Highlights of the House Committee Hearing on FTX

The US House Financial Services Committee’s first hearing on the FTX debacle was held yesterday. Sam Bankman-Fried (SBF), ex-CEO of the fallen crypto exchange, had earlier agreed to provide testimony at the hearing virtually, but in the latest developments, SBF has been arrested by the Bahamian authorities following notification from US officials that criminal charges have been filed against him. At the hearing, John J. Ray III, the new man at the helm at FTX who was appointed to oversee the bankruptcy of the firm, was present to provide testimony.

Congresswoman Maxine Waters, Chairwoman of the House Committee on Financial Services, gave the opening statement at the hearing. In her opening statement, she welcomed the newly-appointed CEO of FTX John Ray III to the hearing to testify before the committee. She said she was hopeful that the arrest of Sam Bankman-Fried means he will be held accountable for the fraud he has committed and the harm he has caused. Congresswoman Waters said the committee will not stop until the full truth behind the collapse of FTX is uncovered.

Shocking Revelations by the New FTX CEO

John Ray III took the stand and gave his opening speech in which he said he accepted the position of CEO of FTX in the early morning hours of November 11. “Immediately, it became clear to me that chapter 11 was the best course available to preserve any remaining value of FTX,” John Ray said. His first action as CEO of FTX was to authorize the chapter 11 bankruptcy filings.

John Ray said that the collapse of FTX appears to stem from the absolute concentration of control in the hands of grossly inexperienced 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. He identified some unacceptable management practices which include the use of computer infrastructure that gave individuals in senior management access to systems that stored customers’ assets without security controls to prevent these individuals in senior management from redirecting these assets. Another flawed management practice was the storage of private keys of wallets that held hundreds of millions of dollars of crypto-assets without effective security controls or encryption. Mr. Ray also mentioned the ability of Alameda Research, FTX’s trading arm, to borrow users’ funds held at FTX, used for Alameda’s trading activities. Other pre-implosion incompetences at FTX cited by the new CEO include the lack of complete documentation for transactions involving nearly 500 separate investments made with funds and assets held at FTX, the absence of audited or reliable financial statements, the lack of experts in financial and risk management functions, and the absence of independent governance at FTX.

John Ray III said the scope of the investigation into FTX is enormous, as it involves the detailed tracing of money flows and asset transfers from the time of FTX’s founding.

When asked by Rep. Waters if FTX had sufficient risk management systems and controls to appropriately monitor any leverage FTX took on and the interconnections it had with Alameda. John Ray responded that there were virtually no internal controls and no separateness whatsoever.

Congressman Patrick McHenry, a ranking member of the House Financial Services Committee, asked Mr. Ray if there was a distinction between FTX.us, the company’s US-based platform, and FTX.com, the international platform. Mr. Ray acknowledged that there was a public distinction between both platforms, but what is being unraveled behind the scenes through investigations is that the crypto assets for FTX.us and FTX.com were housed on the same Amazon Web Services (AWS) database.

Appearing, two weeks ago, in his first live public interview, at the DealBook Summit, since the collapse of FTX, Sam Bankman-Fried reiterated that FTX.us and FTX.com were separate entities, and FTX.us remained solvent. A leak of the speech SBF had prepared for his testimony at the hearing, before his arrest, was obtained. A congressman quoted SBF as saying “FTX.us remains solvent.”

Congressman Bryan Steil asked Mr. Ray about the digital assets that were moved out of FTX a day after the company filed for bankruptcy. “Have you determined whether assets were moved out after the bankruptcy?” Rep. Steil asked. Mr. Ray affirmed that assets were moved out of FTX after the bankruptcy. Rep. Steil further asked whether the assets were moved out as a result of a hack or at the direction of Bahamian authorities, as widely reported. Mr. Ray responded: “it was both.”

Rep. Steil asked Mr. Ray if he had any indications as to why the Bahamian authorities requested to move the crypto-assets. “It wasn’t a request; they just took it,” Mr. Ray responded. The Bahamian authorities were aided by the former employees of FTX to take the crypto-assets, according to Mr. Ray’s account of events.

One of the main highlights of the hearing came from questions by Congresswoman Ann Wagner. The Congresswoman asked Mr. Ray to elaborate on some of the specific ways in which FTX is worse than the previous cases of bankruptcy he had witnessed. “The FTX group is unusual,” Mr. Ray said. “There was no record-keeping whatsoever.”

Mr. Ray said FTX employees discussed invoicing and expenses on Slack – an instant messaging application used mostly by tech project teams to communicate. According to Mr. Ray’s report, FTX used Quickbooks — an accounting software package geared towards small- and medium-sized businesses. Mr. Ray stated that he had nothing against Quickbooks, however, it is just not suitable for a multi-billion dollar company’s accounting needs.

Sam Bankman-Fried was denied bail and will be held in custody in the Bahamas until February 8, 2023, when he is expected to appear in court.

John J. Ray III, the new CEO of FTX, is a lawyer who specializes in restructuring troubled companies. He helped manage the implosion of Enron, the energy trading firm, after an accounting scandal in 2001.