.

As far as the recovery effort, Ray said that so far, only $740 million of crypto had been located (in cold wallets), and that “at least” $372 million tied to the apparent “hack” which grabbed headlines last week isn’t under his control. He also mentioned $300 million in “unauthorized” minting of FTT tokens, and “the failure of the co-founders and potentially others to identify additional wallets believed to contain Debtor assets.”

I don’t know any other way to say this: It seems exceedingly unlikely to me that someone (Bankman-Fried) who exercised unfettered control over a money-minting business and who personally controlled billions of digital assets which could be moved to untraceable wallets (cold or hot) at any given time, is actually broke. My guess is that Bankman-Fried is still quite rich, at least in crypto terms.

Ray walked the court through a litany of alleged failures and foibles, including, but by no means limited to,

• “The absence of daily reconciliation of positions on the blockchain”
• “The use of software to conceal the misuse of customer funds”
• “[The] submi[ssion] [of] payment requests through an on-line ‘chat’ platform where a disparate group of supervisors approved disbursements by responding with personalized emojis”
• The absence of an in-house accounting department
• The absence of “any audited financial statements with respect to… Alameda”
• The use of an audit firm which describes itself as the “first-ever CPA firm to officially open its Metaverse headquarters in the metaverse platform Decentraland”
• The “general absence” of liquidity forecasting, and
• “The absence of an accurate list of bank accounts”

Again, it should be emphasized (and he did emphasize it) that Ray is no stranger to “large corporate failures,” “allegations of criminal activity,” “novel financial structures” and “cross-border asset recovery and maximization.” And yet, in four decades of cleaning up “defects… in internal controls, regulatory compliance, human resources and systems integrity,” he’s never seen anything like FTX.

Keep in mind, these are the entities into which some of the smartest and best known venture capital firms on the planet threw billions of dollars. These are the entities around which countless journalists fawningly editorialized, spilling untold gallons of digital ink in the service of lionizing a would-be messiah. These are the entities that were glorified on a weekly basis by the most widely-followed mainstream financial media outlets on Earth.

The suggestion that this was so elaborate a ruse that no one — neither the most seasoned VCs nor the investigative arms of media conglomerates run by billionaires — could’ve known it might end in tears, beggars belief. The fact is, nobody looked, because nobody wanted to see.

So, they failed. The VCs failed. And journalists failed. And the financial media failed. Not in the sense that they’re going out of business. The VCs are fine, of course. And if anything, the media benefits from this debacle through more monetizable content. But they failed to ask the right questions. In some instances, it seems they failed to ask any questions at all. Don’t expect an apology. It’s not forthcoming, I can assure you of that. In my experience, it takes a special kind of reporter to push the envelope as far as it needs to be pushed. As far as I’m aware, there are no such reporters working for any of the largest financial media outlets in the US. If I’m wrong, and there are any such reporters, they should reach out. Maybe I’ve got a story for them.

During his Wednesday confessional with Vox’s Piper, Bankman-Fried said that his biggest regret was filing Chapter 11. Had he not filed, “withdrawals would be opening up in a month with customers fully whole,” he claimed. I wouldn’t want to speak for Ray, but my guess is he’d generally disagree. “The people in charge… are trying to burn it all to the ground out of shame,” Bankman-Fried said, of Ray and his team.

I have to say, after reading Ray’s declaration, there’s a lot to be ashamed of, assuming, as most people do, that normative statements are valid and useful as a frame of reference for human activity. Bankman-Fried seemed to cast doubt on that notion, though, in his exchange with Piper.

If his contention is that normative statements are arbitrary, and not very useful in the final analysis, I’d have to agree. However, I don’t agree with asymmetric treatment of alleged white collar malfeasance (and, at this point, I don’t think I’m being presumptuous to suggest that many such allegations, formal, informal and otherwise, are inbound for Bankman-Fried and FTX) compared to alleged blue collar wrongdoing.

Either everyone’s held to account based on a shared set of rules derived, in part anyway, from normative considerations (however arbitrary), or they aren’t. And in the US, that’s pretty much the essence of the rule of law. Eventually, I assume, Bankman-Fried will be back in the US to discuss this situation with all interested parties.

On Thursday, in a section describing FTX’s approach to human resources, Ray wrote that he’s been “unable to prepare a complete list of who worked for the FTX Group” and said that “repeated attempts to locate certain presumed employees to confirm their status have been unsuccessful to date.”

He also said that so far, Bankman-Fried’s “connections and financial holdings in the Bahamas remain unclear to me.”