Ahead of Tuesday's U.S. House Financial Services Committee hearing on FTX, John Jay Ray III, FTX's new CEO since bankruptcy, filed written testimony which outlines several "unacceptable management practices," the new CEO uncovered at the bankrupt crypto exchange.
Ray said in prepared remarks FTX's demise was due to "the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals."
Additionally, Ray, who led the liquidation of Enron, has uncovered at least five different things the company did with some of the billions it raised from investors and the billions more in client assets held on its exchanges.
Which, given the $8 billion asset hole found at the center of FTX in bankruptcy, is no doubt of interest to customers and counterparties looking to be made whole.
1. Customer assets from FTX.com were commingled with assets from the Alameda trading platform.
"I didn't knowingly commingle funds," disgraced former CEO Sam Bankman-Fried told Andrew Ross Sorkin in an interview two weeks ago, suggesting the platform's margin trading system was the source of the problem.
"You have the margin trading. You have, you know, customers borrowing from each other. Alameda is one of those. I was frankly surprised by how big Alameda's position was, which points to another failure of oversight on my part," he went on to say in the interview.
NEW YORK, NEW YORK - NOVEMBER 30: Andrew Ross Sorkin and Sam Bankman-Fried on stage at the 2022 New York Times DealBook on November 30, 2022 in New York City. (Photo by Thos Robinson/Getty Images for The New York Times)2. Alameda used client funds to engage in margin trading which exposed customer funds to massive losses.
In a since deleted tweet from November 8, Bankman-Fried said customer assets were backed 1:1.
When asked during a Twitter Spaces on Monday whether this statement was true, Bankman-Fried replied, "Yes, but... the problem is that that includes negative balances for some customers... net customer assets were equal to net assets on the platform... gross customer assets were not."
3. The FTX Group went on a spending binge in late 2021 through 2022, during which approximately $5 billion was spent buying a myriad of businesses and investments, many of which may be worth only a fraction of what was paid for them.
The list of investments by sibling trading firm Alameda Research alone is $5.2 billion spread across approximately 474 companies. Originally supported by both FTX's name and influence, these startups will not likely fetch the price FTX paid despite what independent success they might have, according to Ray's assessment.
4. Loans and other payments were made to insiders in excess of $1 billion.
In Ray's original declaration (Doc 24) for FTX Group's bankruptcy proceedings, he previously highlighted how Alameda lent $2.3 billion to affiliated companies such as Paper Bird Inc., one billion to Bankman-Fried, another $543 million to Former FTX Director of Engineering Nishad Singh, and $55 million to former FTX Digital Markets CEO Ryan Salame.
5. Alameda’s business model as a market maker required deploying funds to various third party exchanges which were inherently unsafe, and further exacerbated by the limited protections offered in certain foreign jurisdictions.
The market for total crypto assets has fallen by 62% from $1.4 trillion to $843 billion since the beginning of January. As cryptocurrency prices have plunged through the year, Alameda can be expected to have taken heavy losses.
In June, it lent $200 million loan to crypto lender Voyager before its U.S. subsidiary lent another $275 million to BlockFi. Both companies have filed for bankruptcy protection.
"My ability to comment on certain matters ... will be materially limited by the state of the FTX Group’s books and records, ongoing bankruptcy proceedings, and the numerous, ongoing investigations by U.S. law enforcement and regulators," Ray added.
David Hollerith is a senior reporter at Yahoo Finance covering the cryptocurrency and stock markets. Follow him on Twitter at @DsHollers
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