Sam Bankman-Fried helped Bahamian investors remove $100 million from their FTX accounts while other customers were locked out, new CEO testifies

FTX CEO John Ray III, who has guided dozens of companies, including Enron, through bankruptcy restructuring, called FTX’s collapse one of the worst business failures he has seen — a “paperless bankruptcy,” fueled by an “unprecedented lack of documentation.”

For nearly four hours, without a break, Ray told lawmakers about the lack of oversight and financial controls that he discovered since taking over FTX a month ago. He found a loan where Bankman-Fried was both the issuer and the recipient. There were expenses approved by emoji. FTX didn’t have accountants. For record-keeping, employees used QuickBooks, pre-packaged software typically used by small and medium-sized businesses, to manage FTX’s finances.

“Nothing against QuickBooks,” Ray said. “It’s a very nice tool, just not for a multibillion-dollar company.”

At its peak, FTX’s market value topped $30 billion.

Notably absent from the hearing before the House Financial Services Committee was Bankman-Fried, who was arrested in the Bahamas just hours before he was scheduled to testify. The arrest was made at the request of the U.S. Government, which on Tuesday announced criminal charges against Bankman-Fried including wire fraud and money laundering.

The timing of Bankman-Fried’s arrest frustrated many committee members. Republican Rep. William Timmons, of South Carolina, called the timing “bizarre” and added that, as a former prosecutor, he couldn’t imagine why any prosecutor wouldn’t want “hours of congressional grilling for the target of an investigation” to help make a case.

FTX filed for bankruptcy protection on Nov. 11, when the firm ran out of money after the cryptocurrency equivalent of a bank run. The collapse of crypto’s second-largest exchange has garnered worldwide attention, and prompted worries in the crypto industry that the pain could become widespread. Ray estimated that about $8 billion of customer funds are missing.

Some customers in the Bahamas, where FTX was based, were able to recover some money, Ray said. That’s because the Bahamian government and Bankman-Fried agreed to let them get their money out of FTX while customers in other countries were blocked from doing so, Ray said.

Ray, who took over FTX on Nov. 11, told the committee that the problems at FTX were a cumulation of months or even years of bad decisions and poor financial controls.

“This is not something that happened overnight or in a context of a week,” he said.

However, Ray didn’t answer numerous questions about what regulations could have stopped the collapse of FTX. Instead, he focused on how unusual FTX was — having no board of directors, having no real structure that prohibited money invested by consumers in FTX to be shifted to Bankman-Fried’s hedge fund Alameda Research for other investments or lavish purchases, without the original investors’ knowledge.

In his prepared remarks, Ray painted a picture of a company acting with little to no oversight.

“FTX Group’s collapse appears to stem from the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals who failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people’s money or assets,” Ray said.

In interviews since FTX filed for bankruptcy protection, Bankman-Fried acknowledged that the company lacked proper financial controls and corporate governance, but denied any fraud had been committed.

U.S. Prosecutors and financial regulators disagreed with that assessment. An indictment unsealed Tuesday charged Bankman-Fried with a host of financial crimes and campaign finance violations, alleging he played a central role in the rapid collapse of FTX and hid its problems from the public and investors. The Securities and Exchange Commission said Bankman-Fried illegally used investors’ money to buy real estate on behalf of himself and family.

Ray’s comments supported those allegations.

“This is just old fashion embezzlement, taking money from others and using it for your own purposes,” he said. “This is not sophisticated at all.”

A lawyer for Bankman-Fried, Mark S. Cohen, said Tuesday he is “reviewing the charges with his legal team and considering all of his legal options.”