It’s completely normal for any new CEO to march in and relentlessly s..t-talk their predecessor.

Some do it quietly, white-anting previous leaders at well-chosen moments to select individuals to bolster support for themselves.

While others take a more brazen approach, in the style of Elon Musk and his takeover of Twitter that saw him using the very platform he’d bought to humiliate the former bigwigs as, one by one, they either jumped or were pushed out the windows at Twitter HQ.

And then there’s this guy – John J. Ray III; a man who looks like what happens when you spell “Lawyer” three times on a Ouija board, burdened with a name that sounds like it belongs to The Next Big Thing from the down’n’dirty world of semi-professional boxing in 1930s New York City.

He’s neither of those things – but he is the replacement CEO of failed crypto exchange FTX, who has set an epically high bar on just how far under the bus it is possible to throw one man.

A few days back, John J. Ray III dropped an interim report into the current state of FTX off at the Delaware court tasked with unpicking the bankruptcy mess that Sam Bankman-Fried (hereafter referred to as SBF) and his cronies have (allegedly) left behind.

True to form, he neither pulled his punches, nor minced his words.

It’s a hard enough read even if you’re not the one on the receiving end of it – but if you were, it’s most likely enough to make you wish a giant chasm of unexplainable and incredibly illegal debt would simply open up underneath you, and swallow you whole.

 

Hubris, incompetence, greed… oh my! 

Those are the three words that are highly likely to haunt the dreams of SBF and the rest of the Prat Pack that held the reins at FTX, while it ballooned like an ageing Marlon Brando before bursting like a foul-smelling cyst that saw SBF riding a wave of ooze all the way into the arms of the po-po.

But John J. Ray III (hereafter referred to as JJR, for consistency’s sake) isn’t being at all hyperbolic. From what he’s presented in this most recent report, it’s frankly astonishing that FTX made it as far as it did before imploding.

The 45-page report filed by JRR Token (or whatever his name is) made it very clear from the outset that, after months of sifting through the shoddy documentation that survived the blast, FTX was “a web of parallel corporate chains with various owners and interests, all under the ultimate control of Bankman-Fried.”

This is somewhat unusual, especially for a business that was supposed to be looking after enormous piles of other people’s money and assets, but particularly scary in this case because of the cavalier – dare I say, laissez-faire – attitude to quite a number of Very Important aspects of the business.

Quoting internal communications, it appears that the only way SBF could have been any more negligent was to have locked FTX in a car beneath The Star Casino in Sydney and gone upstairs to gamble for 48 hours straight, like a proper, responsible grown-up.

He has, in essence, hung himself – which makes the following quote almost too deliciously ironic to be true.

 

Such is life

Widely known as the last words of Aussie folk legend Ned Kelly, and emblazoned on the chiselled abs of countless Gold Coast bogans, the phrase “Such is Life” stands proud in the Aussie lexicon as a statement made by someone for whom life no longer holds any possible positive meaning, without any chance of redemption.

And by one guy who was about to be executed for being a bushranger.

But for SBF, it’s the crude punchline to the kind of joke that would make anyone owed money by the failed exchange justifiably homicidal with rage.

“We sometimes find $50 million of assets lying around that we lost track of; such is life,” Bankman-Fried wrote to co-workers, according to JJR’s report.

As horrifying as it is to read, it does go some way towards providing insight into how it all went belly up – if a company could “sometimes find $50 million of assets lying around”, it’s not a huge leap to make that the same management team would ‘sometimes forget’ about 160 times that in liabilities.

Which, apparently, it did – kinda. Large chunks of what went missing was shovelled holus-bolus into the coffers of FTX’s comrade-in-arms, Alameda Research, to be gambled with complete impunity.

And again, we’ll let SBF explain that in his own words.

 

Alameda was ‘hilariously’ impossible to audit

According to JJR’s report, there wasn’t a whole lot of record-keeping going on FTX.

“Copies of key documentation — including executed loan agreements, intercompany agreements, acquisition and investment documents, bank and brokerage account statements, and contract and account information of all types — were incomplete, inaccurate, contradictory, or missing entirely,” the report said.

Now, I’m no expert, but all of those things do sound like they might be pretty important.

But where SBF and his team were definitely lacking in writing down the stuff that should be written down, one thing they excelled at was writing down a bunch of stuff they shouldn’t.

And that includes SBF’s assurances that are akin to saying that what happens in Alameda, stays in Alameda – as this quote from JJR’s report clearly shows:

“In an internal communication, 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.’”

For so many reasons that there isn’t room enough here to list them, that is a “hilariously” moronic statement to commit to paper.

I don’t mean this in the sense of ‘maybe I shouldn’t have said the quiet bits out loud’; I mean this in the sense of ‘you are 100% going to go to jail, because if you were any dumber we’d only have to water you twice a week to keep you alive’.

 

But how dumb is ‘too dumb’, really?

That, you might be surprised to learn, is actually quite easy to answer – thanks to an extraordinary revelation in JJR’s off-the-top-turnbuckle back-breaker in the Delaware Disaster Zone Arena (formerly known as United States Bankruptcy Court, District of Delaware).

And it hinges on how, and where, FTX stored the assets and funds it was meant to be storing, and how securely they were stored.

So – given that it’s being brought up in this context – you probably won’t be at all surprised to learn that FTX stored a noteworthy chunk of those assets and funds in a relatively insecure place, guarded by passkeys that were also stored (stop me if you’ve heard this one before) in a relatively insecure place.

The coins were in a combination of both cold wallets (good) and hot wallets (as far from good as you can get without handing them out for free on a street corner) – the latter being particularly bad because the keys to those wallets were stored on Amazon Work Services (AWS).

Yep – the same AWS that has repeatedly leaked like a French chef’s sieve, at least 15 times since 2017, if the boffins at FirewallTimes.com have their numbers correct.

The thing that stings the most is that they knew… FTX bloody well knew… that it was doing the wrong thing with its wallets and keys, because, as John J. Ray III noted:

“The FTX group undoubtedly recognised how a prudent crypto exchange should operate, because when asked by third parties to describe the extent to which it used cold storage, it lied.”

Whether it’s because of the unholy marriage of hot wallets and obviously mishandled keys, or whether that system was in place – as some people who totally aren’t me, because I don’t fancy getting sued this week, are alleging – to offer a surprisingly forward-thinking layer of plausible deniability, remains to be seen.

What remains unlikely to ever be seen again, though, is the US$432 million that walked itself out of FTX’s hot wallets after the company filed for bankruptcy.

 

On a scale of 1 to cooked, just how big of a BBQ is SBF sitting on?

While none of the basic information from JJ “Where’s my money?” Ray (the third) is super-new, the extent to which the shenanigans are alleged to have occurred is quite startling.

What is new in recent days, though, is a fresh indictment from the US government prosecutors, and it’s bonkers.

The new, 13th indictment against SBF alleges that the former FTX CEO “conspired to bribe Chinese government officials with a $40 million payment in order to unfreeze certain cryptocurrency accounts that had been frozen”, according to Reuters.

It’s been five months since FTX collapsed and regulators started sniffing around, and 146 days since JJR was put in place as the new CEO.

Taking into account weekends and public holidays, that means JJR’s had his feet under the CEO’s desk for 100 working days, getting paid US$1,200 an hour (on top of the US$200,000 up-front retainer) to go combing through the books to figure out how, why and where it all went wrong.

And that is both ample time and incentive for a guy of JJR’s fearsome reputation to be absolutely certain of his facts before handing over everything he’s learned to prosecutors every step of the way.

Plus, several people named as co-conspirators have rolled over faster than a badly-driven Mustang (which is all of them) – and that can’t be a positive for any defence SBF is trying to mount.

So, in summary… SBF’s probably as f..ked as he is dumb – which is, by the looks of things, “very”.

“Hubris, incompetence, and greed” … It’s quite the epitaph, indeed.

 

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