Bankruptcy attorney and new CEO of FTX, John Ray, spoke to the House Financial Services Committee on Friday to break down some of the internal details of the exchange’s fallout.
Ray said the assets of Alameda Research’s FTX clients were used for margin trading, confirming a long-held suspicion about the two companies that former boss Sam Bankman-Fried (SBF) was reluctant to admit.
confirmation of fraud
While his Preliminary remarksRay said his investigation is still at an early stage, but some critical facts are already clear.
“Initially, client assets at FTX.com were mixed with assets at the Alameda trading platform,” he said. “That much is clear.”
“Second, Alameda has been using client funds to engage in margin trading, which has exposed client funds to massive losses,” he added. As a market maker, Alameda had provided funds to “various third-party exchanges” that were “inherently unsafe” and subject to limited market protections within those jurisdictions.
When asked about the governance ties between FTX and Alameda, Ray said there is virtually “no separation” between the companies, nor any internal risk management controls. The entire FTX group, consisting of over 130 companies including FTX.com, FTX US and Alameda, was “owned and controlled by Sam Bankman-Fried”.
While there was a “public distinction” between FTX and FTX US, Ray said crypto assets for both firms are housed in the AWS system. Still, these were independent of Alameda’s fortune – which may lend credibility to the Bankman-Frieds previous claims that FTX US is still solvent.
Responding to the former billionaire’s claims that he didn’t make decisions about running Alameda, Ray’s statements were far more skeptical.
“I will note that he owned 90% of Alameda. There is no distinction whatsoever. The owners of the company could have free reign across all silos.”
Contributing to FTX’s financial woes in both 2021 and 2022 was a so-called “spending frenzy,” with $5 billion spent on businesses and investments. The company’s lavish spending on various sponsorships, a stadium and others promotional offers has received a lot of criticism from competing exchange leaders, including Binance Changpeng Zhao and octopuses Jess Powell.
Claims by Bankman-Fried
Sam Bankman-Fried avoided directly answering whether client funds were used for margin trading at Alameda Research, assert that he “did not know” that client funds were being misused.
However, he has specified in previous interviews that client assets were treated with “fungibility” during the bank run against its stock exchange in early November. This means that clients holding digital assets on the exchange, the security of which was guaranteed under its exchange’s terms of service, were treated the same as assets used for futures and margin trading.
Bankman-Fried was scheduled to appear alongside John Ray at the congressional hearing but was arrested by Bahamian regulators on Monday. In his prepared remarks, he Approved that FTX lacked a risk management team.
Featured image courtesy of Bloomberg.
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