The liquidators picking over the remains of FTX have released their first formal report into the collapse of Sam Bankman-Fried's empire – and it somehow appears things are even worse than was initially believed.
The 39-page dossier [PDF] details an organization with little to no oversight of its own operations, and leadership that stifled dissent, commingled funds, lied to investors and the public, and routinely misplaced millions of dollars belonging to customers.
Who is SBF... Bankman-Fried co-founded cryptocurrency exchange FTX and served as its CEO. He also cofounded Alameda Research, a hedge fund intertwined with FTX. SBF stepped down late last year and has been charged with fraud over allegations FTX and Alameda, among other things, siphoned billions in people's deposits to fund luxury lifestyles, invest in businesses, and gamble on digital assets. He denies any wrongdoing. A team of liquidators is now in control of the now-imploded FTX, which has filed for bankruptcy.
In one internal communication included in the report, Bankman-Fried made light of the fact that FTX subsidiary Alameda Research was unauditable because even its leaders could only "ballpark" the org's balance sheets.
"We sometimes find $50m of assets lying around that we lost track of; such is life," SBF wrote.
FTX lacked any real form of management or governance oversight, the report claims, stating that SBF, former FTX engineering lead Nishad Singh, and FTX cofounder and CTO Gary Wang were the only ones with any governance capabilities.
"Board oversight … was effectively nonexistent," the report states, adding that FTX didn't have any internal audit functions or employees with experience in finance, accounting, human resources, or cybersecurity in place to serve as a check to the SBF-Singh-Wang leadership triad.
To make matters worse, the report claims that when high-ranking officials in the company attempted to impose oversight structures or rules for delegation of authority, some were rebuffed and others fired outright. Things were so bad that "at the time of the bankruptcy filing, the FTX Group did not even have current and complete lists of who its employees were," the report concluded.
FTX also lacked any form of internal policies, necessitating a scramble to "cobble together purported policies that could be shown to auditors" in late 2020. The FTX Group also lacked any enterprise resource planning software, instead relying on QuickBooks and "a hodgepodge of Google documents, Slack communications, shared drives, and Excel spreadsheets and other non-enterprise solutions to manage their assets and liabilities."
The report said FTX's debtors identified a number of "extensive deficiencies in the FTX Group's controls with respect to digital asset management, information security, and cybersecurity" that ultimately led to it exposing customer crypto funds to "a grave risk of loss, misuse and compromise," not unlike the November 2022 security breach that, or so it's claimed, saw someone skim hundreds of millions in crypto from the company's accounts.
Some of the extensive deficiencies included storing "virtually all funds" in hot wallets, those being cryptocurrency wallets effectively connected to the internet and not isolated from potential theft. Private keys to FTX Group crypto assets were stored in a mix of "over one thousand [AWS] servers and related system architecture."
All of its compounding management failures, the debtors said, placed customer assets and funds at risk "from the outset." The report states that FTX's liquidators have recovered and secured approximately $1.4 billion of crypto-assets and have identified an additional $1.7 billion they are still working to recover.
The review of FTX's finances is ongoing, the defunct biz said in a press release, and additional reports are expected as Chapter 11 bankruptcy processes involving the company continue. An omnibus hearing of those proceedings is scheduled for this Wednesday. ®
Source: The register