Original article: "Re-listening to the 4-hour SBF hearing, I dug out some interesting details"

Author:kean

On the eve of the US hearing, SBF was arrested in the Bahamas, and SBF himself attended the hearing in the Bahamas. SBF's parents suspended their work at Stanford and came to the Bahamas to attend the hearing. FTX's current CEO and restructuring officer John Ray III frankly told all the secrets at the US hearing.

SBF was finally arrested, but what is puzzling is why the Bahamas decided to arrest SBF on the eve of the US hearing?

In the video of SBF being arrested, he was wearing a white suit jacket, which was more formal than his previous clothes in every interview. The Bahamas responded that they arrested SBF in response to the request of the US government. The Bahamas said that after receiving the official notice from the United States, they would cooperate in the extradition of SBF to the United States for trial. In addition, the Prime Minister of the Bahamas, Philip Edward Davis, said: The interests of the Bahamas and the United States are the same.

During the hearing, SBF told the judge that he had been a vegetarian for a long time, and the local prison in the Bahamas could not provide him with vegetarian food. In addition, SBF said that he had long-term depression, insomnia and ADHD, and asked if he could pay bail of $250,000, wear an electronic anklet, stay at home, and report to the police every day. The judge said NO, your medicine can be taken directly from your family, and you have a great risk of absconding.

SBF is currently being held in Foxhill, the only prison in the Bahamas. On February 8, 2023, there will be an extradition hearing for SBF, considering sending him to the United States for trial, which is the accusation from the Bahamas.

The United States prosecuted SBF for both criminal and civil offenses. The indictment of the United States Southern District Court of New York stated that SBF was charged with two wire transfer crimes, conspiracy to commit money laundering, conspiracy to commit commodity fraud, conspiracy to commit securities fraud, conspiracy to defraud the Federal Election Commission, and violating campaign finance regulations. Each of these eight criminal responsibilities can be sentenced to a maximum of 20 years in prison, and the total can be sentenced to a maximum of 115 years in prison.

In addition, the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission also filed a civil lawsuit against SBF, alleging that SBF has been planning fraud through the FTX exchange for many years, raising more than $1.8 billion from investors since May 2019. When introducing this investment project, SBF told investors that FTX is a safe and responsible platform. Subsequently, SBF misappropriated the deposits of FTX.com customers without authorization and paid them to the quantitative trading company Alameda Research, and even falsely reported the financial status of Alameda Research. If SBF had not been arrested by the Bahamas, he should have attended the U.S. hearing online on December 14.

Forbes obtained and made public SBF's draft testimony to the U.S. Congress.

SBF said that he felt that FTX's new CEO John Ray III was simply trying to profit from the entire FTX bankruptcy, and he was not here to help. SBF said that when he applied for the FTX bankruptcy reorganization, he was under a lot of pressure from other people. This included the general counsel of FTX US. He believed that these people wanted to profit from the bankruptcy. Therefore, FTX was forced to apply for Chapter 11 bankruptcy procedures in a short period of time. SBF believed that these people were copying Enron's bankruptcy case and taking advantage of legal mistakes to benefit from it. In addition, SBF said that he tried to contact John Ray III. He sent him 5 emails, but he did not respond.

SBF was originally scheduled to attend a hearing in the US Congress on the 14th, but he was arrested in the Bahamas and was unable to attend. FTX's new CEO and restructuring officer John Ray III attended the hearing.

Congresswoman Ann Wagner: “Mr. Ray, Mr. Bankman-Fried has apologized for his ‘mistake.’ Based on your understanding, was the transfer of FTX customer funds to Alameda Research an error?”

John Ray III, current CEO and restructuring officer of FTX: “I do not find the above statements credible. I accepted the position of CEO of FTX in the early morning of November 11. I immediately realized that Chapter 11 was the best way to preserve the remaining value of FTX. Therefore, my first action as CEO was to authorize the filing of Chapter 11. I am currently implementing a five-part bankruptcy plan.

He was then asked how long it would take to complete the five-part bankruptcy reorganization plan. John Ray III said he hoped it would be as soon as possible, but it was not something that could be resolved in a few days. However, they would report on the progress of their asset liquidation every week and every month.

John Ray III: "I detailed in my written statement that our primary goal is to maximize value for FTX, its customers and creditors so that we can alleviate the pain of so many people. The collapse of FTX Group is due to the absolute concentration of control in the hands of a small group of inexperienced people, almost without any corporate systems or experienced personnel, which is necessary for a company that custody other people's assets. Some of the unacceptable management practices I have found so far include computer systems that give senior people the right to access systems that store customer assets without security controls to prevent them from transferring (users') assets. There is also the problem of storing private keys, (these private keys) control hundreds of millions of dollars in crypto assets, but there are no effective security controls and no encryption. Alameda was able to borrow funds from FTX.com for his own trading or investment strategies without restrictions. The confusion of assets, coupled with the fact that FTX Group invested money and assets in nearly 500 investments, was completely undocumented, unaudited, and without any credible financial statements. FTX Group lacks personnel and financial risk control, and the entire FTX The group lacks an independent supervisor. The most fundamental challenge we face is that (FTX) has to start from scratch in many aspects at the corporate foundation level, including the documentation system that a multi-billion-dollar company should have. "

John Ray III said that in the four weeks since he took over the company, the problem he faced was that FTX had no documents to record the billions of transactions since its inception, and that these were all cryptocurrency conversions, so he felt that there were many technical difficulties. Even now, he believes that the whole process is still in its infancy.

John Ray III then said he was clear on several things:

John Ray III: “First, FTX.com customer assets were commingled with Alameda’s assets.

Secondly, Alameda used customer funds to engage in margin trading, causing huge losses to customer funds.

Third, FTX Group went on a massive “acquisition” spree from 2021 to 2022, spending $5 billion to acquire and invest in many companies. Many of these (acquired companies) may be worth only a fraction of what they paid.

Fourth, (FTX) insiders received over $1.5 billion in funding and loans.

Fifth, Alameda’s business model is a market maker, which requires funds to be deployed to various third-party exchanges, which is inherently unsafe. "

Margin trading is originally to use funds provided by a third party to trade, to amplify the results of asset trading. When the position is facing liquidation, the margin must be increased to ensure that it will not be forcibly closed. However, Alameda's position in FTX was privileged at the time and would not be closed. Therefore, if the price continues to fall, there is no additional assets as margin, and it will fall indefinitely. In addition, it was mentioned in the hearing that if SBF borrows money from FTX, no record is required.

Ann Wagner: “Mr. Ray, you once said that the FTX case is worse than Enron. Can you explain and describe in detail how FTX is worse than the largest corporate fraud in history?”

John Ray III: "FTX Group is very unusual. I have handled more than 12 large bankruptcies in my career, including Enron. Every company (that went through bankruptcy) had some similar financial problems. They all had some common features. But this company (FTX) is very different. The reason why it is different is that (FTX) has absolutely no record keeping. There is no (company) record. (FTX) employees use Slack (commercial chat software) to issue invoices and apply for expenses. It is basically a way of communicating in a chat room. (FTX) uses QuickBooks (simple financial software)."

John Ray III added that he does not underestimate accounting software such as QuickBooks. QuickBooks is a simple accounting software that has been on the market for more than 20 years. As the QuickBooks official website introduces, the software is suitable for small companies such as small restaurants and small grocery stores. However, as a company with a peak market value of more than 30 billion US dollars, it is incredible that FTX uses QuickBooks to keep accounts.

John Ray III: “[In FTX] there is no independent board of directors, there is only one person who really controls it. It is very unusual for a company of this size to not have an independent board of directors. To make things more complicated, we are not dealing with mechanical instruments, or physical assets. We are dealing with crypto assets, and when you are dealing with assets such as cryptocurrencies, the technical issues make the situation more passive.”

Congressman Ann Wagner then asked John Ray III, SBF has publicly stated more than once that FTX US’s assets are sufficient, and he said that in theory, American users can get back 100% of their assets immediately. According to John Ray III’s information, is SBF’s statement true?

John Ray III replied that it seems that FTX US has a funding gap. Although SBF's statement is wrong, he still has great hope in his heart because the trading scale of FTX US is much smaller than that of FTX.com. In addition, FTX US banned users from withdrawing funds later than FTX.com, so the number is much smaller.

John Ray III: “Right now, we have a gap of several hundred million dollars, and it needs to be reiterated that we have not yet finally found all the private keys of the wallets. When we find and open these wallets, hopefully we can find more assets. If we can attribute these assets to FTX US, then there is a good chance of recovery (return of debt), so we can’t draw conclusions yet.”

John Ray III believes that the assets of FTX, FTX US, and Alameda Research are likely all mixed together. It is not clear whether to repay US users first, international users first, or which creditor to repay. They are verifying the addresses and sources of the wallets one by one to determine the ownership of the money. At present, the wallets have not been found, and many assets they don’t know about have not been discovered.

In addition, according to the hearing, withdrawals from the Bahamas began 24 hours before FTX filed for bankruptcy.

John Ray III: “Only the Bahamas account was opened, and over $100 million was released to approximately 15,000 customers in the Bahamas, and then the account withdrawal function was closed at approximately the same time as we filed for Chapter 11 bankruptcy reorganization documents. Mr. SBF also had communications with the Bahamian government at the time, specifically regarding this asset outflow.”