Customer assets at FTX were commingled with those of Alameda Research, exposing clients to significant losses.
Poor management practices and inexperienced leaders led to FTX’s implosion, the crypto exchange’s new chief executive, John Ray, told United States legislators, shortly after regulators charged founder Sam Bankman-Fried with defrauding investors.
“The FTX group’s collapse appears to stem from absolute concentration of control in the hands of a small group of grossly inexperienced, non-sophisticated individuals,” Ray told the US House of Representatives Financial Services Committee on Tuesday.
Ray, who was named CEO after Bankman-Fried stepped down and the company filed for bankruptcy on November 11, also said there was virtually no distinction between the operations of FTX and Alameda Research – Bankman-Fried’s crypto trading firm, which maintained close ties with his exchange.
“I’ve just never seen an utter lack of record keeping – absolutely no internal controls whatsoever,” he said.
A representative for Bankman-Fried did not immediately respond to a request for comment on Ray’s testimony.
Ray said he was shocked to learn FTX was using Quickbooks – software geared towards small and mid-size businesses – for accounting and approving invoices via Slack messages.
Asked why he had testified that he did not believe the audited financial statements were reliable, Ray said: “We’ve lost $8bn of customer money. So by definition, I don’t trust a single piece of paper in this organisation.”
It will take weeks, perhaps months, to secure all the group’s assets, Ray said, warning it would be a lengthy process.
“At the end of the day, we’re not going to be able to recover all the losses here,” he said.
Bankman-Fried was arrested Monday evening in the Bahamas and appeared before a magistrate Tuesday. US federal prosecutors on Tuesday alleged he committed fraud and violated campaign finance laws. The former FTX CEO also faces additional charges by US regulators.
The Bahamas attorney-general’s office said it expects Bankman-Fried will be extradited to the US.
During Tuesday’s hearing, Bankman-Fried indicated to a magistrate judge in the Bahamas that he would fight extradition, according to a Reuters news agency witness.
Ray said FTX would cooperate in turning over information to authorities and that he had already shared some findings of his internal investigation into the collapse of the company with the US Securities and Exchange Commission (SEC) and federal prosecutors.
Since he took over as CEO, Ray said he has established that customer assets at FTX were commingled with those of Alameda Research. Client funds were used to engage in margin trading, which exposed customers to significant losses, he said, calling the practice “old-fashioned embezzlement”.
Ray said in his testimony on Tuesday that he had hired a new chief financial officer, a head of human resources and administration, and a head of information technology. He also appointed a board of directors, which is chaired by former judge Joseph Farnan.
Ray also told legislators that FTX will look to sell its crypto derivatives exchange LedgerX, which is regulated by the US Commodity Futures Trading Commission and was not included in the bankruptcy proceedings.
Bankman-Fried had also been scheduled to appear before the committee on Tuesday and his testimony had been highly anticipated.
“Unfortunately, the timing of his arrest denies the public the opportunity to get the answers they deserve,” said the panel’s chair, Democratic US Representative Maxine Waters.
“Rest assured that this committee will not stop until we uncover the full truth behind the collapse of FTX just a few months ago.”
Representative Patrick McHenry, the ranking Republican on the House Financial Services Committee, described “old-school fraud” behind the fancy trappings of cryptocurrency trading at FTX.
“Fraud and fraudsters have been around just as long as that phrase has been around,” he said. “It appears to be the same old-school fraud – just using new technology.”