{"id":24162,"date":"2022-11-17T20:19:54","date_gmt":"2022-11-17T20:19:54","guid":{"rendered":"https:\/\/davidgerard.co.uk\/blockchain\/?p=24162"},"modified":"2022-11-18T16:59:08","modified_gmt":"2022-11-18T16:59:08","slug":"declaration-of-john-jay-ray-ftx-is-worse-than-enron","status":"publish","type":"post","link":"https:\/\/davidgerard.co.uk\/blockchain\/2022\/11\/17\/declaration-of-john-jay-ray-ftx-is-worse-than-enron\/","title":{"rendered":"Declaration of John Jay Ray \u2014 FTX is worse than Enron"},"content":{"rendered":"<p><i>By <b>Amy Castor<\/b> and <b>David Gerard<\/b><\/i><\/p>\n<ul>\n<li>Send us money! Our work is funded by our Patreons \u2014 here\u2019s<a href=\"https:\/\/www.patreon.com\/amycastor\"> Amy\u2019s<\/a>, and here\u2019s<a href=\"https:\/\/www.patreon.com\/davidgerard\"> David\u2019s<\/a>. Your contributions help greatly!<\/li>\n<\/ul>\n<p><a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2022\/11\/13\/ftx-files-for-bankruptcy-and-the-fallout-begins-whos-next\/\">FTX was utterly screwed, and they knew it.<\/a> Sam Bankman-Fried agreed to step down, finally convinced \u2014 at 4:30 a.m. local time on Friday November 11, so you can guess it was one heck of a full and frank exchange of views \u2014 by his lawyers and his own father, Joseph Bankman of Stanford Law School.<\/p>\n<p>SBF\u2019s replacement was the best possible adult to bring into in the room: John Jay Ray III, the guy who cleaned up Enron as well as many other financial disaster areas.<\/p>\n<p>As new CEO of the wreckage, Ray filed for voluntary Chapter 11 in Delaware just hours later on the same Friday.<\/p>\n<p>Ray filed his first-day declaration with the bankruptcy court on Thursday November 17. And it\u2019s <i>amazing:<\/i> [<a href=\"https:\/\/pacer-documents.s3.amazonaws.com\/33\/188450\/042020648197.pdf\"><i>Declaration<\/i><\/a><i>, PDF<\/i>]<\/p>\n<blockquote><p>Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. 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.<\/p><\/blockquote>\n<p>Ray is not the police or a prosecutor, and he can\u2019t charge anyone. But he knows how to point out events and circumstances that may warrant the attention of the law. Ray considers one of his goals to be a \u201ccomprehensive, transparent and deliberate investigation into claims against Mr Samuel Bankman-Fried.\u201d<\/p>\n<p>Ray becomes CEO of FTX at 4:30 a.m. Hours later, he files for Chapter 11. Hours after that, he watches in horror as $372 million in funds gets siphoned off the exchange by hackers. Welcome to crypto!<\/p>\n<p>&nbsp;<\/p>\n<p><a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2022\/11\/17\/declaration-of-john-jay-ray-ftx-is-worse-than-enron\/ftx-defeats-enron\/\" rel=\"attachment wp-att-24164\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-24164\" src=\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2022\/11\/ftx-defeats-enron.jpg\" alt=\"\" width=\"510\" height=\"315\" srcset=\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2022\/11\/ftx-defeats-enron.jpg 680w, https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2022\/11\/ftx-defeats-enron-300x185.jpg 300w, https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2022\/11\/ftx-defeats-enron-348x215.jpg 348w\" sizes=\"auto, (max-width: 510px) 100vw, 510px\" \/><\/a><\/p>\n<p>&nbsp;<\/p>\n<h3>Four silos<\/h3>\n<p>Ray describes Sam Bankman-Fried\u2019s empire as four silos. All of the numbers come from unaudited accounts as of September 30, 2022. Ray doesn\u2019t trust any of the numbers because SBF prepared them.<\/p>\n<p>Just because Ray separates the silos does not mean the companies were separately controlled. FTX and Alameda, for example, had no effective separation of control. As <a href=\"https:\/\/davidgerard.co.uk\/blockchain\/2022\/11\/13\/ftx-files-for-bankruptcy-and-the-fallout-begins-whos-next\/\">we wrote earlier,<\/a> using customer funds to prop up your trading desk is illegal in nearly every jurisdiction, for good reason.<\/p>\n<p><b>WRS silo<\/b> \u2014 This silo contains FTX US. It <i>should<\/i> be solvent but SBF didn&#8217;t include customer liabilities on the balance sheet, which shows $1.36 billion in total assets.<\/p>\n<p>Frances Coppola notes this is standard for exchanges because customer assets don&#8217;t belong to the exchange. The SEC has issued guidance saying exchanges <i>should<\/i> report customer assets on their own balance sheet with matching &#8220;safeguarding&#8221; assets \u2014 but the guidance is advisory only, and FTX certainly didn\u2019t bother. [<a href=\"https:\/\/twitter.com\/Frances_Coppola\/status\/1593269085655138304\"><i>Twitter<\/i><\/a>]<\/p>\n<p><b>Alameda silo<\/b> \u2014 The accounts show this silo as $8 billion in credit; but again, Ray doesn\u2019t trust these numbers.<\/p>\n<p><b>Ventures silo<\/b> \u2014 This group includes Clifton Bay Investments, Island Bay Ventures, FTX Ventures, and so on. Clifton Bay has assets of $1.52 billion; FTX Ventures shows assets of $493 million. \u201cI have not been able to locate financial statements for Island Bay Ventures Inc.\u201d Assets only. Liabilities are not included.<\/p>\n<p><b>Dotcom silo<\/b> \u2014 This is FTX.com, the main business. SBF claimed that around $15 billion of assets were on the platform by the end of 2021, and \u201cmillions\u201d of registered users. The September 30 balance sheet shows total assets of $2.25 billion. Also, a lot of the assets are FTX\u2019s own worthless magic beans. Liabilities are not listed.<\/p>\n<p>Ray notes that a lot of the smaller FTX subsidiary businesses are in fact solvent, and they&#8217;ll try to keep those going.<\/p>\n<p>The new CEO is installing new directors for each silo \u2014 all restructuring experts. We expect to be using the phrase \u201cfinancial hazmat team\u201d a lot. FTX will get \u201cappropriate corporate governance for the first time,\u201d says Ray.<\/p>\n<h3>Where\u2019s the cash?<\/h3>\n<p>The many FTX business have stashes of cash around the world. If you think FTX kept track of this stuff in any sensible way, you\u2019d be incorrect.<\/p>\n<p>FTX never had any official audits. They did their own accounting on each of the silos \u2014 supplying the numbers that Ray doesn\u2019t trust.<\/p>\n<p>FTX-as-was did use one actual audit firm, Prager Metis, to give them numbers for the Dotcom Silo. Ray notes that Prager Metis\u2019s website proudly states\u00a0 they are the \u201cfirst-ever CPA firm to officially open its Metaverse headquarters in the metaverse platform Decentraland.\u201d LOL.<\/p>\n<p>Ray has \u201csubstantial concerns\u201d as to the accounts, \u201cespecially with respect to the Dotcom Silo.\u201d<\/p>\n<p>How well was the cash managed? Very professionally:<\/p>\n<blockquote><p>Employees of the FTX Group submitted payment requests through an on-line \u2018chat\u2019 platform where a disparate group of supervisors approved disbursements by responding with personalized emojis.<\/p>\n<p>&#8230; Effective cash management also requires liquidity forecasting, which I understand was also generally absent from the FTX Group historically.<\/p><\/blockquote>\n<h3>Who works here, anyway?<\/h3>\n<p>Ray\u2019s team have been unable to prepare a complete list of who worked for the FTX Group as of the petition date, let alone the terms of their employment.<\/p>\n<p>Ray has the core group of non-executive employees \u2014 who SBF has just screwed over, and they are <i>not<\/i> happy [<a href=\"https:\/\/www.wsj.com\/articles\/ftxs-collapse-leaves-employees-sick-with-anger-11668603708\"><i>WSJ<\/i><\/a><i>, paywalled<\/i>] \u2014 and is keeping them on so they can nail SBF to the wall. He is very thankful for their \u201cextraordinary efforts\u201d to this end.<\/p>\n<h3>Where are the cryptos?<\/h3>\n<p>FTX was sloppy as hell with securing the crypto assets:<\/p>\n<blockquote><p>Unacceptable management practices included the use of an unsecured group email account as the root user to access confidential private keys and critically sensitive data for the FTX Group companies around the world, the absence of daily reconciliation of positions on the blockchain, the use of software to conceal the misuse of customer funds, the secret exemption of Alameda from certain aspects of FTX.com\u2019s auto-liquidation protocol, and the absence of independent governance as between Alameda (owned 90% by Mr. Bankman-Fried and 10% by Mr. Wang) and the Dotcom Silo (in which third parties had invested).<\/p><\/blockquote>\n<p>Ray has hired Chainalysis, Kroll, and a \u201cconfidential cybersecurity firm\u201d to work out who transferred assets out after the bankruptcy filing \u2014 and also \u201cwhat may be very substantial transfers of Debtor property in the days, weeks and months prior to the Petition Date.\u201d<\/p>\n<h3>Writing things down<\/h3>\n<p>When you\u2019re trading billions of dollars in crypto, writing stuff down is annoying and tedious. In accordance with the opposite of all financial good practice, SBF told his staff to use disappearing messages:<\/p>\n<blockquote><p>Mr. Bankman-Fried often communicated by using applications that were set to auto-delete after a short period of time, and encouraged employees to do the same. The Debtors are writing things down.<\/p><\/blockquote>\n<p>Ray\u2019s team are attempting to create a balance sheet and financial statements for Alameda and the ventures arm \u201cbottom-up\u201d by using what records they have of cash transactions.<\/p>\n<h3>Calling the cops<\/h3>\n<p>Ray has hired a detective team. He&#8217;s specifically brought on board a pile of cops:<\/p>\n<blockquote><p>The investigative effort underway is led by myself and a team at Sullivan &amp; Cromwell that reports directly to me, including a former Director of Enforcement at the SEC, a former Director of Enforcement at the CFTC, and a former Chief of the Complex Frauds and Cybercrime Unit of the United States Attorney\u2019s Office for the Southern District of New York.<\/p><\/blockquote>\n<p>\u201cFinally, and critically, the Debtors have made clear to employees and the public that Mr. Bankman-Fried is not employed by the Debtors and does not speak for them. Mr. Bankman-Fried, currently in the Bahamas, continues to make erratic and misleading public statements.\u201d Ray has also tweeted to this effect. [<a href=\"https:\/\/twitter.com\/FTX_Official\/status\/1592985707819462657\"><i>Twitter<\/i><\/a>]<\/p>\n<h3>Emergency motion to consolidate bankruptcies<\/h3>\n<p>FTX Digital Markets Ltd., the company\u2019s Bahamas subsidiary, filed a chapter 15 foreign bankruptcy in the Southern District of New York. Ray\u2019s team is asking the court to move the chapter 15 case to Delaware to coordinate with the chapter 11 proceeding \u2014 because having two courts makes absolutely no sense. This is an <i>emergency<\/i> motion: [<a href=\"https:\/\/pacer-documents.s3.amazonaws.com\/33\/188450\/042120648186.pdf\"><i>Motion<\/i><\/a><i>, PDF<\/i>]<\/p>\n<blockquote><p>It is critical to the efforts to end the chaos and to ensure that assets can be secured and marshalled in an orderly process that all proceedings related to the Debtors and their affiliates \u2013 including the Chapter 15 Case \u2013 take place in a single venue. That venue is this Court, the United States Bankruptcy Court for the District of Delaware.<\/p><\/blockquote>\n<p>Ray thinks the filing in SDNY was shenanigans by SBF and unnamed agents of the Bahamas government:<\/p>\n<blockquote><p>The filing of the Chapter 15 Case without advance notice and in the SDNY is a blatant attempt to avoid the supervision of this Court and to keep FTX DM isolated from the administration of the rest of the Debtors, which constitute the vast majority of the remainder of the FTX group.<\/p><\/blockquote>\n<p>Ray quotes text messages between SBF and Vox reporter Kelsey Piper the day before, which Piper published in full, as evidence of SBF\u2019s bad faith. [<a href=\"https:\/\/www.vox.com\/future-perfect\/23462333\/sam-bankman-fried-ftx-cryptocurrency-effective-altruism-crypto-bahamas-philanthropy\"><i>Vox<\/i><\/a>]<\/p>\n<p>(Piper is herself in the same Effective Altruism quantitative-charity circles as SBF; but you can see why Piper took these messages to her editor, and why her editor said yes to running them.)<\/p>\n<p>SBF disclosed to Piper his goal to \u201cwin a jurisdictional battle vs. Delaware\u201d to have any proceedings occur in the Bahamas. He considers the Chapter 11 filing to be the worst advice he\u2019d ever taken and that \u201ceverything would be ~70% fixed right now\u201d if he hadn\u2019t done that. We remain skeptical.<\/p>\n<p>Ray was extremely unhappy with the weird transfers of funds from FTX to Bahamas residents after the bankruptcy.\u00a0 The Securities Commission of the Bahamas previously denied that it had authorized or encouraged funds to be removed from FTX. [<a href=\"https:\/\/twitter.com\/SCBgov_bs\/status\/1591577646005379074\/photo\/1\"><i>Twitter<\/i><\/a>]<\/p>\n<p>Ray thinks the shenanigans were sanctioned at a high level:<\/p>\n<blockquote><p>The Debtors thus have credible evidence that the Bahamian government is responsible for directing unauthorized access to the Debtors\u2019 systems for the purpose of obtaining digital assets of the Debtors\u2014that took place after the commencement of these cases.<\/p><\/blockquote>\n<p>The Emergency Motion will be heard <s>Monday November 21 at 10:00 a.m. ET.<\/s> [<em><a href=\"https:\/\/storage.courtlistener.com\/recap\/gov.uscourts.deb.188450\/gov.uscourts.deb.188450.29.0.pdf\">Order<\/a>, PDF<\/em>] <strong>Update:<\/strong> now to be heard Tuesday November 22 at 11:00 a.m. ET. [<em><a href=\"https:\/\/amyhcastor.files.wordpress.com\/2022\/11\/ftx-chapter-11-doc-32.pdf\">Order<\/a>, PDF<\/em>]<\/p>\n<p>The Ray declaration and motion should put paid to the sudden blast of puff pieces in newspapers who should know better about SBF being a little <a href=\"https:\/\/www.urbandictionary.com\/define.php?term=uwu%20smol%20bean\">uwu smol bean<\/a> birthday boy who is just bad at counting. But it probably won\u2019t.<\/p>\n<p><a href=\"https:\/\/amycastor.com\/2019\/02\/12\/how-the-hell-did-we-get-here-a-timeline-of-quadrigacx-events\/\">What happened at QuadrigaCX<\/a> looks mild in comparison to the box of snakes that Ray laid out in his declaration and motion. This is just the tip of this iceberg.<\/p>\n<p>Regulators have been asleep since 2017, when they had full opportunity to shut\u00a0 down this sort of garbage. Maybe Ray\u2019s declaration will help wake them up.<\/p>\n<p>&nbsp;<\/p>\n<blockquote class=\"twitter-tweet\" data-width=\"550\" data-dnt=\"true\">\n<p lang=\"en\" dir=\"ltr\">All the Wunderkinds should really be forced to take a GAAP year.<\/p>\n<p>&mdash; Karthik Sankaran (@RajaKorman) <a href=\"https:\/\/twitter.com\/RajaKorman\/status\/1593304944722866177?ref_src=twsrc%5Etfw\">November 17, 2022<\/a><\/p><\/blockquote>\n<p><script async src=\"https:\/\/platform.twitter.com\/widgets.js\" charset=\"utf-8\"><\/script><\/p>\n<br><br><div align=\"center\"><p><a href=\"https:\/\/www.patreon.com\/bePatron?u=8420236\"><img src=\"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2021\/10\/become_a_patron_button.svg\" alt=\"Become a Patron!\" title=\"Become a Patron!\" width=217 height=51><\/a><br><p style=\"align:center;\" class=\"patreon-badge\"><i>Your subscriptions keep this site going. <a href=\"https:\/\/www.patreon.com\/bePatron?u=8420236\">Sign up today!<\/a><\/i><\/p><\/div>","protected":false},"excerpt":{"rendered":"<p>&#8220;Never in my career have I seen such a complete failure of corporate controls.&#8221;<\/p>\n","protected":false},"author":1,"featured_media":24164,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"inline_featured_image":false,"jetpack_post_was_ever_published":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[1],"tags":[1798,3315,2491],"class_list":["post-24162","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorised","tag-ftx","tag-john-jay-ray","tag-sam-bankman-fried"],"jetpack_featured_media_url":"https:\/\/davidgerard.co.uk\/blockchain\/wp-content\/uploads\/2022\/11\/ftx-defeats-enron.jpg","jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/24162","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/comments?post=24162"}],"version-history":[{"count":21,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/24162\/revisions"}],"predecessor-version":[{"id":24184,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/posts\/24162\/revisions\/24184"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/media\/24164"}],"wp:attachment":[{"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/media?parent=24162"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/categories?post=24162"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/davidgerard.co.uk\/blockchain\/wp-json\/wp\/v2\/tags?post=24162"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}