The report, filed Sunday with the U.S. bankruptcy court in Delaware, is FTX CEO John J. Ray III’s first detailed account of the control failures at the exchange since he took over after the exchange's spectacular collapse last November.
Harrison, according to the report, had serious concerns about the way FTX US was being run, including “the lack of appropriate delegation of authority, formal management structure and key hires.”
When he took those concerns to Bankman-Fried and Nishad Singh, former director of engineering, his bonus was “drastically reduced,” and he was instructed by company lawyers to apologize to Bankman-Fried, according to Ray's report. He refused.
The allegations are consistent with Harrison’s earlier statements, made via Twitter, that he was threatened after making a written complaint in April 2022, and told that he would be fired and that “Sam would destroy my professional reputation” if he didn’t retract the complaint and deliver an apology.
Reached Sunday by CoinDesk, Harrison confirmed the report but declined to comment further.
According to the report, another employee in the exchange’s legal department was “summarily terminated after expressing concerns about Alameda’s lack of corporate controls, capable leadership and risk management.”
Alameda Research is a trading firm that was affiliated with FTX and that like FTX filed for bankruptcy last year.
Ray’s report, which is over 45 pages, paints a picture of FTX and related entities as a sloppily run web of companies ruled over by Bankman-Fried and his circle of cronies, who cared little for organization or internal controls.
Reconstructing FTX’s balance sheets has been “an ongoing, bottom-up exercise that continues to require significant effort by professionals,” partly because FTX’s leadership regularly lost track of accounts and didn’t bother to cash checks, which “collected like junk mail,” according to the report.
Alameda wasn’t even clear on what its own positions were, “let alone hedging or accounting for them,” Ray's document reads. A June 2022 portfolio summary, which was supposed to show Alameda’s makeup of crypto positions, was reportedly fabricated after employees were allegedly instructed by an unnamed higher-up to “come up with some numbers? Idk.”
'Such is life'
At one point, according to the report, Bankman-Fried told employees:
“Alameda is unauditable. I don’t mean this in the sense of ‘a major accounting firm would have reservations about auditing it’; I mean this in the sense of ‘we are only able to ballpark what its balances are, let alone something like a comprehensive transaction history.’ We sometimes find $50m of assets lying around that we lost track of; such is life.”
Bankman-Fried’s internal admissions to his employees often directly contradicted his public statements, made either via Twitter or to the press.
For example, Bankman-Fried preached the importance of two-factor authentication to his Twitter followers, writing “Daily reminder: use 2FA! 90% of crypto security is making sure you’ve done the basics.”
But according to Ray’s report, FTX failed to use two-factor authentication for its critical corporate services, including Google Workspace and 1Password. Other security issues included storing seed phrases and private keys to various hot wallets containing hundreds of millions of dollars' worth of cryptocurrency in plain text and without encryption on an FTX Group server.
According to Ray’s report, FTX held the vast majority of its crypto assets in hot wallets at all times, despite Bankman-Fried’s public reassurances that the exchange used a “best practice hot wallet and cold wallet standard solution for the custody of virtual assets.”
That lack of security, according to Ray, made it possible for a still-unknown hacker to take control of $432 million worth of crypto from various FTX-controlled wallets the night the exchange filed for bankruptcy.
The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is an award-winning media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. In November 2023, CoinDesk was acquired by Bullish group, owner of Bullish, a regulated, institutional digital assets exchange. Bullish group is majority owned by Block.one; both groups have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary, and an editorial committee, chaired by a former editor-in-chief of The Wall Street Journal, is being formed to support journalistic integrity.