Former FTX CEO Sam Bankman-Fried received a $1 billion personal loan from one of four silo companies deeply involved in the collapse of the FTX cryptocurrency exchange.
A formal declaration in ongoing Chapter 11 bankruptcy filings from FTX’s new CEO, John Ray III, has revealed further misappropriation of funds by Bankman Fried.
According to the filing, Alameda Research loaned $1 billion directly to Bankman-Fried, while FTX director of engineering Nishad Singh also received a $543 million loan from the company.
Ray III, who was responsible for picking up the pieces after the infamous collapse of Enron, was scathing in his initial filing to the United States Bankruptcy Court for the District of Delaware.
He went as far as describing the situation as the worst he’ seen in his corporate career, highlighting the “complete failure of corporate controls” and an absence of trustworthy financial information:
“From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”
The Chapter 11 filing will look to implement controls on accounting, auditing, cybersecurity, human resources, data protection and other systems to four groups of businesses associated with FTX’s corporate organization.
Four silos made up FTX Group
Ray III identifies four “silos,” which include a host of different businesses that make up the FTX Group. The “WRS” silo includes subsidiaries of West Realm Shires Inc., which features FTX US, LedgerX, FTX US Derivatives, FTX US Capital Markets and Embed Clearing.
Alameda Research is a standalone silo in the filing with its own subsidiaries, while Clifton Bay Investments LLC and Ltd, Island Bay Ventures Inc. and Debtor FTX Ventures Ltd fall under the “Ventures” silo. The final “Dotcom” silo includes FTX Trading Ltd and exchanges doing business under the FTX.com umbrella.
According to Ray III’s filing, all of the silos were controlled by Bankman-Fried, while minor equity interests were held by former FTX chief technology officer Zixiao “Gary” Wang and Singh. The WRS and Dotcom silos had third-party equity investors that included a host of investment funds, endowments, sovereign wealth funds and families that have been affected by the collapse of FTX.
Damning indictments
The filing contains other damning indictments on the inner workings of Bankman-Fried’s empire. The wider FTX Group did not “maintain centralized control” of its cash, failed to keep accurate bank account lists and paid “insufficient attention to the creditworthiness of banking partners."
Ray III also notes that the WRS silo was the only arm to have undertaken a reliable audit with a noteworthy accounting firm. He expresses concern with the audited financial statements of the Dotcom silo, while failing to find any audited financial statements for the Alameda and Ventures silos.
The disbursement of funds was also highly dysfunctional, according to the filing:
“For example, employees of the FTX Group submitted payment requests through an on-line ‘chat’ platform where a disparate group of supervisors approved disbursements by responding with personalized emojis.”
Ray III also notes that corporate funds were used to purchase homes and personal items for employees and advisers, with a lack of documentation for transactions including loans.
Crypto custody in disarray
The custody of cryptocurrency assets was also in disarray, according to the Chapter 11 filing, with inadequate records or security controls in place for FTX Group’s digital assets.
Bankman-Fried and Wang controlled access to the cryptocurrency holdings of the main businesses within the group. Ray III outlines “unacceptable practices" that included using an unsecured group email account to access confidential private keys and critically sensitive data for the global network of companies.
The group also failed to carry out daily reconciliation of cryptocurrency holdings and used software to conceal the misuse of customer funds. This also allowed the secret exemption of Alameda from certain aspects of FTX.com’s auto-liquidation protocol.
Perhaps most telling is the fact that the debtors carrying out bankruptcy proceedings have only secured “a fraction of the digital assets” they had hoped to recover. Cold wallets containing $740 million of cryptocurrency have been obtained, but it's not clear which silo the funds belong to.
