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Even Enron can’t compare to the mess at FTX


The thing that’s under-appreciated about lawyers — largely because they are so annoying — is that they are also writers and often talented ones. And so, in the spirit of literary appreciation, let’s all do a close read of the absolute banger filed today by John J. Ray III in the FTX bankruptcy case.

Who’s Ray? He’s the guy running FTX now, and in the filing, he writes:

I have over 40 years of legal and restructuring experience. I have been the Chief Restructuring Officer or Chief Executive Officer in several of the largest corporate failures in history. I have supervised situations involving allegations of criminal activity and malfeasance (Enron). I have supervised situations involving novel financial structures (Enron and Residential Capital) and cross-border asset recovery and maximization (Nortel and Overseas Shipholding). Nearly every situation in which I have been involved has been characterized by defects of some sort in internal controls, regulatory compliance, human resources and systems integrity.

Quite the windup. Here’s how he pays it off, emphasis mine:

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.

The Enron guy says it’s worse than Enron. Enron.

Okay, but what does he think of Alameda Research? Well, it’s not promising:

Alameda Research LLC prepared consolidated financial statements on a quarterly basis. To my knowledge, none of these financial statements have been audited. The September 30, 2022 balance sheet for the Alameda Silo shows $13.46 billion in total assets as of its date. However, because this balance sheet was unaudited and produced while the Debtors were controlled by Mr. Bankman-Fried, I do not have confidence in it and the information herein may not be correct as of the date stated.

Emphasis mine, here and throughout. What about the ventures arm? Well, Ray isn’t confident in those balance sheets, either, for the same reason. But my favorite part is that he can’t find financial statements for one of the entities used to make venture investments, Island Bay Ventures.

How big is FTX dot com? Hard to know. Ray is more polite here about his confidence in Bankman-Fried’s representations:

Mr. Bankman-Fried claimed that, by the end of 2021, around $15 billion of assets were on the platform, which according to him handled approximately 10% of global volume for crypto trading at the time. Mr. Bankman-Fried also claimed that FTX.com, as of July 2022, had “millions” of registered users. These figures have not been verified by my team.

I mean, one very funny outcome would be to discover Bankman-Fried had also been lying this whole time about how many people were using FTX. I personally would be very happy and relieved to find out fewer retail investors got ripped off!

Those of you who hate meetings will find this relatable:

Many of the companies in the FTX Group, especially those organized in Antigua and the Bahamas, did not have appropriate corporate governance. I understand that many entities, for example, never had board meetings.

Anyway, there’s a new board, which presumably will meet. A lot of them are experts on distressed companies. How did FTX do with its cash?

The FTX Group did not maintain centralized control of its cash. Cash management procedural failures included the absence of an accurate list of bank accounts and account signatories, as well as insufficient attention to the creditworthiness of banking partners around the world.

What! They what! I’m… They don’t have an accurate list of their bank accounts!!! I’m sorry, how is that even possible? Who was in charge here? What were they doing? Oh my god. So, uh, “because of historical cash management failures, the Debtors do not yet know the exact amount of cash that the FTX Group held as of the Petition Date.”

We have now reached the point where we need to talk about FTX’s auditors, and boy, are they something. One of the auditors was “Prager Metis,” a firm with which I am not familiar and whose website indicates that they are the “first-ever CPA firm to officially open its Metaverse headquarters in the metaverse platform Decentraland.” You cannot make this shit up! Anyway, Ray has “substantial concerns” about the audited financial statements, especially those audited by the Decentraland-friendly firm.

Okay, so we don’t know about the balance statements or the bank accounts. Surely we can figure out who worked there, though?

The FTX Group’s approach to human resources combined employees of various entities and outside contractors, with unclear records and lines of responsibility. At this time, the Debtors have been unable to prepare a complete list of who worked for the FTX Group as of the Petition Date, or the terms of their employment. Repeated attempts to locate certain presumed employees to confirm their status have been unsuccessful to date.

ksjrhtyakewrtjhwealkewkjweatktwejtwhwksdlthwekpahu PLEASE SEND HELP.

I’m just… literally, I do not know what to say about this, and the hits keep coming for some reason. Payments requests were submitted “through an on-line ‘chat’ platform where a disparate group of supervisors approved disbursements by responding with personalized emojis.” Personalized emojis!!!!

How did FTX keep its books on digital assets? Trick question! They didn’t keep books at all! And somehow, improbably, the situation is worse than that, even?

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’s 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).

Look, I have been shrieking at my computer a lot lately, but reading that paragraph did make me scream! You will be unsurprised to learn that Ray has not located all of the digital assets yet. He has called in forensic analysts to figure it all out. Holy shit, dude.

Ray is also pretty sympathetic to FTX employees, who appeared to be unaware of all this chaos. “Indeed, I believe some of the people most hurt by these events are current and former employees and executives, whose personal investments and reputations have suffered,” he writes. Woof.

Anyway, “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.” Look, I understand this business was run by 12-year-olds, but this is a red flag!!! You need to write things down!!!

But honestly, my favorite part might be near the end. John Ray has had enough of Sam Bankman-Fried’s shit! He is fed up! How do I know? Well:

Finally, 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. Mr. Bankman-Fried, whose connections and financial holdings in the Bahamas remain unclear to me, recently stated to a reporter on Twitter: “F*** regulators they make everything worse” and suggested the next step for him was to “win a jurisdictional battle vs. Delaware”.

Man, I am not a lawyer, but this does read like, “Bring it on, little bitch.”

Here’s the full document, which you can read for yourself:



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