The FTX cryptocurrency exchange may have been built to tap the promise of blockchain technology, but according to the new chief executive of the bankrupt company, John J. Ray III, it ran an “old-fashioned embezzlement” operation that just took money from customers for its own purposes.
Ray spoke Tuesday at a near four-hour U.S. Congressional hearing in Washington DC. Sam Bankman-Fried, the ex-CEO and founder of the exchange that just a couple of months ago was valued at US$32 billion, didn’t get to speak at the hearing following his arrest in the Bahamas on Monday.
Bankman-Fried was denied bail by a judge in the Bahamas on Tuesday, who said he is a flight risk, and faces extradition to the U.S.
On the same day as the hearing, the U.S. Securities and Exchange Commission (SEC) said Bankman-Fried orchestrated a years-long fraud on investors. A U.S. Justice Department indictment, also unsealed the same day, charges him with multiple counts of securities fraud, wire fraud, conspiracy, money laundering, and violating campaign finance rules.
If convicted, he could face decades in prison.
Ray – who served as chief restructuring officer of the US$60 billion energy giant Enron’s bankruptcy in 2001 – and his team have alleged that Bankman-Fried transferred billions of dollars in FTX customer funds to his hedge fund, Alameda Research.
In his testimony, Ray said the exchange’s troubles began “months, if not years” before it filed for bankruptcy on Nov. 11. According to Ray, his team has been able to secure over US$1 billion in assets, but he did not say how long it could take to recover more funds. According to earlier bankruptcy filings, FTX may have as many as a million creditors.
The bankruptcy lawyer said unraveling what happened at FTX is complicated because the exchange used “unsophisticated” accounting and invoicing. They included messaging apps and the business software QuickBooks, which is built for small businesses, to track billions of dollars in assets.
The hearing was led by the House Financial Services Committee and its Chairman, Congresswoman Maxine Waters, who said she hopes the arrest will hold Bankman-Fried accountable for his fraud, but that “unfortunately, the timing of his arrest denies the public the opportunity to get the answers they deserve.”
Similarly, ranking member of the Financial Services Committee Congressman Patrick McHenry said the arrest of Bankman-Fried was welcome news, but more needs to be known about who else is responsible.
“Frankly, I look forward to getting his lies here on the record, under oath,” he added.
Congressman William Timmons expressed frustration over the timing. “Would it have been helpful to have the defendant testify before Congress for six hours answering questions under oath prior to his trial?”
He added: “I look forward to figuring out why the Department of Justice (DOJ) issued a provisional arrest warrant to preclude Sam Bankman-Fried from testifying before us this afternoon.”
Congresswoman Alexandria Ocasio-Cortez said she understood that Ray was unaware of the timing of the Department of Justice’s initial request for the extradition of Bankman-Fried. She said the arrest by Bahamian police came hours after Ray filed evidence in bankruptcy court concerning the relationship Bankman-Fried had with the Bahama authorities.
The evidence shows an email between Bankman-Fried to the Attorney General of The Bahamas on Nov. 9. In it, Bankman-Fried said FTX “segregated” funds belonging to Bahamian customers and offered to open withdrawals exclusively to Bahamian clients. The exchange had frozen withdrawals for customers elsewhere.
On November 10, FTX announced on Twitter that they began to facilitate withdrawals of Bahamian funds in accordance with the country’s regulations and regulators.
In a Tuesday statement, The Securities Commission of the Bahamas accused Ray of making “misstatements” to “advance questionable agendas” related to the FTX case.
Representative Jake Auchincloss requested Ray to update the committee with any findings of improper collusion between Bankman-Fried and any authorities in the Bahamas.
While Bankman-Fried did not appear at the hearing , Fobes released what is said was a copy of his planned testimony in which Bankamn-Fried took shots at Ray’s management and expressed regret over “giving in to pressure” to file for bankruptcy.
“I have reached out to Mr. Ray and the Chapter 11 team numerous times. Sometimes I’ve been requesting access to my own data, but other times I’ve been attempting to alert them to potentially important information for their jobs and duties to creditors and customers of FTX,” read the testimony.
Ray told the hearing that he has not spoken to Bankman-Fried and that he plans to keep him uninvolved in the proceedings following his arrest. Ray also rejected claims in Bankman-Fried’s testimony that FTX US remains solvent.
“There was a public distinction between FTX.com and FTX US, but what we’re seeing now is that the crypto assets for both were housed in the same database,” Ray said, adding that executives had free rein across assets from all Bankman-Fried’s companies.
Congressman Patrick McHenry concluded the session by noting that the title of the hearing was Investigating the Collapse of FTX, Part I, adding, “part two will be next year.”