John J. Ray III, the new FTX CEO issued a scathing assessment of “unprecedented” poor management practices by his predecessor, Sam Bankman-Fried and listed a series of questionable financial activities in a filing to Delaware bankruptcy court.
“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,” said Mr Ray in the document.
This filing came less than a week after his appointment as Debtor’s CEO of FTX last Friday following the resignation of FTX founder and former CEO and the announcement of FTX’s bankruptcy filing.
Mr Ray, who has previously supervised financial scandals such as Enron, criticized poor record-keeping and a lack of experience among senior managers.
“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.”
He pointed out that FTX “did not keep appropriate books and records or security controls” for its digital assets, used unsecured shared email accounts to access private keys, and to this day cannot provide a list of those working for the company as at 11 November.
Ray also criticized the use of software to conceal the “misuse of corporate funds,” a failure to reconcile blockchain positions daily, and the absence of independent governance between Alameda and the cluster of companies that includes FTX.com
In the Bahamas, FTX Group corporate funds were “used to purchase homes and other personal items for employees and advisors,” and assets were assigned to staff personally with no record of them having to repay any loan, noted Mr Ray.
Mr Ray also pointed out that FTX Group’s approach to human resources is to combine employees of various entities and outside contractors, with unclear records and lines of responsibility.
In his conclusion of the financial reporting for FTX, he wrote:
He noted that the company is 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 he is comfortable as Chief Executive Officer.
This is made more difficult given that the FTX Group does not have an accounting department or had outsourced this function.
Temasek Holdings in its statement on Thursday (17 Nov) in regard to its due diligence, said it had conducted an extensive due diligence process on FTX, which took approximately 8 months from February to October 2021.
“During this time, we reviewed FTX’s audited financial statement, which showed it to be profitable,” it said.
“Advice from external legal and cybersecurity specialists in key jurisdictions was sought, with legal and regulatory review done for the investments.”
“Separately, we also gathered qualitative feedback on the company and management team,” it assured but did say that it is not practicable to eliminate all risks.
Temasek then in its statement, goes on to blame Mr Bankman-Fried, “It is apparent from this investment that perhaps our belief in the actions, judgment and leadership of Sam Bankman-Fried, formed from our interactions with him and views expressed in our discussions with others, would appear to have been misplaced.” (emphasis ours)
It said it had expected FTX to act ethically always, “We expect companies that we invest in to comply with their obligations under the laws and regulations of jurisdictions in which they have investments or operations; abide by sound corporate governance; and above all act ethically always.”
Now, given Temasek’s massive portfolio of S$403 billion, it would have been easy to compel the FTX group to provide sufficient data for the purpose of a pre-investment check.
That it found nothing within the span of the 8 months of due diligence before FTX’s fateful collapse is nothing but troubling. Especially since Temasek reportedly invested in FTX’s B series fundraising round in July last year before its supposed due diligence concluded.
While Temasek has reported healthy gains in its portfolio, it is still unsettling to see how it choose to invest in such a company via three funding rounds in spite of the issues highlighted by Mr Ray.
Considering the statement by Temasek which highlights a misplaced belief in the disgraced CEO and what Mr Ray has undercovered in the short span of time, one might come to the conclusion that the decision to invest US$275 million dollars into the cryptocurrency exchange is something that was made based on faith rather than a prudent act of investment weighing against the potential risks and gains.
Some investors have shared that their confidence to invest in FTX was boosted by Temasek’s involvement, thinking that surely the sovereign wealth fund would know better than they do.
Given its non-disclosure policy involving its investments despite the use of Singapore’s reserves and its well-publicised losses, one would shudder to even guess how many of Temasek’s investments are made in the same manner as it did for FTX.
