John J. Ray III, the new CEO of the collapsed crypto exchange FTX, filed for bankruptcy of the company. The statement shocked former FTX users and a wider community, as it shed light on many unflattering moments in the work of the exchange, once considered one of the most reliable participants of the cryptocurrency industry.
In terms of a summary the opening remarks from new CEO John J Ray, who’s leading the restructuring of the collapsed exchange, are as good as any:
Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here. 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.
The filing is a comprehensive summary of how the entity got to this point and why it’s requesting relief via corporate restructuring. Roughly it says,
“Look: we owe a lot of people a lot of money, and we don’t know exactly know where it all is, but we’re looking.”
John Jay Ray III, the appointed overseer, is one of the most experienced restructuring executives in the world, having overseen Enron and a slew of other high-profile bankruptcies.
FTX Bankruptcy Filing TLDR
Here are the main highlights from the FTX bankruptcy filing:
- Employees submitted expense reimbursements over chat. A random manager would accept or reject those reimbursements with an EMOJI.
- Related party loans. Alameda Research (FTX’s hedge fund) gave Sam Bankman-Fried a $1 billion personal loan. They also loaned Director of Engineering Nishad Singh $543 million.
- Very few records were kept. Most decisions were made over chat, with the messages automatically deleted after a certain time. Sam basically used Signal to hide all of his decisions and communications with employees.
- FTX, a company valued at $32 billion, never had board meetings. Neither did most of the subsidiaries.
- FTX had no cash management system. Management had no idea how much cash was on hand at any given time, or even where all their cash was.
- FTX didn’t keep proper records of who they employed. Employees and contractors co-mingled throughout the different companies without proper documentation of how they spent their time. Certain employees can’t be located, which could mean that some employees were fake.
- Corporate funds were used to purchase personal use real estate. And employees & executives put their names on homes purchased with company funds.
- Crypto deposited by customers weren’t even recorded on the balance sheet. Presumably, all crypto assets just went into one central slush fund used for whatever.
- The filing makes clear that Sam Bankman-Fried does not speak for the company, and that his erratic and misleading public statements should not be disregarded. “Mr. Bankman-Fried, currently in the Bahamas, continues to make erratic and misleading public statements. Mr. Bankman-Fried recently stated to a reporter on Twitter: “Fuck regulators they make everything worse.”
- SBF and Gary Wang controlled all of FTX’s digital asset personally, using a GROUP EMAIL ACCOUNT to share private keys, software to “conceal the misuse of customer funds.”
- Alameda was secretly exempted from the FTX’s auto-liquidation engine. Theories that Alameda was liquidation-exempt on FTX seem confirmed by Ray’s initial investigation.
- $372 million in unauthorized transfers happened on the petition date (the FTX “hack”), but further $300 million in FTT tokens were also minted AFTER THE PETITION DATE by an unauthorized source.
- A team of the most experienced restructuring experts in the world under penalty of perjury have submitted to the courts a document that shows nearly EVERY public statement SBF has made in the last week to be a lie.
- FTX estimates Liabilities in the range of $10 to 50 billion- so no visibility into the solvency status now.
- Many FTX employees did not know how dire the situation was at the company. “It is my view based on the information obtained to date, that many of the employees of the FTX Group, including some of its senior executives, were not aware of the shortfalls or potential commingling of digital assets. Indeed, I believe some of the people most hurt by these events are current and former employees and executives, whose personal investments and reputations have suffered.”
FTX Bankruptcy Filing Full Text
Here is the full text of FTX bankruptcy filing. And that’s before we’re really into the bankruptcy proceedings! This is just the initial first look investigation into all the shenanigans happening inside FTX.
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF DELAWARE
In re:
FTX TRADING LTD., et al.,
Debtors.
Chapter 11
Case No. 22-11068 (JTD)
(Joint Administration Pending)
DECLARATION OF JOHN J. RAY III IN SUPPORT OF
CHAPTER 11 PETITIONS AND FIRST DAY PLEADINGS
I, John J. Ray III, hereby declare under penalty of perjury as follows:
1. I am the Chief Executive Officer of the above-captioned debtors and
debtors-in-possession (collectively, the “Debtors”), having accepted this position in the early
morning hours of November 11, 2022. I am administering the interests and affairs of the Debtors
from my offices in the United States.
2. My first official act in these roles was to authorize the chapter 11 filings of
the Debtors and the commencement of the above-captioned chapter 11 cases (the “Chapter 11
Cases”).
3. Since my appointment, I have worked around the clock with teams of
professionals at Alvarez & Marsal, Sullivan & Cromwell, Nardello & Co., Chainalysis, Kroll and
a confidential cybersecurity firm, to secure the assets of the Debtors wherever located, to identify
reliable books and records, to assemble the information necessary to provide to this Court, and to
respond to numerous inquiries from multiple regulators and government authorities including the
U.S. Commodity Futures Trading Commission (“CFTC”), the U.S. Attorney’s Office for the
Southern District of New York, the U.S. Securities and Exchange Commission (“SEC”), and the
U.S. Congress, among others.
4. I have over 40 years of legal and restructuring experience. I have been the
Chief Restructuring Officer or Chief Executive Officer in several of the largest corporate failures
in history. I have supervised situations involving allegations of criminal activity and
malfeasance (Enron). I have supervised situations involving novel financial structures (Enron
and Residential Capital) and cross-border asset recovery and maximization (Nortel and Overseas
Shipholding). Nearly every situation in which I have been involved has been characterized by
defects of some sort in internal controls, regulatory compliance, human resources and systems
integrity.
5. Never in my career have I seen such a complete failure of corporate
controls and such a complete absence of trustworthy financial information as occurred here.
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.
6. These Chapter 11 Cases have five core objectives:
(a) Implementation of Controls: the implementation of accounting, audit,
cash management, cybersecurity, human resources, risk management, data
protection and other systems that did not exist, or did not exist to an
appropriate degree, prior to my appointment;
(b) Asset Protection & Recovery: the location and security of property of
the estate, a substantial portion of which may be missing or stolen;
(c) Transparency and Investigation: the pending, comprehensive,
transparent and deliberate investigation into claims against Mr. Samuel
Bankman-Fried, the other co-founders of the Debtors and third parties, in
coordination with regulatory stakeholders in the United States and around
the world;
(d) Efficiency and Coordination: cooperation and coordination with
insolvency proceedings of subsidiary companies in other jurisdictions; and
(e) Maximization of Value: the maximization of value for all stakeholders
through the eventual reorganization or sale of the Debtors’ complex array
of businesses, investments and digital and physical property.
These proceedings in the District of Delaware are the appropriate means to accomplish each of
these objectives.
7. Except as otherwise indicated herein, all facts set forth in this declaration
(the “Declaration”) are based on my personal knowledge, my review of relevant materials in the
Debtors’ files or my opinion based on my experience, knowledge and information concerning the
Debtors’ operations and financial affairs. I am over the age of 18 and authorized to submit this
Declaration on behalf of each of the Debtors.
8. For the reasons explained below, the Debtors expect to provide
supplemental declarations as to the subject matter of this Declaration in connection with future
motions as more information becomes available to the Debtors, stakeholders and the Court.
I. THE PREPETITION DEBTORS
A. Corporate Organization and Identification of Four Silos
9. For purposes of managing the Debtors’ affairs, I have identified four
groups of businesses, which I refer to as “Silos.” These Silos include: (a) a group composed of
Debtor West Realm Shires Inc. and its Debtor and non-Debtor subsidiaries (the “WRS Silo”),
which includes the businesses known as “FTX US,” “LedgerX,” “FTX US Derivatives,” “FTX
US Capital Markets,” and “Embed Clearing,” among other businesses; (b) a group composed of
Debtor Alameda Research LLC and its Debtor subsidiaries (the “Alameda Silo”); (c) a group
composed of Debtor Clifton Bay Investments LLC, Debtor Clifton Bay Investments Ltd., Debtor
Island Bay Ventures Inc. and Debtor FTX Ventures Ltd. (the “Ventures Silo”); and (d) a group
composed of Debtor FTX Trading Ltd. and its Debtor and non-Debtor subsidiaries (the “Dotcom
Silo”), including the exchanges doing business as “FTX.com” and similar exchanges in non-U.S.
jurisdictions. These Silos together are referred to by me as the “FTX Group.”
10. Each of the Silos was controlled by Mr. Bankman-Fried. To my knowledge, Mr. Bankman-Fried owns (a) directly, approximately 53% of the equity in Debtor West
Realm Shires Inc.; (b) indirectly, approximately 75% of the equity in Debtor FTX Trading Ltd.; (c) directly,
approximately 90% of the equity in Debtor Alameda Research LLC; and (d) directly, approximately 67% of the
equity in Clifton Bay Investments LLC.
Minority equity
interests in the Silos were held by Zixiao “Gary” Wang and Nishad Singh, the co-founders of the
business along with Mr. Bankman-Fried. The WRS Silo and Dotcom Silo also have third party
equity investors, including investment funds, endowments, sovereign wealth funds and families.
To my knowledge, no single investor other than the co-founders owns more than 2% of the
equity of any Silo. Based on the information provided to me, the only Debtors that have received third party equity investments are
Debtor FTX Trading Ltd. (Dotcom Silo) and Debtor West Realm Shires Inc. (WRS Silo). To my knowledge,
(a) approximately 25% of the equity in Debtor FTX Trading Ltd. is owned by a dispersed group of
approximately 600 third party equity investors and (b) approximately 22.25% of the equity in Debtor West
Realm Shires Inc. is owned by a dispersed group of approximately 570 third party equity investors. FTX
Trading Ltd also acquired 51% of Blockfolio, Inc. in 2020, with the remaining 49% of Blockfolio, Inc. owned
by the original shareholders.
11. The diagram attached as Exhibit A provides a visual summary of the Silos
and the indicative assets in each Silo. Exhibit B contains a preliminary corporate structure chart.
These materials were prepared at my direction based on information available at this time and
are subject to revision as our investigation into the affairs of the FTX Group continues.
B. The WRS Silo
12. The WRS Silo includes FTX US, an exchange for spot trading in digital
assets and tokens. FTX US was founded in January 2020. FTX US is available to U.S. users and, according to statements by Mr. Bankman-Fried, had approximately one million users as of
August 2022. FTX US’s spot exchange is registered with the Department of the Treasury (via
the Financial Crimes Enforcement Network) as a money services business and holds a series of
state money transmission licenses in the United States.
13. The WRS Silo also owns 100% of the equity interests in the LedgerX
business, which is operated by non-Debtor LedgerX LLC (d/b/a FTX US Derivatives)
(“LedgerX”). LedgerX offers futures, options, and swaps contracts on digital assets and other
commodities to both U.S. and non-U.S. persons. LedgerX operates with licenses from the
CFTC. Based on the information that I have reviewed at this time, LedgerX is solvent.
14. The WRS Silo also owns 100% of the equity interests in non-Debtor FTX
Capital Markets LLC, which is an SEC-registered broker-dealer. Based on the information that I
have reviewed at this time, FTX Capital Markets LLC is solvent.
15. The WRS Silo also owns 100% of the equity interests in non-Debtor
Embed Financial Technologies Inc., as well as its wholly-owned non-Debtor subsidiary Embed
Clearing LLC, which operates as a securities clearing firm and is an SEC-registered brokerdealer. Based on the information that I have reviewed at this time, each of these non-Debtor
entities is solvent.
16. The WRS Silo also owns 100% of the equity interests in FTX Value Trust
Company, a South Dakota Trust Company, which provides custodial services. Based on the
information that I have reviewed at this time, this non-Debtor company is solvent.
17. The WRS Silo also owns 100% of other Debtor and non-Debtor
companies operating miscellaneous businesses, such as video game development and a market
place for trading non-fungible tokens. Finally, the WRS Silo has made loans and investments,
including a loan of FTT tokens to BlockFi Inc. in a principal amount of FTT tokens valued at
$250 million as of September 30, 2022.
18. I have been provided with an unaudited consolidated balance sheet for the
WRS Silo as of September 30, 2022, which is the latest balance sheet available. The balance
sheet shows $1.36 billion in total assets as of that date. However, because this balance sheet was
produced while the Debtors were controlled by Mr. Bankman-Fried, I do not have confidence in
it, and the information therein may not be correct as of the date stated.
19. The chart below summarizes certain information regarding the WRS
Silo’s consolidated assets as reflected in the September 30, 2022 balance sheet:
(1) Amounts shown in thousands of U.S. Dollars.
(2) In the above table, assets shown reflect the elimination of intercompany entries within and between the
WRS Silo and Dotcom Silo.
(3) Restricted cash at the WRS Silo is primarily comprised of approximately $250 million in restricted funds at
non-Debtor LedgerX.
(4) Customer custodial fund assets are comprised of fiat customer deposit balances. Balances of customer
crypto assets deposited were not recorded as assets on the balance sheet and are not presented.
(5) Loans receivable of $250 million consists of a loan by Debtor West Realm Shires Inc. to BlockFi Inc. of
$250 million in FTT tokens.
(6) Intangible assets (in the amount of $229 million) are not reflected above. These consist of values
attributable to customer relationships and trade names.
(7) Goodwill balance (in the amount of $135 million) is not reflected above.
20. To my knowledge, the WRS Silo Debtors do not have any long-term or
funded debt. The WRS Silo Debtors are expected to have significant liabilities arising from
crypto assets deposited by customers through the FTX US platform. However, such liabilities
are not reflected in the financial statements prepared while these companies were under the
control of Mr. Bankman-Fried. The chart below summarizes certain information regarding the
WRS Silo’s consolidated liabilities as reflected in the September 30, 2022 balance sheet:
(1) Amounts shown in thousands of U.S. Dollars.
(2) In the above table, liabilities shown reflect the elimination of intercompany entries within and between the
WRS Silo and Dotcom Silo.
(3) Customer custodial fund liabilities are comprised of fiat customer deposit balances. Balances of customer
crypto assets deposited are not presented.
21. All Debtors and non-Debtors in the WRS Silo are organized in the State of
Delaware, other than non-Debtor FTX Vault Trust Company, which is a South Dakota Trust
Company.
C. The Alameda Silo
22. The parent company and primary operating company in the Alameda Silo
is Alameda Research LLC, which is organized in the State of Delaware. Before the Petition Date
(as defined below), the Alameda Silo operated quantitative trading funds specializing in crypto
assets. Strategies included arbitrage, market making, yield farming and trading volatility. The
Alameda Silo also offered over-the-counter trading services, and made and managed other debt
and equity investments. In short, the Alameda Silo was a “crypto hedge fund” with a diversified
business trading and speculating in digital assets and related loans and securities for the account
of its owners, Messrs. Bankman-Fried (90%) and Wang (10%).
23. Alameda Research LLC prepared consolidated financial statements on a
quarterly basis. To my knowledge, none of these financial statements have been audited. The
September 30, 2022 balance sheet for the Alameda Silo shows $13.46 billion in total assets as of
its date. However, because this balance sheet was unaudited and produced while the Debtors
were controlled by Mr. Bankman-Fried, I do not have confidence in it and the information
therein may not be correct as of the date stated.
24. The chart below summarizes certain information regarding the Alameda
Silo’s consolidated assets as reflected in the September 30, 2022 balance sheet:
(1) Amounts shown in thousands of U.S. Dollars.
(2) In the above table, intercompany accounts receivable, accounts payable, loans payable, and loans
receivable are not presented.
(3) Related Party Loans Receivable of $4.1 billion at Alameda Research (consolidated) consisted primarily of a
loan by Euclid Way Ltd. to Paper Bird Inc. (a Debtor) of $2.3 billion and three loans by Alameda Research
Ltd.: one to Mr. Bankman-Fried, of $1 billion; one to Mr. Singh, of $543 million; and one to Ryan Salame,
of $55 million.
25. The chart below summarizes certain information regarding the Alameda
Silo’s consolidated liabilities as reflected in the September 30, 2022 balance sheet:
(1) Amounts shown in thousands of U.S. Dollars.
(2) In the above table, intercompany accounts receivable, accounts payable, loans payable, and loans
receivable are not presented.
26. As mentioned above, Alameda Research LLC is organized in the State of
Delaware. The other Debtors in the Alameda Silo are organized in Delaware, Korea, Japan, the
British Virgin Islands, Antigua, Hong Kong, Singapore, the Seychelles, the Cayman Islands, the
Bahamas, Australia, Panama, Turkey and Nigeria.
D. The Ventures Silo
27. The Debtors in the Ventures Silo make and manage private investments.
The investments are held in Debtors Clifton Bay Investments, LLC, Clifton Bay Investments
Ltd., FTX Ventures Ltd., Island Bay Ventures Inc. and, potentially, affiliated companies.
28. To my knowledge, Debtors Clifton Bay Investments, LLC and FTX
Ventures Ltd. prepared financial statements on a quarterly basis. The September 30, 2022
balance sheet for Debtor Clifton Bay Investments LLC shows assets with a total value of $1.52
billion as of its date, and the September 30, 2022 balance sheet for FTX Ventures Ltd. shows
assets with a total value of $493 million as of its date. To my knowledge, none of these financial
statements have been audited. Because these balance sheets were unaudited and produced while
the Debtors were controlled by Mr. Bankman-Fried, I do not have confidence in them, and the
information therein may not be correct as of the date stated.
29. I have not been able to locate financial statements for Island Bay Ventures
Inc.
30. The chart below summarizes certain information regarding the Ventures
Silo’s assets as reflected in the September 30, 2022 balance sheets, excluding any assets held by
Island Bay Ventures Inc.
(1) Amounts shown in thousands of U.S. Dollars.
(2) In the above table, intercompany accounts receivable, accounts payable, loans payable, and loans
receivable are not presented.
31. The chart below summarizes certain information regarding the Ventures
Silo’s liabilities as reflected in the September 30, 2022 balance sheets excluding any liabilities of
Island Bay Ventures Inc.:
(1) Amounts shown in thousands of U.S. Dollars.
(2) In the above table, intercompany accounts receivable, accounts payable, loans payable, and loans
receivable are not presented.
(3) Related Party Accounts Payable at Clifton Bay Investments LLC consists of four related-party balances:
one with Debtor Alameda Research Ltd, of $1,400 million; one with Debtor Alameda Research LLC, of
$68.6 million; one with Alameda Ventures Ltd, of $38.5 million; and one with Debtor West Realm Shires
Services Inc. of $2.25 million.
(4) Customer custodial fund liabilities are comprised of fiat customer deposit balances. Balances of customer
crypto assets deposited are not presented.
32. All Debtors in the Ventures Silo are organized in the State of Delaware or
the British Virgin Islands.
E. The Dotcom Silo
33. The Dotcom Silo includes FTX.com, the trade name for the business
conducted by the parent company in the Dotcom Silo, FTX Trading Ltd., which is organized in
Antigua. FTX.com is a digital asset trading platform and exchange. It was founded by Messrs.
Bankman-Fried, Wang and Singh and commenced operations in May 2019. The Dotcom Silo
also holds certain marketplace licenses and registrations in certain non-U.S. jurisdictions,
including the European Union and Japan. The FTX.com platform is not available to U.S. users.
34. In addition to its core digital asset exchange, the Dotcom Silo offered an
off-exchange portal that enabled users to connect and request quotes for spot digital assets and
trade directly. The portal enabled users to lend their digital assets to other users for spot trading
and matched users wanting to borrow with those willing to lend.
35. The FTX.com platform grew quickly since its launch to become one of the
largest cryptocurrency exchanges in the world. Mr. Bankman-Fried claimed that, by the end of
2021, around $15 billion of assets were on the platform, which according to him handled
approximately 10% of global volume for crypto trading at the time. Mr. Bankman-Fried also
claimed that FTX.com, as of July 2022, had “millions” of registered users. These figures have
not been verified by my team.
36. The Dotcom Silo’s unaudited consolidated balance sheet as of September
30, 2022 is the latest balance sheet that was provided to me with respect to the Dotcom Silo. It
shows total assets of $2.25 billion as of September 30, 2022. Because such balance sheet was
produced while the Debtors were controlled by Mr. Bankman-Fried, I do not have confidence in
it, and the information therein may not be correct as of the date stated.
37. The chart below summarizes certain information regarding the Dotcom
Silo’s consolidated assets as reflected in the September 30, 2022 balance sheet:
(1) Amounts shown in thousands of U.S. Dollars.
(2) The balance sheet for non-Debtor FTX Digital Markets Ltd. is consolidated to Debtor FTX Trading Ltd.’s
balance sheet. The September 30, 2022 Balance Sheet of non-Debtor FTX Digital Markets Ltd. reflects an
asset position of $149,336, as follows: Cash and Cash Equivalents ($82,564), Restricted Cash ($10,000),
U.S. Dollar Denominated Stablecoins ($63), Related Party Receivables ($45,944), Prepaid Expenses and
Other Current Assets ($4,922), Property and Equipment, Net ($5,565) and Other Non-Current Assets
($278) (amounts in thousands of U.S. Dollars).
(3) Non-debtor FTX Digital Markets Ltd. has a net intercompany accounts payable of $30 million due to
entities controlled by Debtor FTX Trading Ltd.
(4) In the above table, assets shown reflect the elimination of intercompany entries within and between the
WRS Silo and Dotcom Silo.
(5) Customer custodial fund assets are comprised of fiat customer deposit balances. Balances of customer
crypto assets deposited are not presented.
(6) Loans Receivable of $250 million at FTX US consists of a loan to BlockFi Inc. of $250 million in FTT
tokens.
(7) Intangible assets (in the amount of $343 million) are not reflected above. These consist of values
attributable to customer relationships and trade names.
(8) Goodwill balance (in the amount of $359 million) is not reflected above.
38. To my knowledge, the Dotcom Silo Debtors do not have any long-term or
funded debt. The Dotcom Silo Debtors may have significant liabilities to customers through the
FTX.com platform. However, such liabilities are not reflected in the financial statements
prepared by these companies while they were under the control of Mr. Bankman-Fried. The
chart below summarizes certain information regarding the Dotcom Silo’s consolidated liabilities
as reflected in the September 30, 2022 balance sheet:
(1) Amounts shown in thousands of U.S. Dollars.
(2) In the above table, liabilities shown reflect the elimination of intercompany entries within and between the
WRS Silo and Dotcom Silo.
(3) The balance sheet for non-Debtor FTX Digital Markets Ltd. is consolidated to Debtor FTX Trading Ltd.’s
balance sheet. The September 30, 2022 Balance Sheet of non-Debtor FTX Digital Markets Ltd. reflects
total liabilities in the amount of $1,278, as follows: Accounts Payable and Accrued Expenses ($1,259),
Accounts Payable, Related Party ($19) (amounts in thousands of U.S. Dollars).
(4) Customer custodial fund liabilities are comprised of fiat customer deposit balances. Balances of customer
crypto assets deposited were not recorded as assets on the balance sheet and are not presented.
39. The Debtors in the Dotcom Silo are organized in jurisdictions around the
world, with the parent company FTX Trading Ltd. organized in Antigua. The Debtors in the
Dotcom Silo also own 100% of the equity interests in over a dozen non-Debtor companies.
II. EVENTS LEADING TO CHAPTER 11 FILING
40. The Debtors faced a severe liquidity crisis that necessitated the filing of
these Chapter 11 Cases on an emergency basis on November 11, 2022, and in the case of Debtor
West Realm Shires Inc., on November 14, 2022 (collectively, the “Petition Date”). In the days
leading up to the Petition Date, certain of the circumstances described in Part III below became
known to a broader set of executives of the FTX Group beyond Mr. Bankman-Fried and
members of his inner circle. Questions arose about Mr. Bankman-Fried’s leadership and the
handling of the Debtors’ complex array of assets and businesses.
41. As the situation became increasingly dire, Sullivan & Cromwell and
Alvarez & Marsal were engaged to provide restructuring advice and services to the Debtors.
42. On November 10, 2022, the Securities Commission of the Bahamas (the
“SCB”) took action to freeze assets of non-Debtor FTX Digital Markets Ltd., a service provider
to FTX Trading Ltd. and the employer of certain current and former executives and staff in the
Bahamas. Mr. Brian Simms, K.C. was appointed as provisional liquidator of FTX Digital
Markets Ltd. on a sealed record. The provisional liquidator for this Bahamas subsidiary has filed
a chapter 15 petition seeking recognition of the provisional liquidation proceeding in the
Bankruptcy Court for the Southern District of New York.
43. In addition, in the first hours of November 11, 2022 EST, the directors of
non-Debtors FTX Express Pty Ltd and FTX Australia Pty Ltd., both Australian entities,
appointed Messrs. Scott Langdon, John Mouawad and Rahul Goyal of KordaMentha
Restructuring as voluntary administrators.
44. At the same time, negotiations were being held between certain senior
individuals of the FTX Group and Mr. Bankman-Fried concerning the resignation of Mr.
Bankman-Fried and the commencement of these Chapter 11 Cases. Mr. Bankman-Fried
consulted with numerous lawyers, including lawyers at Paul, Weiss, Rifkind, Wharton &
Garrison LLP, other legal counsel and his father, Professor Joseph Bankman of Stanford Law
School. A document effecting a relinquishment of control was prepared and comments from Mr.
Bankman-Fried’s team incorporated. At approximately 4:30 a.m. EST on Friday, November 11,
2022, after further consultation with his legal counsel, Mr. Bankman-Fried ultimately agreed to
resign, resulting in my appointment as the Debtors’ CEO. I was delegated all corporate powers
and authority under applicable law, including the power to appoint independent directors and
commence these Chapter 11 Cases on an emergency basis.
45. Other than the proceedings in the Bahamas and Australia, to my
knowledge, no other Debtor or non-Debtor subsidiary is subject to other insolvency proceedings
at this time.
III. ACTION TAKEN SINCE MR. BANKMAN-FRIED’S DEPARTURE
A. New Governance Structure
46. Many of the companies in the FTX Group, especially those organized in
Antigua and the Bahamas, did not have appropriate corporate governance. I understand that
many entities, for example, never had board meetings.
47. The following new independent directors (the “Directors”) have been
appointed as directors of the primary companies in the FTX Group:
(a) WRS Silo: Mitchell I. Sonkin: Mitchell Sonkin is currently a Senior
Advisor to MBIA Insurance Corporation in connection with the
restructuring of the Firm’s insured portfolio exposure of the
Commonwealth of Puerto Rico’s $72 billion of outstanding debt. He is
also currently Chairman of the Board of the ResCap Liquidating Trust,
successor to ResCap and GMAC Mortgage Corporations. Before joining
MBIA, Mr. Sonkin was a senior partner at the international law firm, King
& Spalding, where he was co-chair of King & Spalding’s Financial
Restructuring Group and a member of the firm’s Policy Committee. He
has over 40 years of experience in U.S. and international bond issuances,
corporate reorganizations, bankruptcies and other debt restructurings and
has served as a bankruptcy-court-appointed examiner. In particular, he has
played a significant role in numerous municipal, utility, insurance, airline,
healthcare debt and international debt restructurings including the
Anglo/French Euro Tunnel debt reorganization.
(b) Alameda Silo: Matthew R. Rosenberg: Mr. Rosenberg is a Partner at
Lincoln Park Advisors, a financial advisory firm that he founded in 2014.
He has more than 25 years of restructuring, corporate finance, principal
investing, operating and board experience. Prior to founding Lincoln Park
Advisors, he was a partner at the restructuring and investment banking
firm Chilmark Partners, a partner in two private equity funds, the
Zell/Chilmark Fund and Chilmark Fund II, the Chief Restructuring Officer
of The Wellbridge Company and a member of multiple corporate boards.
His restructuring advisory experience includes such companies as OSG,
Supermedia, Nortel, Trinity Coal, USG Corporation, JHT Holdings, Inc.,
Covanta Energy, Sirva, Lodgian, Inc., ContiGroup Companies, Inc., Fruit
of the Loom, Ltd. and Recycled Paper Greetings.
(c) Ventures Silo: Rishi Jain: Mr. Jain is a Managing Director and CoHead of the Western Region of Accordion, a financial and technology
consulting firm focused on the private equity industry. He has more than
25 years of experience supporting management teams and leading finance
and operations initiatives in both stressed and distressed environments.
Prior to joining Accordion, Mr. Jain was part of Alvarez & Marsal’s
corporate restructuring and turnaround practice for over 10 years and
served in a variety of senior financial operating roles. His most notable
assignments have included helping lead the restructuring, liquidation and
wind down of Washington Mutual and its predecessor entity, WMI
Liquidating Trust. He also navigated the restructuring of Global
Geophysical Services in its chapter 11 and eventually the liquidation and
wind down in its second chapter 11 filing.
(d) Dotcom Silo: The Honorable Joseph J. Farnan (Lead Independent
Director): Mr. Farnan served as a United States District Judge for the
District of Delaware from 1985 to 2010. He served as Chief Judge from
1997-2001. During his tenure, Mr. Farnan presided over numerous bench
and jury trials involving complex commercial disputes. Prior to his
appointment to the federal bench, Mr. Farnan was appointed to several
positions in local, state and the federal government returning to private
practice in 2010 with the formation of Farnan LLP, a law firm focused on
complex commercial matters, including chapter 11 proceedings, securities
litigation, antitrust litigation and patent litigation. Additionally, Mr.
Farnan serves as an arbitrator, mediator, independent director and trustee
of businesses contemplating or filing chapter 11 bankruptcy.
(e) Dotcom Silo: Matthew A. Doheny: Mr. Doheny is President of North
Country Capital LLC, an advisory and investment firm focused on
challenging advisory assignments and investing private investment
portfolios in special situation opportunities. He has held this position since
January 2011. Mr. Doheny has served on the board of directors or as Chief
Restructuring Officer of numerous stressed and distressed companies,
including Yellow Corp., MatlinPatterson, GMAC Rescap and Eastman
Kodak. He was also Managing Director and Head of Special Situations
Investing at HSBC Securities Inc. from 2015 to 2017. Previously, Mr.
Doheny served as Portfolio Manager in Special Situations at Fintech
Advisory Inc. from 2008 to 2010 and as Managing Director of the
Distressed Products Group at Deutsche Bank Securities Inc. from 2000 to
2008.
48. The appointment of the Directors will provide the FTX Group with
appropriate corporate governance for the first time.
49. The Directors intend to hold joint board meetings of the Debtors on
matters of common interest, including (a) the implementation of controls, (b) asset protection
and recovery, (c) the investigation into claims against the founders and third parties, (d)
cooperation with insolvency proceedings of subsidiary companies in other jurisdictions and (e)
the maximization of value for all stakeholders through the eventual reorganization or sale of the
Debtors’ complex array of businesses, investments and property around the world. The
Directors will implement appropriate procedures for the resolution of any conflicts of interest
among the Silos and, if necessary, within the Silos as the case progresses, including the potential
engagement of independent counsel to represent various Debtors in the resolution of
intercompany claims against other Debtors. I expect there to be a multitude of intercompany
claims that will benefit from fair resolution under the rules and conventions of U.S. chapter 11
practice in the District of Delaware for complex, multi-Debtor cases. For the time being, my
belief is that all stakeholders are best served by a coordinated and centralized administration.
B. Cash Management
50. The FTX Group did not maintain centralized control of its cash. Cash
management procedural failures included the absence of an accurate list of bank accounts and
account signatories, as well as insufficient attention to the creditworthiness of banking partners
around the world. Under my direction, the Debtors are establishing a centralized cash
management system with proper controls and reporting mechanisms.
51. During these Chapter 11 Cases, cash that the Debtors are able to locate
and transfer to the United States without adverse consequences, including substantially all
proceeds of the global reorganization effort, will be deposited into financial institutions in the
United States that are approved depository institutions in accordance with the U.S. Trustee
Guidelines. Each Silo will have a centralized cash pool, and the Debtors will implement
appropriate arrangements for allocating costs across the various Silos and Debtors. The Debtors
expect to file promptly a Cash Management Motion that will describe the new cash management
system in more detail.
52. Because of historical cash management failures, the Debtors do not yet
know the exact amount of cash that the FTX Group held as of the Petition Date. The Debtors are
working with Alvarez & Marsal to verify all cash positions. To date, it has been possible to
approximate the following balances as of the Petition Date based on available books and records:
53. The Debtors have been in contact with banking institutions that they
believe hold or may hold Debtor cash. These banking institutions have been instructed to freeze
withdrawals and alerted not to accept instructions from Mr. Bankman-Fried or other signatories.
Proper signature authority and reporting systems are expected to be arranged shortly.
54. Effective cash management also requires liquidity forecasting, which I
understand was also generally absent from the FTX Group historically. The Debtors are putting
in place the systems and processes necessary for Alvarez & Marsal to produce a reliable cash
forecast as well as the cash reporting required for Monthly Operating Reports under the
Bankruptcy Code.
C. Financial Reporting
55. The FTX Group received audit opinions on consolidated financial
statements for two of the Silos – the WRS Silo and the Dotcom Silo – for the period ended
December 31, 2021. The audit firm for the WRS Silo, Armanino LLP, was a firm with which I
am professionally familiar. The audit firm for the Dotcom Silo was Prager Metis, a firm with
which I am not familiar and whose website indicates that they are the “first-ever CPA firm to
officially open its Metaverse headquarters in the metaverse platform Decentraland.”
56. I have substantial concerns as to the information presented in these audited
financial statements, especially with respect to the Dotcom Silo. As a practical matter, I do not
believe it appropriate for stakeholders or the Court to rely on the audited financial statements as a
reliable indication of the financial circumstances of these Silos.
57. The Debtors have not yet been able to locate any audited financial
statements with respect to the Alameda Silo or the Ventures Silo.
58. The Debtors are locating and securing all available financial records but
expect it will be some time before reliable historical financial statements can be prepared for the
FTX Group with which I am comfortable as Chief Executive Officer. The Debtors do not have
an accounting department and outsource this function.
D. Human Resources
59. The FTX Group’s approach to human resources combined employees of
various entities and outside contractors, with unclear records and lines of responsibility. At this
time, the Debtors have been unable to prepare a complete list of who worked for the FTX Group
as of the Petition Date, or the terms of their employment. Repeated attempts to locate certain
presumed employees to confirm their status have been unsuccessful to date.
60. Nevertheless, there is a core team of dedicated employees at the FTX
Group who have stayed focused on their jobs during this crisis and with whom I have established
appropriate lines of authority and working relationships. The Debtors continue to review
personnel issues but I expect, based on my experience and the nature of the Debtors’ business,
that a large number of employees of the Debtors will need to continue to work for the Debtors
for the foreseeable future in order to establish accountability, preserve value and maximize
stakeholder recoveries after the departure of Mr. Bankman-Fried. As Chief Executive Officer, I
am thankful for the extraordinary efforts of this group of employees, who despite difficult
personal circumstances, have risen to the occasion and demonstrated their critical importance to
the Debtors.
61. The Debtors are preparing one or more motions to address issues relating
to continuing employees and contractors. The Debtors also may hire new employees and
officers with turnaround or other relevant experience in core functions where I determine that
new leadership is required. I anticipate that the Debtors will be able to file these motions in the
coming days.
E. Disbursement Controls
62. The Debtors did not have the type of disbursement controls that I believe
are appropriate for a business enterprise. For example, employees of the FTX Group submitted
payment requests through an on-line ‘chat’ platform where a disparate group of supervisors
approved disbursements by responding with personalized emojis.
63. In the Bahamas, I understand that corporate funds of the FTX Group were
used to purchase homes and other personal items for employees and advisors. I understand that
there does not appear to be documentation for certain of these transactions as loans, and that
certain real estate was recorded in the personal name of these employees and advisors on the
records of the Bahamas.
64. The Debtors now are implementing a centralized disbursement approval
process that reports to me as Chief Executive Officer.
F. Digital Asset Custody
65. The FTX Group did not keep appropriate books and records, or security
controls, with respect to its digital assets. Mr. Bankman-Fried and Mr. Wang controlled access
to digital assets of the main businesses in the FTX Group (with the exception of LedgerX,
regulated by the CFTC, and certain other regulated and/or licensed subsidiaries). Unacceptable
management practices included the use of an unsecured group email account as the root user to
access confidential private keys and critically sensitive data for the FTX Group companies
around the world, the absence of daily reconciliation of positions on the blockchain, the use of
software to conceal the misuse of customer funds, the secret exemption of Alameda from certain
aspects of FTX.com’s auto-liquidation protocol, and the absence of independent governance as
between Alameda (owned 90% by Mr. Bankman-Fried and 10% by Mr. Wang) and the Dotcom
Silo (in which third parties had invested).
66. The Debtors have located and secured only a fraction of the digital assets
of the FTX Group that they hope to recover in these Chapter 11 Cases. The Debtors have
secured in new cold wallets approximately $740 million of cryptocurrency that the Debtors
believe is attributable to either the WRS, Alameda and/or Dotcom Silos. The Debtors have not
yet been able to determine how much of this cryptocurrency is allocable to each Silo, or even if
such an allocation can be determined. These balances exclude cryptocurrency not currently
under the Debtors’ control as a result of (a) at least $372 million of unauthorized transfers
initiated on the Petition Date, during which time the Debtors immediately began moving
cryptocurrency into cold storage to mitigate the risk to the remaining cryptocurrency that was
accessible at the time, (b) the dilutive ‘minting’ of approximately $300 million in FTT tokens by
an unauthorized source after the Petition Date and (c) the failure of the co-founders and
potentially others to identify additional wallets believed to contain Debtor assets.
67. In response, the Debtors have engaged forensic analysts to identify
potential Debtor assets on the blockchain, cybersecurity professionals to identify the parties
responsible for the unauthorized transactions on and after the Petition Date and investigators to
begin the process of identifying what may be very substantial transfers of Debtor property in the
days, weeks and months prior to the Petition Date. The Debtors’ team includes business,
accounting, forensic, technical and legal resources that I believe are among the best in the world
at these activities. It is my expectation that the Debtors will require assistance from the Court
with respect to these matters as the investigation and these Chapter 11 Cases continue.
68. Although the investigation has only begun and must run its course, it is my
view based on the information obtained to date, that many of the employees of the FTX Group,
including some of its senior executives, were not aware of the shortfalls or potential
commingling of digital assets. Indeed, I believe some of the people most hurt by these events are
current and former employees and executives, whose personal investments and reputations have
suffered. These are many of the same people whose work will be necessary to ensure the
maximization of value for all stakeholders going forward.
G. Custody of Other Assets and Investments
69. The FTX Group had billions in investments other than cryptocurrency, as
suggested above in the descriptions of the four Silos. However, the main companies in the
Alameda Silo and the Ventures Silo did not keep complete books and records of their
investments and activities.
70. The Debtors are creating a balance sheet and other financial statements for
the Alameda Silo and the Ventures Silo as of the Petition Date. The Debtors are doing so from
the ‘bottom-up’ by using the records of cash transactions at the Debtors, and also are reviewing
various third-party sources to locate investments.
H. Information and Retention of Documents
71. One of the most pervasive failures of the FTX.com business in particular
is the absence of lasting records of decision-making. Mr. Bankman-Fried often communicated
by using applications that were set to auto-delete after a short period of time, and encouraged
employees to do the same.
72. The Debtors are writing things down. The investigative effort underway is
led by myself and a team at Sullivan & Cromwell that reports directly to me, including a former
Director of Enforcement at the SEC, a former Director of Enforcement at the CFTC, and a
former Chief of the Complex Frauds and Cybercrime Unit of the United States Attorney’s Office
for the Southern District of New York. I regard ensuring the comprehensiveness,
professionalism and integrity of this investigation as an essential part of my job as Chief
Executive Officer.
73. Transparency with regulators around the world is an important objective
for the Debtors. Since Friday, the Debtors have been in contact with dozens of regulators
throughout the United States and around the world, and will continue to be as these cases
continue.
I. Regulated and Licensed Subsidiaries
74. The FTX Group included regulated or licensed subsidiaries in many
jurisdictions that may or may not have valuable going concern franchises. The Debtors will soon
be taking efforts to preserve these subsidiary businesses to the extent practicable under the
circumstances. The Debtors also are engaging a leading investment bank to assist the Debtors in
valuing these businesses and potentially conducting sales efforts.
J. Access to Data
75. The Debtors have cryptocurrency, digital assets and other critically
sensitive data in repositories that have been the subject of unauthorized attempts to access. The
Debtors have implemented certain defensive measures. The Debtors have been advised that
attempts to access this property of the estate may create a risk of its loss to unauthorized persons.
The Debtors expect to seek special relief from the Court to authorize measures to access this
information as safely as possible. The Debtors are unable to create a list of their top 50 creditors
that includes customers without access to the data repositories at issue, and may seek related
relief from the Court as well if the problem cannot be promptly resolved.
K. Corporate Communications
76. Finally, and critically, the Debtors have made clear to employees and the
public that Mr. Bankman-Fried is not employed by the Debtors and does not speak for them. Mr.
Bankman-Fried, currently in the Bahamas, continues to make erratic and misleading public
statements. Mr. Bankman-Fried, whose connections and financial holdings in the Bahamas
remain unclear to me, recently stated to a reporter on Twitter: “F*** regulators they make
everything worse” and suggested the next step for him was to “win a jurisdictional battle vs.
Delaware”.
I declare under penalty of perjury that the foregoing is true and correct.
Dated: November 17, 2022 /s/ John J. Ray III
Name: John J. Ray III
Title: Chief Executive Officer
Exhibit A
Summary of the Silos and Indicative Assets
Exhibit B
Preliminary Corporate Structure Chart
