Eduardo Munoz/Reuters
- FTX filed shockingly for Chapter 11 bankruptcy in November, after a week of a liquidity crisis.
- On Sunday, its debtors released their first report on the collapse of the crypto exchange.
- 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 to the US Bankruptcy Court for the District of Delaware, the debtors — which includes 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 misused corporate and customer funds, lied to third parties about their business, joked internally about their tendency to lose track of millions of dollars in assets, and thereby caused the FTX Group to collapse as swiftly as it had grown," the debtors wrote in their first report since the exchange's collapse in November.
"While the FTX Group's failure is novel in the unprecedented scale of harm it caused in a nascent industry, many of its 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 the same year, after a week of a liquidity crisis.
The crisis was followed by swift criminal cases against the company's top brass.
Sam Bankman-Fried, a high-profile cofounder of the exchange and former CEO, pleaded not guilty in the US government's criminal case against him and is scheduled for a trial in October. Gary Wang, another cofounder, and Caroline Ellison, former CEO of FTX subsidiary Alameda Research, have pleaded guilty and are working with prosecutors. Former engineering chief Nishad Singh also pleaded guilty.
The report was filed by John J. Ray III, the current CEO and chief restructuring officer at FTX, per a Sunday press release. The debtor's filing was being released "in the spirit of transparency that we promised since the beginning of the Chapter 11 process," Ray said.
Read further for the three key allegations from the debtors' report.
1. A lack of management and governance controls.
The report alleged the management and governance of FTX were largely limited to Bankman-Fried, Singh, and Wang.
For most parts, FTX also lacked independent or experienced personnel in finance, accounting, HR, and information security and "lacked any internal audit function whatsoever," the debtors stated in the filing. Board oversight was "effectively non-existent," they added.
The company also didn't have an organizational structure and at the time of its bankruptcy filing, did not even have a complete list of who its employees were, per the filing.
2. A lack of financial and accounting controls.
The report states that FTX relied on a small unnamed external accounting firm for nearly 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 of this appointment.
"There is no evidence that the FTX Group ever performed an evaluation of whether its outside accountants were appropriate for their role given the scale and complexity of the FTX Group's business, or whether they possessed sufficient expertise to account for the wide array of products in which the FTX Group transacted," per the exchange's debtors.
Another issue cited in the report was the submission of expenses and invoices on Slack, which were then approved with emoji. "These informal, ephemeral messaging systems were used to procure approvals for transfers in the tens of millions of dollars, leaving only informal records of such transfers, or no records at all," per the report.
3. A lack of digital asset management, information security, and cybersecurity controls.
The report also alleged FTX failed to put in place "basic, widely accepted" security controls to safeguard its crypto assets.
They include keeping almost all crypto assets in hot wallets that are connected to the internet, which makes them more susceptible to getting stolen.
It also did not effectively enforce using multi-factor authentication, or MFA, among its staff and corporate infrastructure. MFA requires users to provide two or more methods of authentication — such as the use of a password and a one-time passcode to a cell phone — to verify their identities to gain access to a system, per the report. In particular, it did not enforce multi-factor authentication for Google Workspace and its password management program.
"The deficiency is ironic given that the FTX Group recommended that customers use MFA on their own accounts, and Bankman-Fried, via Twitter, publicly stressed the importance of "2FA [Twofactor authentication]," a form of MFA, for crypto security.
FTX's debtors said they have "recovered 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."
A spokesperson for Bankman-Fried declined comment to Insider. Kroll, FTX's claims agent, as well as legal representatives for 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, U.S. Bankruptcy Court for the District of Delaware.