New FTX CEO John J. Ray, III Shares Interesting Insight into FTX Debacle During House Hearing

This past Tuesday, the House Committee on Financial Services hosted a hearing with a single witness – John J. Ray, III, the new CEO of FTX.

Originally, the Committee had scheduled the former CEO of FTX, Sam Bankman-Fried, to testify, but his arrest the day prior got in the way of his participation in the hearing. Some believe the decision to arrest Bankman-Fried the day prior was a strategic move.

Widely anticipated by industry insiders, the hearing provided insight into the many questions that have emerged in the bankruptcy of FTX and its affiliated entities. The allegations of fraud are astounding with officials claiming the malfeasance began the day FTX came to life. This stands in contrast to Bankman-Fried’s protestations.

At one point, FTX was the second-largest crypto exchange in the world – just behind Binance. The statements by Ray indicate the once-vaunted exchange operated in a manner that customer assets were comingled, doing business as one company, with the funds of Alameda Research – the hedge fund controlled by Bankman-Fried, accessing the capital for trading, acquisitions, and investments. Many of the investments made are now worth a “fraction” of their value. At the same time, billions in loans were made to insiders.

Committee Chair Maxine Waters commented at the beginning of the hearing:

“It’s clear that the time to act was yesterday. While the SEC has a huge job ahead of it and will require additional funding, Congress also has a role to play. We must not only investigate, we must legislate. I stand committed to working with the Ranking Member when he becomes Chairman of this Committee next year on drafting the rules that will effectively police this industry and prevent another FTX from happening again.”

Incoming Chair and Ranking Member Patrick McHenry added:

“I believe in the promise of digital assets and those around the world building blockchain technologies. This is why I have worked, and will continue to work, to provide clear rules of the road for the digital asset ecosystem. That is how we protect American consumers and investors in this marketplace and allow innovation to occur in the U.S. I’ll finish with this: we know SEC Chair Gensler’s regulation-by-enforcement-only approach is not going to stop bad actors. Next year, I look forward to hearing from Mr. Gensler [SEC Chair] early and often on how we can provide clarity on the application of our securities laws to trading platforms—which he has failed to do. The Financial Services Committee still has a role to play in this fact-finding mission, which we will start today, and continue to work toward a legislative outcome to prevent this from happening again.”

So while members hammered Bankman-Fried’s fraud, there appears to be a consensus that regulation for digital assets must be pursued in haste.

So what else did we learn from FTX CEO Ray?

“No corporate controls, no oversight, no independent board.”

Below are some of the vignettes gleaned from the Hearing proceedings from Ray’s testimony and Q&A session.

  • The loans given to SBF were not just one loan. There were numerous loans. There is no description of the loans. In one instance, he [SBF] signed as issuer and recipient. We do not know what the use of the funds was for.
  • The operation of Almeda needed the funds of FTX.
  • “There were virtually no internal controls” – John J. Ray, III
  • There were over 100 entities which have been segregated into four silos for the purpose of bankruptcy proceedings:
    • US Silo – US FTX Exchange
    • The International exchange for non-US investors
    • Alameda – purely crypto hedge fund
    • A silo purely for investments
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  • All four silos were owned or controlled by Bankman-Fried
  • LedgerFX is solvent and separate as it is regulated in the US
  • Alameda made both long and short investments. A user of FTX, Alameda invested over $5 billion in other assets.
  • FTX disclosed problems on November 2nd, but this began months or years earlier as this did not happen overnight.
  • The crypto assets for both and FTX.US were housed in the same database.
  • Bankman-Fried said he was not running Alameda, but he owns 90% of Alameda, and there is “no distinction between the two” entities.
  • “I have never seen an utter lack of record keeping. No internal controls whatsoever.” – John J. Ray, III
  • So far, they have secured over $1 billion in assets now placed in cold storage. This is an ongoing process that will take weeks or months.
  • The majority of creditors trade outside the US.
  • In questioning about his experience handling Enron, Ray said this one is unusual in the sense there is literally no record keeping whatsoever. Invoicing and record keeping via Slack. They used QuickBooks. Not a tool for a multi-billion dollar company. There is no independent board. Very unusual. There was no sophistication whatsoever. There wasn’t any management.
  • “Funds were deposited directly into Alameda instead of bank accounts.” – John J. Ray, III
  • On Bankman-Fried’s claims, it was all a mistake, Ray does not find these statements credible.
  • Asked about the size of the loss several times, Ray said several billion dollars and then later stated $8 billion.
  • “We are doing a thorough investigation, and we are cooperating with the authorities” – John J. Ray, III
  • “Ultimately, we will look to sell LedgerX and put it in the hands of a good steward” – John J. Ray, III
  • While they do not have a full accounting yet, they have hired EY to do a comprehensive review to investigate returns. They are looking at all of the transactions in 2022.
  • There are about two dozen exchanges where we have funds (FTX). “Are there wallets we do not know about? Could be…” – John J. Ray, III
  • There were 2.7 million users in the US silo. Some had multiple accounts.
  • This is old-fashioned embezzlement. Not sophisticated at all. “Plain old embezzlement.”
  • They could move money and assets as they desired. Any existing rules were made to be broken.
  • “This company was uniquely positioned to fail” – John J. Ray, III
  • The US is not solvent. His [SBF] statement is inaccurate.
  • Liquidation in the Bahamas was filed 24 hours in advance of US filing. Over $100 million was released to 1500 customers in the Bahamas. Then the door was closed.
  • We have imaged the slack environment the company had. There were certain forms of communication with disappearing messages.
  • After the bankruptcy filing, both the Bahamian government and an undisclosed hacker accessed funds on FTX.

In the eyes of John J. Ray, III, the actions of FTX and its management, specifically Bankman-Fried, were fraudulent. Over time, more information will become available as the court filings emerge and the bankruptcy process moves forward.


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