Bankruptcy proceedings are about locating assets, determining how much they are worth and then distributing them to whoever they rightfully belong. Based on such criteria, the FTX Chapter 11 case can now be confirmed as an official nightmare.
On Thursday, its new chief executive, John Ray III, wrote in detailed court papers that the FTX debacle was “a complete failure of corporate controls and [demonstrated] such a complete absence of trustworthy financial information”. Ray had once helped clean up Enron so presumably he is not easily disturbed.
In the filing, Ray first delineated the four silos of FTX operations. These were a US-based trading platform, a segment making venture capital-like investments, the Alameda Research crypto trading arm and the main offshore unit. The last held the bulk of customers’ accounts.
Proper cash controls, corporate governance and bookkeeping are basically non-existent at FTX, Ray discovered. Crypto assets have gone missing, with forensic investigators trying to track them down in cyber space.
Just how the various silos shuffled money around is not well understood. One example, the Alameda Research unit, according to its balance sheet from September, showed it was owed billions personally by FTX management. That includes the now-deposed Sam Bankman-Fried. At the same time, Ray said the financial statements he could find and piece together were unreliable, implying that the reality of the financial calamity is even messier than first thought.
One important item conspicuously missing from the financial statements is the value of FTX customer crypto accounts. At one point those had been estimated to be in the $10bn-to-$15bn range. FTX customers will be the ultimate creditors in this bankruptcy.
Customers will need to fight with other claimants for whatever scraps of crypto that can be located. They will also battle over the value of litigation claims against the company and its executives who precipitated the collapse.
Finding and distributing assets to share with creditors will take years of toil. And after all that, do not expect them to be pleased with what remains.