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New FTX chief calls company's collapse 'a complete failure'

New FTX CEO, John Jay Ray III, slammed the company's "complete failure of corporate controls" in a new document filed with U.S. bankruptcy court on Thursday.

“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,” Ray, the same lawyer responsible for winding down Enron in 2002, wrote in the filing.

Appointed at FTX’s Chapter 11 filing last Friday, the seasoned bankruptcy chief said FTX saw at least $372 million of "unauthorized transactions" just hours into his position as the platform’s new CEO. The firm has since put blockchain analytics company, Chainalysis, on the case.

Last week, the WSJ reported FTX could be missing up to $10 billion due to the decision by former FTX CEO Sam Bankman-Fried and others to use customer funds to make payments owed by sibling trading firm Alameda Research.

As for taming FTX's balance sheet, that might not happen any time soon, according to Ray, who raised questions around the accuracy of the failed enterprise's financials, including FTX US, FTX, and Alameda.

"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," Ray wrote at several points in the document.

One reason is because there is little to no paper trail for key management decisions, the liquidator pointed out.

“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," he stated.

Thursday's declaration comes as Bankman-Fried continues to suggest the company's financial position remains stronger than outlined in bankruptcy documents, according to his most recent tweets.

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Other takeaways from the document include Ray’s assessment on what he finds to be the source of FTX's ultimate failure: “unacceptable management practices.”

Those included giving one "root user" access to all the company’s confidential financial information, “the use of software to conceal the misuse of customer funds,” and “secret exemption” of Alameda from the exchange’s auto-liquidation protocol.

“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,” Ray wrote.

Over the past week, FTX's bankruptcy has been likened to the fall of Lehman Brothers in 2008.

While only a fraction the size of Lehman Brothers' $691 billion case, both companies are "free fall" bankruptcies, meaning they appear to have a no plan prior to filing, Jesse Austin, a former bankruptcy partner with the law firm King & Spalding, told Yahoo Finance.

Representations of cryptocurrencies are seen in front of displayed FTX logo and decreasing stock graph in this illustration taken November 10, 2022. REUTERS/Dado Ruvic/Illustration
Representations of cryptocurrencies are seen in front of displayed FTX logo and decreasing stock graph in this illustration taken November 10, 2022. REUTERS/Dado Ruvic/Illustration

The first-day declaration is also Ray's way to prove his authority for having filed Chapter 11 last Friday. On Wednesday, Bahamian liquidators for FTX "rejected the validity" of its Bahamas unit, FTX Digital Markets, to proceed in the U.S., using the argument that no one was authorized under Bahamian law to file the U.S. Chapter 11 case.

FTX lawyers argued there was far more direct connection in another filing published around the same time.

"Mr. Bankman-Fried, the co-founder, and controlling owner of all of the Debtors and of FTX DM, appears to be supporting efforts ... to expand the scope of the FTX DM proceeding in the Bahamas, to undermine these Chapter 11 Cases, and to move assets from the Debtors to accounts in the Bahamas under the control of the Bahamian government," they stated in a Southern Distrcit of New York court document.

Though Bahamian liquidators have not shown evidence of seeking to dismiss FTX's other U.S. bankruptcy cases, it's not out of the realm of possibility, according to Austin.

"If true, then the U.S. cases could be subject to dismissal as being unauthorized filings," he added.

David Hollerith is a senior reporter at Yahoo Finance covering the cryptocurrency and stock markets. Follow him on Twitter at @DsHollers

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