By NEIL HARTNELL
Tribune Business Editor
FTX’s newly-appointed chief executive yesterday asserted that corporate governance was non-existent at its Bahamian subsidiary, adding: “Never have I seen such a complete failure of controls in my 40-plus years.”
John J. Ray, who almost two decades ago oversaw the bankruptcy of Enron, the energy trader whose failure sparked global accounting and corporate governance reforms, also took a thinly-veiled swipe at this nation by referring to “faulty regulatory oversight abroad” of the collapsed crypto currency exchange.
And, in legal filings with the Delaware Bankruptcy Court, he also alleged that FTX used corporate funds to acquire Bahamian real estate for its senior executives but placed these assets in their name - not the company’s. No details were provided.
Meanwhile, Brian Simms KC, the senior Lennox Paton partner who has been appointed joint provisional liquidator of FTX Digital Markets, the exchange’s Bahamian subsidiary, warned in separate legal documents that its assets were “at serious risk” of being list, stolen or seized unless frozen by the US courts.
He and fellow provisional liquidators, PricewaterhouseCoopers (PwC) accounting duo, Kevin Cambridge and Peter Greaves, urged the US federal bankruptcy court in southern New York to grant them “emergency” recognition. And Mr Simms also delivered bad, but not surprising, news for FTX Digital Markets’ creditors - including its Bahamian staff and goods and services suppliers - by warning they are unlikely to recover 100 percent of what is owed to them.
With the competition for control of FTX’s assets, and its winding-up, between Mr Ray and the Bahamian provisional liquidation heating up, the former revealed that the Bahamian subsidiary’s balance sheet contained some $149.336m in assets as at end-September 2022.
While warning that FTX’s financial accounts and figures cannot be relied upon, Mr Ray disclosed that 55 percent or $82.564m of the assets shown on FTX Digital Markets’ balance sheet relate to “cash and cash equivalents”. A further $45.944m, or 30.7 percent, was said to be owed to the Bahamian subsidiary by other entities in the FTX empire, and was listed as “related party receivables”.
However, Mr Ray’s filings in the Delaware courts alleged that FTX Digital Markets owed a net $30m debt to its group affiliates. “Non-debtor FTX Digital Markets has a net inter-company accounts payable of $30m due to entities controlled by debtor, FTX Trading Ltd,” he asserted.
Providing a bleak assessment of what caused FTX’s implosion, which took its co-founder, Sam Bankman-Fried, from crypto genius and hero to zero in the space of a week, Mr Ray blasted: “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.”
“Many of the companies in the FTX Group, especially those organised in Antigua and The Bahamas, did not have appropriate corporate governance. I understand that many entities, for example, never had board meetings.”
Focusing on FTX’s near-complete absence of payment and cash controls, Mr Ray added: “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.
“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.”
Mr Simms, meanwhile, said it was vital that the US courts approve the FTX Digital Markets’ provisional liquidators’ bid for an urgent asset freeze and recognition if they were to accurately determine the company’s true position and trace, secure and recover monies for clients and creditors.
“We are in the early stages of what will likely be a lengthy wind down or restructuring process for FTX Digital,” the Lennox Paton partner revealed. “As discussed, at this juncture, the full scope and location of FTX Digital’s assets, claims and liabilities are unknown. Accordingly, it is critical that the court enter an order preventing creditors from executing on FTX Digital’s assets for at least two reasons.
“First, as discussed, at this time the full extent of FTX Digital’s assets is unknown, and therefore it is possible that unscrupulous creditors may attempt to take advantage of this by executing on FTX Digital’s assets before they become known to the joint provisional liquidators.
“Second, it is believed that FTX Digital is cash flow insolvent, and creditors may therefore receive something less than a 100 percent recovery on their claims against FTX Digital. Accordingly, an order preventing creditors from executing on assets now in an attempt to realise more than they would receive in the Bahamian litigation is paramount.
“It is my belief and opinion that an order of the court preventing execution against the debtor’s assets will ameliorate the threat of dissipation of the debtor’s assets before they can be properly administered by the joint provisional liquidators. It is my belief that the longer the holders of the debtor’s assets have the ability to transfer or dispose of them, the less likely it is the joint provisional liquidators will be able to recover said assets for distribution or restructuring in The Bahamas.”
Giving as equally a bleak picture as his Delaware counterpart, Mr Simms added: “At the most basic level, the joint provisional liquidators are presently unable to ascertain FTX Digital’s financial position, and its assets and liabilities more generally, nor do the joint provisional liquidators have the totality of the information necessary to protect FTX Digital’s assets.
“The authority to seek discovery requested in the motion is critical to my ability to discover the full extent of FTX Digital’s assets and financial situation so that I can work towards a full, efficient and equitable distribution of FTX Digital’s assets to creditors in the Bahamian liquidation.”
Asserting that the Bahamian provisional liquidators will need to determine whether FTX Digital Markets has claims against other group entities over “insider transactions”, Mr Simms added: “US records of FTX Digital and the FTX brand are likely to be of critical importance to the Bahamian liquidation for multiple reasons.
“For example, these documents could provide a clear picture of the reasons for the insolvency of FTX Digital, and allow the joint provisional liquidators to make an informed judgment as to the potential third party claims available to FTX Digital, and to determine if FTX Digital holds additional, undisclosed assets.
“The books and records will provide valuable insight into the financial machinations that led to the alleged dissipation of FTX Digital assets at the expense of creditors. The discovery of these agreements and other financial documents will likely provide further insight into the financial engineering, which appears to have contributed to the insolvency of FTX Digital.”