A cryptocurrency exchange has collapsed. According to its administrator, FTX’s financial records were worse than Enron’s.
In filings made public on Wednesday, John Ray III, who was appointed as FTX’s liquidator last week, told a US bankruptcy court: “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 oversaw the liquidation of Enron, a US energy company that went bankrupt in 2001. Enron’s bankruptcy reduced the company’s $60 billion (£51 billion) valuation to zero, precipitating the demise of global audit firm Arthur Andersen. Enron CEO Jeffrey Skilling was sentenced to 24 years in prison after being convicted of conspiracy, insider trading, securities fraud, and making false statements to auditors.
Mr Ray stated in the FTX filing that the company was run by “a very small group of inexperienced, unsophisticated, and potentially compromised individuals,” calling the situation “unprecedented.”
According to the filing, executives will approve payment requests by “responding with personalised emojis” to messages on a company chat platform.
Other filings reveal that FTX currently holds only about $740m in digital tokens, despite owing around $9bn at the time it filed for bankruptcy protection. It was valued at $32bn in a funding round earlier this year
Mr Ray urged the court not to rely on balance sheets prepared under former chief executive Sam Bankman-Fried’s watch, highlighting the lack of internal controls and difficulties establishing exactly what assets FTX owned and controlled. The company appears to have paid for property in the Bahamas that was registered to individuals, rather than the company, Mr Ray said.
The former Enron executive also questioned the credentials of an audit firm that signed off on FTX’s financials, noting that the company recently boasted of opening an office in Facebook’s virtual world, the metaverse.
The harsh verdict comes as regulators around the world, including the US Department of Justice, investigate FTX’s demise, which has left over a million creditors out of pocket.
The company, Mr Bankman-Fried, and celebrities who endorsed it, including NFL quarterback Tom Brady and Seinfeld co-creator Larry David, were accused of orchestrating “a fraudulent scheme… designed to take advantage of unsophisticated investors,” according to a lawsuit filed against the company, Mr Bankman-Fried, and celebrities who endorsed it.
Since leaving the business, Mr Bankman-Fried has taken to Twitter to explain his decision-making. Mr Ray said these public statements were disruptive, with FTX’s official Twitter account saying: “Mr Bankman-Fried has no ongoing role at FTX, FTX US, or Alameda Research Ltd and does not speak on their behalf.”
Separately, Mr Bankman-Fried claimed he had puffed up his ethical credentials as part of a “dumb game we woke Westerners play” in an interview with online publication Vox.
The 30-year-old said his public stance on ethical issues was in part a “front” to burnish his reputation “so everyone likes us”.
Mr Bankman-Fried, who at one stage was worth around $16bn, was a self-proclaimed “effective altruist”, meaning he aimed to make as much money as possible in order to give it away to charities.
He appeared in multiple videos explaining his views on climate change and world poverty and posted his thoughts on how to maximise his positive impact on the world on Twitter.
However, he told Vox: “Man all the dumb s*** I said… it’s not true really.”
On Twitter on Thursday morning, he added: “Some of what I said was thoughtless or overly strong. I was venting and not intending that to be public.”
He added: “What matters is what you do – is actually doing good or bad, not just talking about doing good or using ESG language.”
On Twitter, cryptocurrency investors compared FTX’s demise to that of Bernie Madoff, the American financier who ran the largest Ponzi scheme scam in history, worth over $60 billion.
The company has been accused of misusing billions of pounds in customer deposits to FTX and secretly transferring them to a hedge fund called Alameda Research to make high-risk investments.
In his interview with Vox, Mr Bankman-Fried appeared to admit that he used customer funds to make questionable trades.
“It was never the intention,” he said, “sometimes life creeps up on you.”
He claimed: “Each step in isolation was rational and reasonable, and then when I finally added it all up last week it wasn’t.”
FTX, which was based out of a luxury Bahamas penthouse, filed for bankruptcy protection in the US last week.