Crypto exchange FTX mishandled billions of dollars of customer funds and went on a $5 billion “spending binge” in late 2021 and early 2022, acquiring firms for far more than they were worth, according to CEO John J. Ray III, who replaced founder Sam Bankman-Fried on Nov. 11 following a liquidity crisis that prompted the firm’s bankruptcy.
The exchange was “commingling,” or sharing, its clients’ assets with sister firm Alameda Research, a trading house founded by Sam Bankman Fried, which were in turn used by Alameda to make risky trades that “exposed customer funds to massive losses,” according to Ray’s written testimony to the House Financial Service Committee Monday. Bankman-Fried, who was scheduled to attend the committee’s Tuesday hearing remotely, was arrested Monday by Bahamian authorities on behalf of the U.S., pending an official extradition request, after the U.S. filed charges against him, and was sued by the Securities and Exchange Commission (SEC) Tuesday. (RELATED: Billionaire Dem Donor And Former Crypto CEO Sam Bankman-Fried Arrested In Bahamas)
“[N]ever in my career have I seen such an utter failure of corporate controls at every level of an organization, from the lack of financial statements to a complete failure of any internal controls or governance whatsoever,” wrote Ray. “Although our investigation is ongoing and detailed findings will have to await its conclusion, the FTX Group’s collapse appears to stem from the absolute concentration of control in the hands of 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.”
Federal prosecutors have been investigating the company for months, alongside Bankman-Fried, in connection to money laundering, but the more-recent allegations of commingling and mishandling of customers’ assets prompted investigators to shift the focus of their investigation. Bankman-Fried is set to be charged with wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy and money laundering.
NEW: John J. Ray III, who is overseeing FTX amid bankruptcy, has shared his planned testimony for tomorrow’s major House hearing. Says “never in my career have I seen such an utter failure of corporate controls at every level of an organization”https://t.co/46neomQPKB
— Tony Romm (@TonyRomm) December 12, 2022
Bankman-Fried alleged on Dec. 1 that FTX US — the company’s U.S. branch — was completely solvent, and that he was unsure why U.S. customers were no longer able to withdraw money from their accounts. Ray alleged that FTX US was not an independent entity from FTX’s international operations, making bankruptcy “necessary both to avoid a ‘run on the bank’ at FTX US and to allow our team the time to identify and protect its assets.”
In addition, Alameda engaged in risky trades on third party exchanges and FTX loaned more than $1 billion to various insiders within the company, according to Ray.
The company also failed to properly store security credentials with sufficient encryption, granted Alameda essentially unlimited borrowing of funds from FTX, failed to document roughly 500 transactions made with company assets and a complete lack of audited financial records, Ray alleged.
FTX did not respond to the Daily Caller News Foundation’s request for comment.
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