FTX, one of the largest crypto exchnages, went bankrupt recently due to a complete lack of corporate control. Sam Bankman Fried, the founder and the former CEO of the exchange, has also been arrested today in the Bahamas. So, today at 10:00 Am ET/8:30 PM IST, there is a live congress hearing on the FTX collapse, which will answer many questions. Since Sam was arrested, the current CEO of FTX, John J. Ray III, will be present in the hearing.
This is a live article, and we will keep adding updates with timestamps.
11: 08 AM ET: Sam wanted the SEC away from crypto
Sam Bankman Fried tried his best to keep the Securities and Exchange Commission away from the crypto industry and prevent any regulations. This was probably his way of preventing him from being caught.
10: 58 AM ET: Sam’s disrespectful testimony
Mr Clever asks John if he has read Sam’s testimony. And then says that the testimony is very ‘disrespectful’ and that he can’t even read them.
10: 54 AM ET: MR Green ask, “Is all this really a big mistake?”
John says they are currently investigating the entire incident and are not pointing any fingers or accusing anyone by putting on any labels.
10: 45 AM ET: Why is FTX the worst fraud in history?
John ray was asked why he described FTX as a complete failure of corporate controls. And he said, “That comment, it went to really, you know, one thing that we found, which, you know, every case is different. The challenges of every case are different. The issue I was speaking to here is that I’ve just never seen an utter lack of record keeping. Absolutely no internal controls whatsoever. And, of course, this case is then made difficult in that context when you’re dealing with technology.”
John even says that FTX is an even bigger fraud then Enron, whose bankruptcy he handled. He says, “The FTX group is unusual in the sense that, you know, I’ve done probably a dozen large, you know, scale bankruptcies over my career, you know, including Enron, of course. Every one of those entities had some financial problem or another. They have some characteristics that are in common. This one is unusual, and it’s unusual in a sense that literally, you know, there’s no record keeping whatsoever. It’s the absence of record keeping. Employees would communicate, you know, invoicing and expenses on slack, which is, you know, essentially a, you know, a way of communicating. For chat rooms, they use QuickBooks, a multibillion-dollar company using QuickBooks. Nothing against QuickBooks. It’s a very nice tool, just not for a multibillion-dollar company. There’s no independent board, right? We had one person really controlling this, no independent board.”
10: 40 AM ET: MR. McHenry questions John Ray
Mr McHnry says that John’s declaration separates the businesses into four silos. There was an international exchange called ftx.com again for non-us persons that invested in crypto. There was Alemeda, which is purely a crypto hedge fund which made other investments, venture capital type investments. And there’s a fourth entity which was purely investments.
SO McHenry asks who owns those four silos? and John replies that all those entities were under the control of Sam Bankman Fried.
10: 34 AM ET: Ms Waters questions John Ray
Ms Waters says, “Sam Bankman Fried appears to have tried to hide the linkages between the exchange and his hedge fund. Have you seen evidence of such a cover-up? Have you seen evidence that there was any independent governance of Alameda separate and apart from that of the exchange?”
John replies, “The operations of the FTX group were not segregated; it was really operated as one company. As a result, there’s no distinction virtually between the operations of the company and who controlled those operations.”
Ms Waters then says, “Well, Mr Ray another bankruptcy filing revealed that Mr Bankman freed personally received $1 billion, a $1 billion loan from Alameda Research. In a meeting with committee staff, Mr Bankman freed was unaware of the terms of the repayment interest details and could not confidently state which authorized the loan. He claimed that he reinvested this money into the exchange but knowingly chose to have the loan. You should take him rather than FTX to avoid directly connecting Alameda’s research to FTX. Can you elaborate on any significant findings in connection with this loan?”
John replies, “The loans that were given to Mr and been freed were not just one loan, it was numerous loans. Some of which were documented by individual promissory notes. There’s no description of what the purpose of the loan was in one sense for instance, he signed both as the issuer of the loan and the recipient of the loan. We have no information at this time as to what the purpose or the use of those funds were, and that is part of our investigation.”
Ms Waters then asks, “Did you find any business or operational activities that the entity entities jointly engaged in that you would consider inappropriate or detrimental to FTX? If so, could you give us an example?”
John says, “Certainly, thank you. You know, the operation of Alameda really depended on based on the way it was operated for the use of customer funds. That’s the major breakdown here of funds from ftx.com, which was the exchange for.”
Ms Waters ends her questioning asking, “Did FTX have sufficient risk management systems and controls to appropriately monitor any leverage the business took on and the interconnections it had with businesses like, again, Alameda?”
John replies, “There were virtually no internal controls and no separateness whatsoever.”
10:26 AM ET: John Ray’s testimony
John says that as soon he started digging into what was wrong with FTX, it became clear to him that Chapter 11 was the best course available to preserve any remaining value of FTX. Therefore, my first act as CEO has authorized the Chapter 11 filings.
He also says, “The FTX groups collapse appears to stem from absolute concentration of control in the hands of a 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 entrusted with other people’s money or assets.”
Some of the unacceptable management practices were the use of computer infrastructure that gave individuals and senior management access to systems that stored customers’ assets without security controls to prevent them from redirecting those assets. The private keys were stored with access to hundreds of millions of dollars in crypto assets without effective security controls or encryption.
10:23 AM ET: Failure of regulation from the SEC
Mr Mc Henry says, “I look forward to hearing from Mr Gensler early and often. And we’ll hear from him and how we can provide clarity on the application of our securities laws to trading platforms, which he has failed to do.”
10:13 AM ET: The court is live!
The chairwoman Ms Waters welcomes the current CEO of FTX, Mr John. She also says that today’s hearing will dive into Mr Ray’s findings, with the hosts piecing together the events that led to the collapse of FTX and the subsequent harm to millions of customers who put their trust in the platform.
They will also look into FTX’s deep ties with Alameda, a crypto hedge fund predominantly owned by the bank and that gambled away billions of dollars in customer assets there were inappropriately transferred.
