Testimony by John J. Ray III, CEO of FTX, Outlines Management Disaster that Caused Crypto Exchange Collapse

Tomorrow’s hearing at the House Financial Services Committee is widely anticipated across the crypto industry. Both current FTX CEO, John J. Ray, III, and former FTX CEO Sam Bankman-Fried, are scheduled to testify on the collapse of FTX. In advance of the hearing, Ray has submitted prepared testimony that outlines the causes of FTX’s bankruptcy.

the failure of #FTX stems from a very small group of grossly inexperienced & unsophisticated individuals who failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people’s money or assets Click to Tweet

Ray explained that the failure of FTX stems from “a very small group of grossly inexperienced and unsophisticated individuals who failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people’s money or assets.”

Outlining “unacceptable management practices,” Ray bullets out some of the many problems of the crypto exchange:

  • The use of computer infrastructure that gave individuals in senior management access to systems that stored customer assets, without security controls to prevent them from redirecting those assets;
  • The storing of certain private keys to access hundreds of millions of dollars in crypto assets without effective security controls or encryption;
  • The ability of Alameda, the crypto hedge fund within the FTX Group, to borrow funds held at FTX.com to be utilized for its own trading or investments without any effective limits;
  • The commingling of assets;
  • The lack of complete documentation for transactions involving nearly 500 investments made with FTX Group funds and assets;
  • The absence of audited or reliable financial statements;
  • The lack of personnel in financial and risk management functions, which are typically present in any company close to the size of FTX Group; and
  • The absence of independent governance throughout the FTX Group.

While in the early days of the bankruptcy process, Ray says they gain insight every day about how the platform operated. He states that the “scope of the investigation underway is enormous.”

Ray notes that customer assets were commingled with Alameda funds, a profound breach of fiduciary responsibility. Alameda “used client funds to engage in margin trading, which exposed customer funds to massive losses.”

The $5 billion FTX spent in buying and investing in many different businesses from 2021 to 2022 may be worth only a fraction Click to Tweet

The $5 billion FTX spent in buying and investing in many different businesses from 2021 to 2022 may be worth “only a fraction” of what was spent.

Insiders benefitted from approximately $1 billion in loans.

Ray was the executive who managed the bankruptcy of Enron so he brings to the table extensive experience in dealing with extreme acts of fraud. He states they are committed to returning as much value to creditors and account holders as possible, but the complexity is challenging.

While it is widely known that both the SEC and CFTC are investigating FTX, most observers also expect criminal charges to be filed by the US Department of Justice at some point in the near future.

As of yet, testimony from Bankman-Fried is not available. He is expected to participate in the hearing tomorrow via a video feed.

The hearing will be live-streamed on the Committee’s website, commencing at 10 AM ET tomorrow (Tuesday, December 13, 2022).

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