Sam Bankman-Fried's Laughable Business Operation of FTX: My Comments on the First Interim Report
For the first interim bankruptcy report on FTX, see the well-written, nontechnical, court document here (hat tip to Molly Long):
https://www.courtlistener.com/docket/65748821/1242/1/ftx-trading-ltd/
I’ll do a sort of fisking, giving you juicy excerpts with brief comments of mine after each. I very much welcome reader comments on legal and business points.
" These individuals stifled dissent, commingled and misused corporate and customer funds, lied to third parties about their business, joked internally about their tendency to lose track of millions of dollars in assets, and thereby caused the FTX Group to collapse as swiftly as it had grown. In this regard, while the FTX Group’s failure is novel in the unprecedented scale of harm it caused in a nascent industry, many of its root causes are familiar: hubris, incompetence, and greed."
I hope the Bahamas still does public hangings. For more on the moral question, see:
"The Debtors have also been engaged in substantial analysis of FTX Group customer transaction data, which is housed in databases that are over one petabyte (i.e., 1000 terabytes) in size."
First time I've seen "petabyte" used. I'll have to tell my 7th grade math class.
"The set of electronic devices in the Debtors’ possession does not include those known to have belonged to Bankman-Fried and other key insiders that are currently in the possession of the Bahamian Joint Provisional Liquidators (“JPLs”) and are the subject of ongoing discussion between the Debtors and the JPLs."
It seems like those would be urgently needed by the Debtors. You can't wait 6 months when funds can be electronically transferred.
"While Singh, Wang, and Ellison have pleaded guilty pursuant to cooperation agreements with the Justice Department, it is generally not feasible for the Debtors to interview them on key subjects until after the ongoing criminal prosecution of Bankman-Fried has concluded. Wang has provided discrete assistance to the Debtors’ financial and technical advisors."
Doesn't this kind of blow the discrete part if they mean "discreet"? Or does "discrete" have a technical meaning here? Does it mean "non-zero"?
"With isolated exceptions, including for FTX.US Derivatives (“LedgerX”), a non-Debtor entity it acquired in late 2021, FTX Japan, a Debtor acquired in 2022, and Embed Clearing LLC, a non-Debtor acquired in 2022, the FTX Group lacked independent or experienced finance, accounting, human resources, information security, or cybersecurity personnel or leadership, and lacked any internal audit function whatsoever."
My first chairman, Mike Granfield at UCLA, talked about how in advising small businesses two of the main lessons were (a) Have a shoebox to put all your records in , and (b) Hire only relatives. Too bad FTX didn't call him.
" Similarly, less than three months after being hired, and shortly after learning about Alameda’s use of a North Dimension bank account to send money to customers of the FTX exchanges, a lawyer within the FTX Group was summarily terminated after expressing concerns about Alameda’s lack of corporate controls, capable leadership, and risk management."
The time to fire your lawyers is not right after they point out you're doing illegal stuff. It's not like shooting the messenger; it's like shooting your sentries.
“Indeed, in late December 2020, when the FTX Group learned, in connection with exploring a potential direct listing on NASDAQ, that FTX.US would have to be audited, and that this audit would include a review of policies and procedures, senior FTX Group personnel scrambled to cobble together purported policies that could be shown to auditors.”
Here we see an underrated reason to invest in U.S. publicly listed companies: they are required to have written policies and procedures. I wonder how many start-ups or private-turned-public companies have had to scramble this way? Note, too, that this probably makes such companies operate more efficiently, adding value to the economy. Regulation of public companies raises efficiency in this way. A private company can get away with sloppiness, on the other hand. An interesting example related to this is my church. We have started a graveyard next to the church. As a church we’re exempt from most of the rules that would apply to a for-profit or nonreligious nonprofit graveyard, but we’re voluntarily following them anyway, because things like putting aside sufficient funds for perpetual maintenance is good management, not just a bothersome regulation.1
“Data had to be transported from the FTX Group systems into QuickBooks manually, generally by outside accountants who did not have access to the source data to validate that they had completely and accurately transferred the data into QuickBooks. Furthermore, because they processed large volumes of data only manually, a great deal of transaction detail (e.g., the purpose of a transaction) was either populated en masse, or omitted entirely. Substantial accounts and positions went untracked in QuickBooks. Digital asset transactions were tracked in QuickBooks using the generic entry “investments in cryptocurrency,” but detailed recordkeeping reflecting what those cryptocurrency investments actually consisted of did not exist in QuickBooks, making reconciliation with other data sources extremely challenging or impossible.”
I write this on April 10, while procrastinating on my tax filing. I don’t know if this should make me feel better about the primitiveness of how I do my personal accounting, or worse (given what happened to the FTX executive).
“Approximately 80,000 transactions were simply left as unprocessed accounting entries in catch-all QuickBooks accounts titled “Ask My Accountant.”
What can I say?
Bankman-Fried described Alameda as “hilariously beyond any threshold of any auditor being able to even get partially through an audit,” adding:
"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. "
I wonder if he was lamenting, or boasting?
I guess it might worthwhile looking through his dryclearning; he probably leaves a lot of $100 bills in his pockets.
This is the first time I’ve had to punctuate quotes within quotes within quotes. I used the Substack block indent, then double quotes, then single quotes
“Thousands of deposit checks were collected from the FTX Group’s offices, some stale-dated for months, due to the failure of personnel to deposit checks in the ordinary course; instead, deposit checks collected like junk mail.”
Most of us can only wish we had this problem.
“Expenses and invoices of the FTX Group were submitted on Slack and were approved by “emoji.” These informal, ephemeral messaging systems were used to procure approvals for transfers in the tens of millions of dollars, leaving only informal records of such transfers, or no records at all.”
It would be worth prosecutors looking into how many of the lower-level employees were embezzling from FTX. Being approved by emoji is not a bad idea, but you do have to keep track of whether it was a smile or a frown.
Numerous loans were executed between former insiders and Alameda without contemporaneous documentation, and funds were disbursed pursuant to those purported loans with no clear record of their purpose. In one instance, an insider entered into an agreement to Case 22-11068-JTD Doc 1242-1 to purchase a piece of real estate. The funds used to purchase that property, however, were wired directly from Alameda and FTX Digital Markets Ltd. (“FTX DM”), a Bahamas-based entity which was owned by, and had obtained the funds from, FTX Trading Ltd. Only four months after the real estate purchase had closed did the employee enter into a promissory note with Alameda in which he undertook to repay the funds used to purchase the property. Other insiders received purported loans from Alameda for which no promissory notes exist.
An interesting law question is which kinds of loans are civil and which are criminal wrongs, and what the remedies would be. My guess is that all the insider loans were unlawful (if FTX was a corporation rather than a partnership or LLC, and even if it was those if they used boilerplate agreements), but only with the remedy of required immediate repayment with a market rate of interest. Loans with no documentation at all, though, sound like criminal embezzlement--- that if you get a pal to write you a check on the company account, the burden of proof switches to you to show it’s not criminal.
I’m only up to page 20 of 43 of this very good report. I should read the rest of it, but I really should get back to my tax filing now. If you do want me to finish going over the entire report, gentle readers, please LIKE or comment to increase the probability I’ll spend the time doing so.
If you want to buy a plot in Bloomington, Indiana, contact me at erasmuse61@gmail.com.