John J. Ray III's interim report stated, “Despite [high] asset levels and transaction volumes, the FTX Group lacked fundamental financial and accounting controls. Reconstruction of the Debtors’ balance sheets is an ongoing, bottom-up exercise that continues to require significant effort by professionals.”
A recent court filing revealed that FTX lacked adequate governance, accounting, and security controls under its previous leadership.
According to the exchange’s new CEO John J. Ray III, the FTX Group did not maintain appropriate financial records even though the exchange processed as many as 26M transactions every day. As a result, fifty-six entities operating under the FTX Group failed to disclose financial statements to the debtors.
The court document stated that insiders issued undocumented loans from Alameda Research. In fact, FTX executives altered the codebase of FTX.com to grant additional trading privileges to Alameda. These included the authorization to limitlessly withdraw assets from FTX and a complete exemption from the exchange’s auto-liquidation process.
Ray’s interim report also referenced the security breach of November 2022, when hackers stole around $400M worth of assets from FTX shortly after the firm filed for bankruptcy. He said FTX’s failure to implement basic security features exposed user funds to hacking and misappropriation. The new CEO of FTX further claimed that the exchange held "virtually all crypto assets" in hot wallets. In his words,
“FTX Group employees openly acknowledged uncertainty about FTX Group’s use of cold storage, and that regulators and users appeared to receive different information on the subject.”
Furthermore, FTX did not implement appropriate systems for managing the private keys and seed phrases used by FTX.com, FTX.US, and Alameda.
The court document submitted by Ray was synonymous with his earlier criticisms of FTX’s corporate practices. So far, FTX’s debtors have recovered $1.4B worth of assets from the bankrupt platform. Moreover, the debtors seek to recover an additional $1.7B in digital assets.
Written by
Ayush Pande
Ayush Pande is a hardware, gaming, and crypto writer based in India. He's a tech enthusiast who's fascinated by the potential of blockchain technology.
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