Failed crypto exchange FTX’s spectacular collapse was due to “hubris, incompetence and greed,” first debtor report says
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FTX shockingly filed for Chapter 11 bankruptcy in November, after a week of liquidity crunch.
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On Sunday, the debtors released their first report on the collapse of the crypto exchange.
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The report alleged a lack of controls, including in management, governance and accounting.
“Hubris, incompetence and greed” led to the implosion of crypto exchange FTX, the now-defunct entity’s debtors said in a Sunday report detailing control failures at the exchange.
In a 39-page strongly worded report filed with the US Bankruptcy Court for the District of Delaware, the debtors – which include FTX Trading and affiliates – further alleged that FTX lacked basic accounting and financial controls and was under the command of a small group of individuals who ” stifled dissent”.
“These individuals stifled dissent, commingled and misappropriated company and customer funds, lied to third parties about their business, joked internally about their tendency to lose track of millions of dollars in assets, thereby causing the FTX Group to collapse as quickly as it had done. grown,” the debtors wrote in their first report since the stock exchange’s collapse in November.
“While the FTX Group failure is novel in the unprecedented scale of damage it caused in a nascent industry, many of the root causes are familiar: hubris, incompetence and greed,” they said.
FTX’s implosion was shocking and swift. The exchange – worth $32 billion in early 2022 – filed for Chapter 11 bankruptcy on November 11 of that year, after a week of liquidity crisis.
The crisis was followed by swift criminal proceedings against the company’s top managers.
Sam Bankman-Fried, a high-profile co-founder of the exchange and former CEO, pleaded not guilty in the US government’s criminal case against him and is scheduled for trial in October. Gary Wang, another co-founder, and Caroline Ellison, former CEO of FTX subsidiary Alameda Research, have pleaded guilty and are cooperating with prosecutors. Former engineering chief Nishad Singh also pleaded guilty.
The report was filed by John J. Ray III, the current CEO and restructuring chief of FTX, according to a Sunday press release. The debtor’s filing was released “in the spirit of transparency that we promised since the beginning of the Chapter 11 process,” Ray said.
Read on for the three central claims from the debtor’s report.
1. Lack of management and control controls.
The report alleged that the leadership and management of FTX was largely limited to Bankman-Fried, Singh and Wang.
For the most part, FTX also lacked independent or experienced finance, accounting, HR and information security personnel, and “lacked any internal audit function whatsoever,” the debtors stated in the filing. Board oversight was “virtually non-existent,” they added.
The company also did not have an organizational structure and, at the time of the bankruptcy filing, did not even have a complete list of who its employees were, according to the filing.
2. Lack of financial and accounting control.
The report says FTX relied on a little-named external accounting firm for almost all of its basic accounting functions — and the accounting firm appeared to have no specialist knowledge of cryptos or international financial markets. The debtors did not provide further details about this appointment.
“There is no evidence that FTX Group ever carried out an evaluation of whether its external accountants were appropriate for their role given the scale and complexity of FTX Group’s business, or whether they had sufficient expertise to account for the wide range of products that The FTX group has completed transactions,” according to the exchange’s debtors.
Another issue cited in the report was submitting expenses and invoices on Slack, which were then approved with emoji. “These informal, ephemeral messaging systems were used to obtain approvals for transfers in the tens of millions of dollars, leaving only informal records of such transfers, or no records at all,” according to the report.
3. Lack of digital resource management, information security and cyber security controls.
The report also alleged that FTX failed to put in place “basic, widely accepted” security controls to protect its crypto assets.
They include keeping almost all crypto assets in hot wallets that are connected to the internet, making them more vulnerable to being stolen.
It also did not effectively enforce the use of multi-factor authentication, or MFA, among employees and corporate infrastructure. MFA requires users to provide two or more methods of authentication — such as using a password and a one-time code for a mobile phone — to verify their identity to access a system, according to the report. In particular, it did not enforce multi-factor authentication for Google Workspace and the password manager.
“The shortfall is ironic given that FTX Group recommended clients use MFA on their own accounts, and Bankman-Fried, via Twitter, publicly emphasized the importance of “2FA [Twofactor authentication],” a form of MFA, for crypto security.
FTX’s debtors said they have “obtained 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.”
Kroll, FTX’s indemnification agent, as well as legal representatives for Bankman-Fried, Wang, Ellison and Singh, did not immediately respond to Insider’s request for comment sent outside regular business hours.
The case is FTX Trading Ltd., 22-11068, US Bankruptcy Court for the District of Delaware.
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