Lawmakers hold FTX hearing despite former CEO arrest

WASHINGTON — The new CEO of failed cryptocurrency exchange FTX painted a picture of a company plagued by a lack of oversight and financial controls when testifying before a House committee Tuesday. 

John Ray III, who discovered these issues after taking over the company a month ago, called FTX’s collapse one of the worst business failures he has seen — even considering Enron, which he helped restructure two decades ago.

The problems at FTX were a cumulation of months or even years of bad decisions and poor financial control, said Ray, who took over FTX on Nov. 11.

“FTX Group’s collapse appears to stem from the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals who failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people’s money or assets,” Ray said.

FTX filed for bankruptcy protection on Nov. 11, when the firm ran out of money after the cryptocurrency equivalent of a bank run. The collapse of crypto’s second-largest exchange has garnered worldwide attention, and prompted worries in the crypto industry that the pain could become widespread. Estimates are that FTX customers could wind up losing billions of dollars.

Ray detailed how there was “no-record keeping whatsoever” at FTX. Employees used QuickBooks, he said, which is software typically used by small and medium-sized businesses, to manage FTX’s finances.

“A multibillion-dollar company using QuickBooks,” Ray said. At its peak, FTX’s market value topped $30 billion.

Notably absent from the hearing before the House Financial Services Committee was FTX’s founder and former CEO Sam Bankman-Fried, who was arrested in the Bahamas just hours before he was scheduled to testify. The arrest was made at the request of the U.S. government, which on Tuesday announced criminal charges against Bankman-Fried including wire fraud and money laundering. The Securities and Exchange Commission said Bankman-Fried illegally used investors’ money to buy real estate on behalf of himself and his family.

An indictment unsealed Tuesday charged Bankman-Fried with a host of financial crimes and campaign finance violations, alleging he played a central role in the rapid collapse of FTX and hid its problems from the public and investors

“Mr. Bankman-Fried is reviewing the charges with his legal team and considering all of his legal options,” his counsel Mark S. Cohen said in a statement.

In previous interviews since FTX filed for bankruptcy protection, Bankman-Fried denied any fraud had been committed, though acknowledged the company lacked proper financial controls and corporate governance. 

Ray said the company is now instituting meaningful steps to gain command and control of FTX. 

“The scope of our investigation is truly enormous, involves detailed tracing of money flows and asset transfers from the time of FTX’s founding, and complex technological efforts to identify and trace crypto assets,” Ray said. “We are in the process of collecting and reviewing dozens of terabytes of documents and data.”

Still, Ray said, not all of the FTX customers’ losses will be recovered. 

“Money was spent that we’ll never get back,” he said. Additionally, the process to recover these assets will take months, Ray added, but the company is trying “to this in the most expeditious way possible.”

FTX, and cryptocurrency itself, garnered much criticism from lawmakers at the hearing. 

“My fear is that we will view Sam Bankman-Fried as just one big snake in a crypto Garden of Eden,” Democratic Rep. Brad Sherman of California said.  “The fact is, crypto is a garden of snakes.”

AP Reporter Ken Sweet contributed.