FTX Dumpster Fire Continues To Smolder

FTX, under the oversight of CEO John Ray III, released a 45-page report on the firm’s organizational failures leading to the collapse of the company. It’s an extensive and thoroughly damning report, with key findings including FTX’s slapdash record-keeping, nearly non-existent cybersecurity defenses and its sparse expertise in key areas like finance. (You can find the report on the Kroll debtor website, under Quick Links and the heading “Notice of Filing First Interim Report”.)

That last part is especially alarming, given that FTX was a trading platform. The report also examines associated trading firm Alameda Research which, according to the document “often had difficulty understanding what its positions were, let alone hedging or accounting for them.” This, combined with the extraordinary latitude the firm was given lead to the sort of disaster any rational person would expect. The report is very explicit about the scope of the failures here:

The FTX Group configured the codebase of FTX.com and associated customer databases to grant Alameda an effectively limitless ability to trade and withdraw assets from the exchange regardless of the size of Alameda’s account balance, and to exempt Alameda from the auto-liquidation process that applied to other customers. Any number of different controls routinely implemented by financial institutions and exchanges in established financial markets would be expected to have prevented, detected, and escalated these secret privileges to personnel in control functions with sufficient independence and authority to address the issue.

The FTX Group not only failed to disclose these privileges to its customers or the public, but affirmatively misrepresented Alameda’s privileged status relative to that of other customers. On July 31, 2019 — the same day Singh altered the codebase to allow Alameda to withdraw apparently unlimited amounts of crypto assets from FTX.com, and a week after he altered it to effectively exempt Alameda from auto-liquidation — Bankman-Fried claimed on Twitter that Alameda’s account was “just like everyone else’s and “Alameda’s incentive is just for FTX to do as well as possible.” As recently as September 2022, in interviews with reporters, Bankman-Fried claimed that Alameda was a “wholly separate entity” and Ellison claimed that Alameda was “arm’s-length and [did not] get any different treatment from other market makers.

This is all very bad, but in addition, SBF is also on record making such self-incriminating statements as: “[Alameda is] hilariously beyond any threshold of any auditor being able to even get partially through an audit.” SBF continued:

Alameda is unauditable. I don’t mean this in the sense of ‘a major accounting firm will have reservations about auditing it’; I mean this in the sense of ‘we are only able to ballpark what its balances are, let alone something like a comprehensive transaction history.’ We sometimes find $50m of assets lying around that we lost track of; such is life.

First, I would argue that SBF is wrong about this classification. Alameda is “auditable,” in the sense that it clearly would fail any audit worth doing. Presumably he means there is no way to correct the records so as to pass an audit, but SBF has revealed himself to be only a marginally intelligent scammer whose brazen manner substituted for charisma and expertise. Statements like this are going to come back to haunt him again and again, as his litany of criminal charges are processed. I’m looking forward to seeing how that all pans out.

Derek Avatar