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(Kitco News) – The United States government’s investigations of former FTX CEO Sam Bankman-Fried ramped up over the last two days, with both Congressional and Senate hearings taking place even as new allegations implicated SBF and Binance CEO Changpeng Zhao in the collapse of the exchange.
On Tuesday, new FTX CEO John Ray testified before the House Committee on Financial Services into the collapse of SBF’s former exchange.
“The FTX Group’s collapse appears to stem from the absolute concentration of control in the hands of a very 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 that is entrusted with other people’s money or assets,” Ray said.
Among the “unacceptable management practices” identified to date, Ray said FTX computers gave senior management access to customer assets without security controls, private keys to hundreds of millions in crypto assets were stored without security controls or encryption, and sister firm Alameda Research could access customer funds without any effective limits.
Other concerns highlighted by Ray include the fact that assets belonging to different companies and divisions within the FTX group were commingled, documentation for nearly 500 investments made by FTX were missing altogether, there were no audited or reliable financial statements, and no financial or risk management functions were in place.
The new CEO also alleged that there was no independent governance throughout the FTX Group, nor any distinction in governance between FTX and Alameda, and that there was “no way” SBF was unaware of Alameda’s ‘backdoor’ access to FTX customer funds. “We’ve lost $8 billion of customer money,” Ray said. “I don’t trust a single piece of paper in this organization.”
Wednesday saw the first Senate hearing into the implosion of the exchange, where the focus shifted to potential regulation of digital assets.
There were some new allegations made about the cause of FTX’s collapse as well. Former FTX spokesperson Kevin O’Leary claimed that Bankman-Fried told him during a phone conversation that $2-3 billion worth of company funds were used to buy back FTX shares from Binance because CZ refused to participate in the disclosures to regulators that FTX needed to perform to get licensed in different markets.
O’Leary also said that one week before FTX went bankrupt, CZ publicly declared he would sell all $500 million of Binance’s holdings of FTT, knowing it would drive down the price and harm the exchange. “It was a war between these two,” O’Leary said.
O’Leary’s attempt to place the blame for FTX’s bankruptcy squarely on Binance contradicted Ray’s assertion made before Congress that FTX was insolvent before any actions taken by Binance.
New information also emerged from government court filings. The CFTC claimed that FTX created a fake ‘Korean’ customer account which was used to hide Alameda’s mounting debts to the exchange, which ultimately rose to over $8 billion. The CFTC said SBF was aware of the account and its purpose, referring to it as “our Korean friend’s account” in internal correspondence. The account had the same privileges as Alameda’s other accounts, including exemptions from FTX’s stop-loss auto-liquidation features and other risk management policies.
A Bahamas court filing dated Nov. 11 but filed Dec. 14 showed that FTX co-CEO Ryan Salame was the insider who tipped off Bahamian regulators that the exchange was misappropriating FTX customer funds and sending them to Alameda Research.
On Nov. 9, Salame told the Securities Commission of the Bahamas (SCB) that only three people could have authorized transfers of customer funds to Alameda: Bankman-Fried, FTX co-founder Zixiao “Gary” Wang, and engineering director Nishad Singh.
“The Commission understood Mr. Salame as advising that the transfer of clients’ assets in this manner was contrary to the normal corporate governance and operations of FTX Digital,” the filing noted. “Put simply, that such transfers were not allowed and therefore may constitute misappropriation, theft, fraud or some other crime.”
On Nov. 10, the SCB froze FTX assets, suspended their license and appointed a provisional liquidator to oversee bankruptcy proceedings.
Sam Bankman-Fried was denied bail following his arrest on Dec. 12 and is being held by the Bahamas Department of Correctional Services (BDOCS). He is next scheduled to appear in court on Feb. 8, 2023 to face extradition to the United States.
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