John Jay Ray III, FTX’s current CEO, has filed a declaration in support of the crypto company’s bankruptcy proceedings. The court document revealed questionable business practices within FTX.
In the financial industry, John is known for masterfully handling the bankruptcy proceedings of Enron, a big energy company that folded in 2001. He has over 40 years of Legal and restructuring experience. He also worked with the cross-border recovery of assets involving Nortel and Overseas Shipbuilding.
Corporate Control Within FTX is Non-existent
Paragraph 5 of the declaration revealed that there was a complete failure of corporate control and the absence of credible financial information.
He further stated that” 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.”. Mr. Ray is basically saying that FTX was controlled by a few who do not know what they were doing.
FTX has no Reliable Employee Record.
Attempts to retrieve a complete list of people who worked for FTX have been unsuccessful. According to paragraph 59, “The FTX Group’s approach to human resources combined employees of various entities and outside contractors, with unclear records and lines of responsibility”. Any person who has worked for a reputable company knows that the Human resources department has all the pertinent employee records, but FTX seemed to have decided that this is not important.
Employees Can Use FTX funds to Buy Properties Under Their Names
John stated that FTX did not have any disbursement control appropriate for a business enterprise. He found out that employees submitted payment requests via a chat platform where supervisors approved disbursements with emojis.
In paragraph 63, He also revealed that in the Bahamas, FTX employees and advisors were able to purchase homes and personal items without proper documentation. And some of these real estate properties were in the name of employees and advisors.
Alameda was Exempted from FTX’s Auto-liquidation Protocol
Any seasoned trader is taught to manage his risk and leverage properly to avoid liquidation of funds. Liquidation happens when collateralized assets are not enough to cover the amount borrowed. The trading platform will simply close the position to avoid any loss to the exchange. It seems like FTX is not following this and granted exemption to Alameda, its sister company.
Paragraph 65 states several unacceptable FTX management practices which included,” …the secret exemption of Alameda from certain aspects of FTX.com’s auto-liquidation protocol”. This type of exemption has the potential to wreck any portfolio, especially with over-leveraged positions
FTX Purges Communication Records
Any respectable company keeps meticulous records of transactions and official communications. This helps avoid any future misunderstanding and serves as a basis for any decision. But FTX CEO Sam Bankman-Fried (SBF) often communicated by using an application with automatically deletes his message after some time. He also encouraged his staff to do the same.
There are two major reasons why official communications are deleted. The first is to avoid leakage of sensitive information and to hide something. It is up to the reader’s imagination why FTX did this.
Was FTX a Company or a Club?
According to Investopedia, “Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled.” A good one involves balancing the interest of all stakeholders, which include shareholders, management, and the community. John Jay Ray III’s court filing showed us that this was not practiced in FTX.
John is a bankruptcy proceeding veteran, but for him to say that he has never seen such a complete failure of corporate control is an indication of how FTX was mismanaged. He further described the management as “inexperienced”, which is a word not supposed to be associated with multi-billion-dollar asset executives.
The company also does not keep records of employees and their job description. This is disturbing since this makes it make it hard to pinpoint the person responsible for a certain job. You certainly don’t want the wrong person handling a multi-billion dollar portfolio.
Company perks and bonuses are certainly nice, but FTX employees buying personal items and homes by using a corporate account is not good business practice. Corporate disbursements were also communicated and approved with emojis instead of formal approval. They might have been trying to streamline and make it fun for every employee, but investors who lost money will certainly not see it that way.
Alamedas exemption from auto-liquidation protocols will not be seen as anything but bad. Alameda CEO Caroline Ellison said in an interview that they “tend not to have stop losses (SL)” and being exempted by FTX from liquidation will probably explain the risky trading behavior.
We can only guess why FTX encouraged employees to use an app to delete all messages. Were they trying to safeguard sensitive information or to hide anomalous transactions?
Pieces of evidence gathered by John Jay Ray III revealed a company that was being managed like a recreational club instead of a multi-billion-dollar company. No Records, no process, no proper risk management, no accountability, and decision-making powers shared by a few. The small group of people who founded FTX did not set the proper foundation. When investors started to question FTX’s stability, the company quickly went down, and with it the money invested by people who taught that they were dealing with professionals.
Image: Pixabay
Read court document here
