New FTX CEO John Ray: Commingling Client Funds Not an Accident

New FTX CEO John Ray testified before the U.S. House Financial Services Committee on Tuesday. This is the first hearing in the committee’s public investigation into the collapse of the crypto exchange.

During the hearing, Ray told the committee that usage of FTX customer funds by Alameda was intentional, not an accident. He also criticized FTX for poor record keeping, claiming that the company used QuickBooks for bookkeeping.

FTX founder Sam Bankman-Fried was also scheduled to testify remotely, but he was detained by Bahamian law enforcement Monday evening. This comes after a U.S. court shared a sealed indictment with the authorities of the island nation.

FTX filed for U.S. bankruptcy protection on Nov. 11, and Bankman-Fried resigned as CEO on the same day. Ray replaced Bankman-Fried as chief executive to oversee the bankruptcy proceedings and locate missing funds.

Schemes and Insiders

In his prepared remarks for the hearing on Dec. 13, Ray included “the commingling of assets” in his list of “unacceptable management practices at the FTX Group.” He also confirmed what many media outlets have reported—namely that FTX customer funds were funneled to Alameda to finance the latter company’s trading schemes.

Ray accused former FTX executives of embarking on a “spending binge” of more than $6 billion, of which more than $1 billion went to FTX “insiders” in the form of personal loans or direct payments. He elaborated on these personal loans during the hearing, specifically loans that went directly to Bankman-Fried.

“When Sam Bankman-Fried signs on behalf of the company and then he signs his own loan, that should tell you a lot right there.”

The acting CEO noted that he and his team are employing “painstaking forensic efforts” to locate the company’s missing assets. However, Ray mentioned later in the hearing that “at the end of the day, we’re not going to be able to recover all the losses here.”

In a leaked draft of Bankman-Fried’s prepared remarks, obtained by Forbes, the defamed founder criticized Ray for ignoring his offers of assistance. “I have sent 5 emails to Mr. Ray. Mr. Ray has never responded, nor has he reached out to communicate with me in any other ways.”

Bankman-Fried insisted in his remarks that his inside knowledge of FTX could be useful as the new team attempts to track down assets. The founder has also claimed that FTX US is solvent and customers could be repaid today, and when asked about this, Ray stated bluntly, “It is not solvent. That’s just inaccurate.”

In his opening statement, ranking member of the committee, Rep. Patrick McHenry (R-N.C.), said FTX “appears to be the same old-school fraud, just using new technology,” though he did have encouraging things to say about digital assets in general.

“I believe in the promise of digital assets and those around the world building on blockchain technologies.”

‘Near-Zero’ Record Keeping

Ray’s opening statement included more harsh words for former FTX management, calling them “a small group of grossly inexperienced and unsophisticated individuals.” He added that the crypto exchange had “near-zero” record keeping that would be expected from a billion-dollar company.

House Financial Services Committee Chair Maxine Waters (D-Calif.) during a hearing in the Rayburn House Office Building on Capitol Hill on May 12, 2022 in Washington, D.C. (Chip Somodevilla/Getty Images)

When asked by committee chair Maxine Waters (D-Calif.) about unsavory business practices, Ray stated plainly that the fundamental issue at FTX was the use of non-U.S. customer funds by Alameda Research for “investments and other disbursements.”

Alameda engaged in derivatives trading in various cryptocurrencies, according to the acting CEO.

When asked about whether Bankman-Fried was involved in the day-to-day business of Alameda Research—the founder has previously claimed to have minimal involvement—Ray responded that he did not know for sure but that Bankman-Fried owned 90 percent of Alameda. Ray added that, in regards to whether the two companies were governed separately, “there was no distinction whatsoever.”

On the topic of regulation, Ray kept it simple: “You need records, you need controls, and you need to segregate people’s money.”

Rep. Ann Wagner (R-Mo.) asked the CEO about statements made by Bankman-Fried implying the accidental usage of FTX customer funds by Alameda.

“I don’t find any such statements to be credible,” Ray replied.

Founded in 2019, FTX was one of the world’s largest cryptocurrency exchanges. The firm was valued at $32 billion at its peak, while Bankman-Fried’s net worth was estimated to be $26 billion. He was the second-largest individual donor to the Democratic Party, donating about $40 million in the 2022 election. He also said he donated a similar amount to Republicans, but more quietly.

Billions of dollars in customer funds remain missing amid numerous and credible reports that FTX misused client money for personal loans to senior staff and to finance risky investments through sister investment firm Alameda Research. Ray acknowledged during the hearing that there may exist crypto wallets—software used to hold and trade cryptocurrencies—that his team is unaware of.

The CEO revealed that at least $100 million in customer funds was released to Bahamas-based FTX clients, just before Ray and his team took over. The balance was distributed to 1,500 different accounts—roughly $67,000 per account.

QuickBooks

Ray, who was responsible for the liquidation of failed energy company Enron, reiterated throughout the hearing that he’s never encountered anything like FTX, at one point highlighting the company’s use of QuickBooks. Lawmakers were surprised to hear this given the software is typically not used by international billion-dollar companies.

“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 wrote in a court filing in mid-November.

Speaking at the hearing, Rep. Bill Huizenga (R-Mich.) summed up his thoughts on the collapse of Bankman-Fried’s empire of influence: “It seems to me there’s a lot more to uncover here. Certainly, Mr. Bankman-Fried has, let’s say, wooed many in New York, Silicon Valley, around the world, and yes, certainly here in DC,” the congressman said.

“Everybody loved the exciting idea of a politically progressive, smart entrepreneur who is going to reimagine capitalism and change the world, feeling better about themselves, all while making them gobs of money,” Huizenga went on, referring to Bankman-Fried’s political and philanthropic donations.

Ray claimed to be investigating the relationship between FTX and Bankman-Fried’s politically connected parents. Bankman-Fried’s mother, Barbara Fried, founded the “Mind the Gap” progressive political group that funneled $20 million to Democrats in 2020.

“I’m glad to see it’s finally unraveled,” Rep. Huizenga concluded.

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Liam Cosgrove works as a freelance journalist covering business, markets, and finance. He received his bachelor’s degree in mathematics from the University of California, Santa Barbara.

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