John Ray III, FTX's replacement CEO now steering the company through bankruptcy, told lawmakers on Tuesday that misdeeds inside the crypto giant weren't like the sophisticated, highly orchestrated crimes he encountered when taking apart Enron two decades ago.
"This is really old-fashioned embezzlement," he said in testimony before the U.S. House Financial Services Committee. "This is just taking money from customers and using it for your own purpose. Not sophisticated at all."
If there was complexity, he said, it was in the way the senior managers "were able to sort of hide it from people, frankly right in front of their eyes."
When pressed about whether founder and former CEO Sam Bankman-Fried had committed crimes, he hesitated.
"We're trying not to lay judgment or put labels on actions," he said, adding that his primary job was finding money for those who were harmed. "Obviously there's been failure here of massive proportion. Ultimately I think others will judge him by his actions."
As Ray picks through the wreckage of the company Bankman-Fried drove spectacularly into the ground, the former CEO was arrested in the Bahamas and is facing U.S. criminal charges as well as enforcement actions from regulators. Against that backdrop, Ray testified in the hearing that was supposed to include Bankman-Fried, telling the panel that a group of untrained executives with no interest in safe corporate practices was responsible for gathering billions of dollars from customers and investors.
Despite repeated public assurances from Bankman-Fried, the distinctions between crypto exchange FTX US and its international sibling were no more than superficial, Ray said.
“What we’re seeing now is that the crypto assets for both FTX.com and for FTX US were housed in the same database," Ray said in his testimony. He indicated the assets were “all housed in the same web format” at Amazon Web Services.
Ray, who performed the same task when Enron fell into ruin, said the dysfunction at FTX was longstanding. There was no independent board and no coherent record keeping, he said.
“This is not something that happened overnight or within the course of a week,” he said, describing “absolutely no internal controls, whatsoever.”
“Employees would communicate invoicing and expenses on Slack," he said, referring to the communications app. And he said the team used the off-the-shelf accounting software QuickBooks. "Nothing against Quickbooks. It's a very nice tool – just not for a multi-billion-dollar company.”
Committee Chair Maxine Waters (D-Calif.) exhibited frustration against the law enforcement authorities’ timing, which robbed her of a chance to question Bankman-Fried at the hearing. He’d planned to testify remotely from his island home, until news emerged late Monday that local authorities had taken him into custody to face U.S. charges of conspiracy and fraud revealed early Tuesday.
“Unfortunately, the timing of his arrest denies the public the opportunity to get the answers they deserve,” Waters said.
With testimony from Ray, the formal actions from regulators detailing wrongdoing inside FTX’s “house of cards” and the U.S. criminal case, Tuesday marks the first full view into what happened inside of FTX, without the filter of its fallen leader, Bankman-Fried.
Up to hours before his arrest, the former CEO has barely stopped talking publicly with journalists and other industry figures, even after resigning from the company. Among his arguments was that the U.S. arm of the company was separate from global exchange, FTX.com.
Ray said some pieces of the company in Japan and the U.S.-regulated derivatives-trading subsidiary known as LedgerX were "sort of distinct" from the rest of the company.
"Ultimately, we will look to sell LedgerX and put it in the hands of a good steward," he said.
But he confirmed that money, including customer funds, flowed freely between FTX and Bankman-Fried's trading firm, Alameda Research. And he's investigating the massive loans made to FTX insiders including Bankman-Fried.
"In one instance he signed as both the issuer of the loan as well as the recipient of the loan," Ray said.
Ray said the recent efforts have recovered more than a billion in crypto assets so far for creditors, though the company may have lost more than $7 billion. He also suggested that it may not be easy to isolate the former management from the company's assets.
"Are there wallets that we don't know about? Certainly that is the potential," he said. "What we don't know is whether or not the founders could have taken crypto and put it in a cold wallet that we just don't have awareness of. And if they did, hopefully we can trace that."
He agreed with lawmaker suggestions that Bankman-Fried and others had already undermined the U.S. bankruptcy process when they aided authorities in The Bahamas to grab a considerable share of remaining FTX assets.
“I'm so deeply troubled to learn how common it was for Bankman-Fried and FTX employees to steal from the cookie jar of customer funds to finance their lavish lifestyles,” Waters said.
The panel’s ranking Republican, Rep. Patrick McHenry (R-N.C.), who will lead the committee in the next congressional session, hewed to his party’s common argument on the FTX case:
"We have to separate out the bad actions of an individual from the good created by an industry and an innovation," McHenry said.
Ray characterized the mess at FTX as "really unprecedented."
"Even in the most failed companies, you have a fair road map of what happened," he said. "We're dealing with literally sort of a paperless bankruptcy in terms of how they created this company. It makes it very difficult to trace and track assets, particularly as I've said, in the crypto world."
The chairman of the U.S. Commodity Futures Trading Commission had said at another recent congressional hearing that as many as 2% of the global company's customers were from the U.S., though the platform wasn't supposed to allow U.S. users.
"We found that there's a small number of U.S. customers that engaged," Ray confirmed on Tuesday. He said it seems "less than a couple hundred" individuals, though he hasn't yet identified the scale of their holdings.
UPDATE (Dec. 13, 17:16 UTC): Adds Ray comments on Japan, LedgerX and loans starting in 11th paragraph, comment on state of company and possible wrongdoing in last four paragraphs.
UPDATE (Dec. 13, 18:07 UTC): Adds Ray comments on FTX have embezzled customer funds.
UPDATE (Dec. 13, 19:42 UTC): Adds Ray comments on the potential that Bankman-Fried and others could have access to FTX assets in unknown wallets.
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