Key Takeaways From House Hearing on FTX Crypto Collapse

Hearings into the FTX crypto collapse kicked off without input from now-jailed founder Sam Bankman-Fried.

As reported by PYMNTS, the failed FTX founder faces eight interrelated criminal counts levied against him by the U.S. Department of Justice (DOJ), as well as additional civil suits filed by the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC).

He was arrested in the Bahamas a dozen or so hours before he was set to testify in front of lawmakers during Tuesday’s (Dec. 13) House Financial Services Committee hearing titled, “Investigating the Collapse of FTX, Part I.”

As a result of his incarceration, SBF, now Bahamas inmate #14732, was forced to cede the floor to John J. Ray III, the CEO appointed to manage FTX’s bankruptcy process, who was left the sole witness present.

Ray, who also famously managed Enron’s restructuring, is no stranger to lawmaker inquiries.

“A house of cards”

It remains unclear why the DOJ moved to arrest SBF so soon before his testimony, an action that left House Financial Services Committee chairwoman Maxine Waters “surprised” and “disappointed,” according to a public statement.

Several lawmakers present also questioned the intent behind the DOJ’s actions, which Ray declined to address.

The new FTX group CEO did say during the hearing that subjecting SBF to questioning by lawmakers would have been “incredibly helpful” for his own investigation. He called the situation with FTX a “literal paperless bankruptcy.”

Ray similarly stated, as part of his prepared testimony, that a fundamental challenge underscoring the task of unwinding the FTX debacle is that he and his team are, “in many respects, starting from near-zero in terms of the corporate infrastructure and record-keeping that one would expect to find in a multi-billion-dollar international business.”

The unsealed federal indictment of SBF states that FTX has been fraudulent since its founding in 2019.

“We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto,” said SEC Chair Gary Gensler in a public release.

For around four hours, lawmakers pressed Ray, who described the situation at FTX as “old-fashioned embezzlement.”

FTX’s tight-knit leadership group could have stolen digital assets from the company “and have it on a thumb drive somewhere,” he said.

This contrasts with the “highly sophisticated” crimes of Enron’s executives.

Ray pointed to the fact that FTX, a multibillion-dollar company, used Intuit’s QuickBooks accounting software, a bookkeeping tool mostly relied upon by small- or medium-sized operations.

A press conference held by the Manhattan U.S. attorney’s office this afternoon (Dec. 13) described FTX as operating “beneath a veneer of legitimacy,” and that the company’s risk controls and customer protection claims were “simply bogus.”

Forbes gained access to the prepared testimony  SBF would reportedly have given had he not been arrested and, like so many other aspects of this still-developing saga, it was a remarkable commentary.

His statement, which opens with an expletive-laced apology, goes on to share blame with everyone that served around him, while simultaneously repeating the claim that he alone could fix FTX’s problems if given the chance.

“Control of assets in the hands of a few people”

Asked during Tuesday’s Committee hearing about the underlying cause of FTX’s collapse, CEO Ray replied that the “unlimited ability” of the company’s small leadership team to misappropriate funds and deploy them for their own use was to blame. This central fissure, he said, was compounded by a spectacular lack of basic controls around documentation, governance and segregation of client funds and assets.

Alameda, Ray said, was able to transfer assets from FTX “on an unlimited basis to take positions with other people’s money,” adding that the company did not perform daily reconciliations.

“Clearly, any regulation would have helped,” he told lawmakers. “FTX was operated as one company. As a result there is no distinction between the operations of the company and who controlled those operations. We can confirm that user funds were deposited directly into Alameda instead of FTX.”

Notably, Ray declined to use the word “fraud” in response to lawmaker questions, saying instead the company did not have the proper controls in place.

He also demurred when asked which government agency should be responsible for regulating the crypto industry.

Ray did take aim at the Bahamas, claiming that the island nation’s liquidation process was “not transparent,” and that the U.S. Chapter 11 bankruptcy process was the best, and accordingly most transparent way to discover and recover misappropriated customer assets.

There is a “general truth” to the claims that customers of FTX’s U.S. exchange will suffer less than international investors, Ray said.

He added that FTX has yet to start the process of liquidating its own crypto assets, and that the company was “not solvent” prior to Binance CEO Changpeng Zhao’s tweet about selling his FTT tokens, which caused the now infamous “run” on FTX.

Separately, while SBF did not make it to the hearing in Washington, he did make his first appearance in a Bahamas court, where he reportedly has requested to be released on bail.

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