First Interim Report on FTX Failure: “Stunning Collapse” Managed by Group with Little Interest in Appropriate Oversight

FTX Exemplified hubris, incompetence, and greed.

FTX CEO John J. Ray, III has filed his first interim report on the failure of FTX as the bankruptcy proceedings continue. Once one of the largest crypto exchanges in the world, led by high-profile founder and CEO Sam Bankman-Fried, the report describes the collapse of the firm as having familiar root causes – “hubris, incompetence, and greed.”

Stating that FTX caused an “unprecedented scale of harm” to the young digital asset industry, the report claims:

“Despite the public image it sought to create of a responsible business, the FTX Group was tightly controlled by a small group of individuals who showed little interest in instituting an appropriate oversight or control framework. These individuals stifled dissent, commingled and misused corporate and customer funds, lied to third parties about their business, joked internally about their tendency to lose track of millions of dollars in assets, and thereby caused the FTX Group to collapse as swiftly as it had grown.”

The report states that once it was taken over by debtors, a pervasive lac of records was uncovered, forcing the team to “start from scratch” in identifying liabilities and assets. FTX lacked appropriate “management and governance, finance and accounting, as well as digital asset management, information security, and cybersecurity.”

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FTX is described as having lacked any experienced finance and accounting personnel and did not have any internal audit function whatsoever. Noting that large firms frequently utilize the services of advanced management software, Enterprise Resource Planning (ERP) – such as SAP, FTX, and 35 entities in the group depended on QuickBooks as their accounting platform.

The report describes a company that is shambolic at best, controlled by Bankman-Fried, who was surrounded by minions who deferred to his decisions.

If an executive voiced their concerns or challenged top executives, they were terminated:

… less than three months after being hired, and shortly after learning about Alameda’s use of a North Dimension bank account to send money to customers of the FTX exchanges, a lawyer within the FTX Group was summarily terminated after expressing concerns about Alameda’s lack of corporate controls, capable leadership, and risk management.”

FTX is said to have managed over a thousand accounts on digital asset trading platforms around the world. These accounts did not typically show any obvious link to FTX.

As for Alameda, the hedge fund controlled by Bankman-Fried, this firm had an “effectively limitless ability to trade and withdraw assets from the exchange.” This relationship was said to have been “affirmatively misrepresented.”

When the firm was taken over by the bankruptcy management, one of the first events was mitigating a hack that drained “approximately $432 million worth of crypto,” which was stolen in a couple of hours. The hack occurred due to the fact that FTX had zero controls to detect a breach or any way to stop it.

In conclusion, the report states:

“The FTX Group’s profound control failures placed its crypto assets and funds at risk from the outset. They also complicated the Debtors’ recovery efforts, although the Debtors have made and continue to make substantial progress in that regard. To date, through the work described above, the Debtors have recovered and secured in cold storage over $1.4 billion in digital assets, and have identified an additional $1.7 billion in digital assets that they are in the process of recovering. The Debtors will continue to provide updates on their ongoing recovery efforts and investigation.”

Perhaps the most surprising conclusion derived from the report is that it is incredible that the FTX dumpster fire prevailed for so long and that Bankman-Fried was able to convince so many sophisticated investors of his ability to operate such a complex organization, eventually destroying billions in value.




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