Inside The First Congressional Hearing On FTX Collapse

Tuesday’s hearing on the FTX collapse was supposed to feature testimony from a former crypto billionaire Sam Bankman-Fried (SBF), but he was arrested on Monday evening in the Bahamans. According to the unsealed indictment by the Southern District of New York (SDNY), former CEO of FTX has been charged on eight counts including wire fraud, securities fraud, money laundering, and campaign finance violations. The Securities and Exchange Commission and the Commodity Futures Trading Commission also filed civil complaints against Bankman-Fried.

Rep. Maxine Waters was “surprised” when she heard the news of his arrest but quickly issued a statement that the Tuesday hearing with John Ray, who was appointed the CEO of FTX in the early morning hours of November 11, will go forward. 

Waters said that while Bankman-Fried “must be held accountable” the public has been “waiting eagerly to get these answers under oath” before Congress. “The timing of this arrest denies the public this opportunity,” said Waters. “While I am disappointed that we will not be able to hear from Mr. Bankman-Fried,” she said, “the hearing will go forward with the testimony from Mr. John Ray III.”

So it began.

On Tuesday morning 10 am EST, the press, guests, and the members of the Congress flocked into room 128 to hear from the appointed CEO John Ray who’s been in charge of the FTX since Sam Bankman-Fried filed for bankruptcy on November 11, 2022.

As the Congressional hearing on FTX collapse was about to start, one of the Congressional staffers told The Pavlovic Today that they had “the longest question line” for a hearing thus far from the US Representatives.

Until the FTX collapse, Bankman-Fried enjoyed a friendly relationship with the Who’s Who in American politics and has personally donated Joe Biden $5.2 million, during the election campaign 2020. Flash forward to December 2022, the crypto wunderkind has been charged, according to Manhattan US Attorney Damian Williams for “tens of millions of dollars” in illegal campaign contributions and attempts to “buy bipartisan influence and impact the direction of public policy in Washington.” His life turned on a dime.

Lies under oath

Rep. Maxine Waters opened the hearing by welcoming the appointed CEO of FTX, John Ray. She said that she’s hoping that Sam Bankam-Fried will be “held accountable” for the “fraud” he has committed. 

“This committee won’t stop until we uncover the full truth,” pledged Waters. The Chairwoman said that Bankman-Fried misused approximately 7 billion in customer funds and that millions of consumers were hurt in the process. 

Rep. McHenry began by saying that “we heard anything but the truth” from Sam Bankman-Fried. Republican Congressman from North Carolina said that SBF’s interviews and tweets do not substitute a testimony before the US Congress and that he wanted to hear SBF’s “lies under oath.” 

Rep. McHenry said that the arrest of Sam Bankman-Fried “is welcome news” and that Congress needs to examine the “actions of those who contributed to the complete failure of corporate control” of the FTX. He noted that SBF’s play’s “nothing new” since fraud and fraudsters have been around since the begining of the world. He characterized SBF’s actions as “old school fraud, new technology.”

John Ray: FTX had no internal control

FTX CEO John Ray opened his testimony by saying that his first act as CEO was to “authorize the Chapter 11 filings of over 100 FTX entities.” He noted that FTX had no internal control and was in the hands of “grossly inexperienced” and “unsophisticated” leadership. According to him, FTX was “a company uniquely destined to fail.”

Some of the “unacceptable management“ practices at the FTX Group John Ray identified so far include:

• The use of computer infrastructure that gave individuals in senior management access to systems that stored customer assets, without security controls to prevent them from redirecting those assets
• The storing of certain private keys to access hundreds of millions of dollars in crypto assets without effective security controls or encryption
• The ability of Alameda, the crypto hedge fund within the FTX Group, to borrow funds held at FTX.com to be utilized for its own trading or investments without any effective limits
• The commingling of assets
• The lack of complete documentation for transactions involving nearly 500 investments made with FTX Group funds and assets
• The absence of audited or reliable financial statements
•  The lack of personnel in financial and risk management functions, which are typically present in any company close to the size of FTX Group
• The absence of independent governance throughout the FTX Group

“This is really just old fashioned embezzlement. This is just taking money from customers and using it for your own purpose. Not sophisticated at all,” said Ray.

No distinction between FTX and FTX US

While Sam Bankman-Fried maintains that FTX and FTX US were two separate entities, there was no essential distinction between them, according to John Ray. The appointed CEO said that Alameda Research was different in that it was the customer of FTX. Ray explained that Crypto assets for FTX.com and FTX.us were basically housed on the same platform. He said that the whole FTX had to file for Chapter 11 because FTX US “was not operated independently” of FTX. He added that Chapter 11 protection was necessary to avoid a “run on the bank” at FTX US and protect assets. 

Ray told Congress that FTX first experienced financial troubles “probably years” before November 2, 2022, as “this is not something that happened overnight.” While Sam Bankman-Fried said he was not making decisions for Alameda Research, Ray said he is still determining if that was true.

FTX CEO said that Sam Bankman-Fried’s company was “unusual” because there was no record keeping and that they were keeping invoices on Slack and QuickBooks. Ray pledged to do a thorough investigation but acknowledged that this is the case of basically “paperless” bankruptcy where tracing funds was difficult. 

The question of loans Sam took during his tenure at the FTX came into focus at the hearing. Bankman-Fried claimed during several media availabilities that he was using loans to re-invest in the exchange. Ray said that the loans given to SBF had “no description of purpose” and that he could not find any information about how the funds were used. 

Rep. Al Green asked a rhetorical question if the collapse of FTX could be considered “sincere ignorance.” He then expressed his point of view that he finds it difficult to believe that this was a mistake as for what SBF did, a “talent was required” to make it successful. “We have to send a message to the others who would take advantage of the people that this won’t be tolerated,” said Rep. Green.

Ray said that he finds it difficult to find credible that the FTX collapse resulted from a mistake and that the crypto exchange lost at least $7 billion. 

SBF: I’ve fucked up

Rep. Emanuel Cleaver used his five minutes at the hearing to comment on the draft testimony Sam Bankman-Fried leaked to Forbes. Pointing to the copy of the testimony he was holding in his hand, the Missouri Democrat called it “disrespectful” and “absolutely insulting” of the US House of Representatives. What he was referring to were the opening remarks a former billionaire was planning to say at the hearing. “I would like to start by finally stating, under oath: I fucked up,” reads SBF’s undelivered testimony.

Cleaver also suggested that “cryptocurrency” should be renamed “creepy dough” an idea Ray left for others to decide.

The Congressional hearing on FTX collapse offered some personality insight into how Sam Bankman-Fried behaved behind the cameras and in interaction with the members of Congress. Speaking of the former CEO of FTX, Rep. Bill Huizenga said that a young billionaire was at least 15 minutes late for a meeting with him. Huizenga recalled how everyone in the political orbit was excited with the “progressive ideas” of SBF and thought of him as someone who would “re-imagine capitalism.” 

What caused FTX collapse?

One of the reasons for FTX collapse was a risky margin trading by Alameda Research, but there were more factors, according to Ray, that have contributed to the loss of consumer funds.

A repetitive theme at the hearing was the lack of internal control and the lack of a top-level board of directors but what was not mentioned was that FTX, in fact, had advisors.

Minnesota Representative Tom Emmer called out Gary Gensler for having more meetings with Sam Bankman-Fried than any other exchange and accused him of giving FTX “preferential treatment.” At the hearing, he asked John Ray to provide all and any correspondence between Gensler and SBF, as well as details into the nature and scale of FTX’s investment into IEX. Rep. Emmer maintains that Gensler must appear before Congress and answer questions.

“We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto,” SEC Chair Gary Gensler said after the news about Bankman-Fried’s arrest.

There is a potential that SBF’s claims that FTX US is solvent are true

Sam Bankman-Fried, in his prepared testimony, intended to say that he has sent “five emails to Mr. Ray.” but that the appointed CEO “has never responded” nor has accepted to communicate in any other way. 

“I have potentially pertinent information concerning future opportunities and financing for FTX and its creditors. I also believe that I have relevant financial information about FTX US, and further that I have potentially relevant regulatory information concerning FTX. I would love to talk to you, whether it’s via email or phone, and to work constructively with you and the Chapter 11 team to do what’s best for customers,”Bankman-Fried intended to say.

In his testimony at the Congressional hearing on the FTX collapse, Bankman-Fried planned to say that FTX US “has been and remains solvent and could pay off all of its customers in full tomorrow.”

Rep. Barry Loudermilk asked about the solvency of FTX US and whether Ray would assert that SBF’s claim that FTX US was solvent was valid. Ray confirmed that there is a potential for that to be true.

Congressional hearing on FTX collapse ask about withdrawals for Bahamian citizens

Georgia Republican Rep. Loudermilk raised the issue at the Congressional hearing on FTX collapse about Sam Bankman-Fried reopening withdrawals for Bahamian citizens shortly before filing for bankruptcy. In one of the phone calls Sam Bankman-Fried had with blogger Tiffany Fong he claimed that the reason he did this “was critical to the exchange being able to have a future because that’s where I am right now, and you do not want to be in a country with a lot of angry people in it and you do not want your company to be incorporated in a country with a lot of angry people in it.”

In 24 hours , $100 million were withdrawn by 1,500 individuals. Ray said that Sam, who was still in control of his money at the time, did that despite being aware that the Chapter 11 was immanent.

“Assets were moved after the bankruptcy,” said Ray. Bahamian authorities just took the funds, authorized by Ryan Salame and Bankman-Fried. Speculating of the motivations for his process, Ray said that the Bahamian authorities said it was in the interest of the consumers.

However, the Congress thinks that SBF might have been working to undermine the scope of the bankruptcy.

Prior to the today’s hearing The Securities Commission of The Bahamas (SCB) denied any involvement by saying that it “has not directed, authorized or suggested to FTX Digital Markets, Ltd. the prioritization of withdrawals for Bahamian clients.”

Rep. Anthony Gonzalez asked if there was a way that the FTX leadership would not know what was happening and Ray responded with a firm “no.” Ohio Congressman then asked if the documents were destroyed before he overtook and Ray said that some messages were “disappearing.”

Timing of SBF’s arrest

At the today’s hearing, Rep. Alexandria Ocasio-Cortez (AOC) expressed her suspicion over the timing of Sam Bankman-Fried’s arrest by the Bahamian government, given that it was made only an hour or so after John Ray filed the documents. 

Former prosecutor Rep. Timmons was blunt by stating that he believes someone at the DOJ made a decision to prevent Sam Bankman-Fried from coming to testify at the House today. 

After four hours of questionings, incoming chair of the House Financial Services Committee,  Rep. Patrick McHenry, closed the Congressional hearing on FTX by saying that the next one on the matter will be held in 2023. 

“We know there will be ongoing conversations in the new year,” he said.

Due to flight risk, Sam Bankman-Fried was denied bail and will remain in custody until February 8, 2023, Chief Magistrate Joyann Ferguson-Pratt has ruled.

On Wednesday, December 14, the Senate Committee on Banking, Housing, and Urban Affairs will hold their hearing on the FTX crash. 

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