Testimony of Mr. John J.

Ray III
CEO, FTX Debtors
December 13, 2022
House Financial Services Committee

Chairwoman Waters, Ranking Member McHenry, distinguished members of the

Committee: thank you for the invitation to appear before you today. I truly appreciate – and am

very grateful for – your interest in this matter, and I hope my testimony can be helpful to you as

the Committee continues its inquiry into the collapse of FTX and the efforts that are underway to

help those who have been harmed.

I accepted the position of Chief Executive Officer of the FTX Group1 in the early

morning hours of November 11. Immediately, it became clear to me that Chapter 11 was the

best course available to preserve any remaining value in the FTX Group, which was in deep

financial distress. My first act as CEO was to authorize the Chapter 11 filings of over 100 FTX

entities.

I, along with a comprehensive team, including experts and consultants with a

wide array of relevant skills, are now working on behalf of the FTX Group to achieve one

fundamental goal: maximizing value for FTX’s customers and creditors so that we can mitigate,

to the greatest extent possible, the harm suffered by so many.

To give you a sense of my background and how I ended up in this role: I have

over 40 years of legal and restructuring experience. I have been the Chief Restructuring Officer

or Chief Executive Officer in several large and vexing corporate failures involving allegations of

criminal activity and malfeasance, including the Enron bankruptcy. I also have experience in

bankruptcies involving novel financial and cross-border asset recovery and maximization.

1
The “FTX Group” refers to the entities in the appended charts, with the ownership structure denoted therein.

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 Nearly all of these situations share common characteristics, ranging from gross

mismanagement, excessive leverage, failures of internal controls, failures of external checks as a

result of audit firm failures, or insufficient board governance. But never in my career have I seen

such an utter failure of corporate controls at every level of an organization, from the lack of

financial statements to a complete failure of any internal controls or governance whatsoever.

Although our investigation is ongoing and detailed findings will have to await its

conclusion, the 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.

Some of the unacceptable management practices at the FTX Group 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;

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  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; and

 The absence of independent governance throughout the FTX Group.

With that understanding, as soon as I gained control on November 11, I began

implementing a restructuring plan that will serve as the roadmap for navigating the FTX debtor

entities through Chapter 11 and to a final resolution with its customers and creditors.

That plan has five core objectives:

The first objective, Implementation of Controls, is already well underway. That

work involves building accounting, audit, cash management, cybersecurity, human resources,

risk management and other systems that did not exist, or did not exist to an appropriate degree,

prior to my appointment. We are not relying on prior management, but instead have hired a new

Chief Financial Officer, a new Head of Human Resources and Administration and a new Head of

Information Technology, all of whom have deep experience in their areas of core competency

and have also managed other, large-scale corporate failures. In addition, I have engaged a team

of independent third-party professionals in the necessary areas of restructuring, forensic

accounting, tax disciplines, and cybersecurity, including Alvarez & Marsal, Alix Partners, Ernst

& Young, respectively, along with a cybersecurity firm.

The second objective, Asset Protection & Recovery, is also a top priority. We are

working around the clock to locate and secure the property of the estate, a substantial portion of

which may be missing, misappropriated, or not readily traceable due to the lack of proper record

keeping. We are working with Nardello & Company, Chainalysis, BitGo, Alvarez & Marsal and

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our cybersecurity firm on these recovery efforts. Thus far, we have secured more than $1 billion

of digital assets to protect against the risk of theft or unauthorized transfers.

The third objective is Transparency and Investigation. Our investigative and

cyber security teams, led by the law firm Sullivan & Cromwell, are already well into the process

of gathering the evidence that will provide us with an understanding of what led to this collapse.

They are working in close coordination with U.S. and foreign regulatory and law enforcement

authorities. Their team includes attorneys who have served as Directors of Enforcement at the

SEC and CFTC, and as Chiefs of the Securities Fraud, Money Laundering and Asset Forfeiture,

and Complex Frauds and Cybercrime Units at the U.S. Attorney’s Office in the Southern District

of New York. We welcome the transparency of the Chapter 11 process and the oversight of the

federal Bankruptcy Court.

In addition, the entire process is being overseen by our newly appointed

independent Board of Directors, in consultation with its independent counsel at Quinn

Emmanuel, a firm that also has deep investigatory experience. The independent Board of

Directors is chaired by former U.S. Attorney and Chief Judge for the U.S. District Court for the

District of Delaware, the Honorable Joseph Farnan.

Our fourth objective is Efficiency and Coordination, which requires cooperation

and coordination with insolvency proceedings of subsidiary companies in other jurisdictions.

The fifth and final objective is the Maximization of Value for all stakeholders

through the eventual reorganization or sale of the complex array of businesses, investments,

digital assets, and physical property of the FTX Group.

A fundamental, overarching challenge with each of these objectives is that we are,

in many respects, starting from near-zero in terms of the corporate infrastructure and record-

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keeping that one would expect to find in a multi-billion dollar international business. Still, in

just over four weeks since assuming control of FTX, we have instituted meaningful steps to gain

command and control and are well on our way to achieve the goals outlined above. Every week

we gain a better understanding of what occurred and the path forward, which will be shared with

interested and affected parties through the Chapter 11 processes.

The scope of the investigation underway is enormous. It involves detailed tracing

of money flows and asset transfers from the time of FTX’s founding, and highly complex

technological efforts to identify and trace crypto assets. We are in the process of collecting and

reviewing dozens of terabytes of documents and data, including records of billions of individual

transactions, and we are leveraging sophisticated technology and expertise to identify and trace

additional transactions and assets.

We are also summarizing this information in a manner that will make the

information useful, not only to the bankruptcy estate, but also to governmental and regulatory

stakeholders in the U.S., including the House Financial Services Committee, and around the

world. We know that our investigative record will be the foundation for work done by many

others, and we are committed to building a reliable foundation.

Questions have been raised as to why all of the FTX Group companies were

included in the Chapter 11 filing, particularly FTX US. The answer is because FTX US was not

operated independently of FTX.com. Chapter 11 protection was necessary both to avoid a “run

on the bank” at FTX US and to allow our team the time to identify and protect its assets. Since

the time of the filing, I have become even more confident this was the correct decision, as the

books and records issues at FTX US and the many relationships between FTX US and the other

FTX Group companies become clearer.

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 Questions also have been raised about what I think of the many opinions

expressed by former CEO Sam Bankman-Fried and his recent offers to assist in the recovery

effort. I will not comment on his statements other than to say that this is a professional

investigation that is proceeding in a professional manner. We have a fact-finding process in

place, and we will seek information from Mr. Bankman-Fried and others through that process, as

appropriate.

In the absence of cooperation from responsible parties or any appropriate system

to track and protect crypto assets, we are continuing our painstaking forensic efforts to account

for all of the assets, both as to the FTX US and FTX.com exchanges, as well as Alameda. These

efforts pose complex technical challenges that are made even more vexing by the massive

amount of data that must be reviewed. At the same time, the review must be conducted in a

highly secure fashion to avoid the risk of compromise or loss of assets.

While many things are unknown at this stage, and many questions remain, we

know the following:

First, customer assets from FTX.com were commingled with assets from the

Alameda trading platform.

Second, Alameda used client funds to engage in margin trading which exposed

customer funds to massive losses.

Third, the FTX Group went on a spending binge in late 2021 through 2022,

during which approximately $5 billion was spent buying a myriad of businesses and investments,

many of which may be worth only a fraction of what was paid for them.

Fourth, loans and other payments were made to insiders in excess of $1 billion.

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 Fifth, Alameda’s business model as a market maker required deploying funds to

various third party exchanges which were inherently unsafe, and further exacerbated by the

limited protections offered in certain foreign jurisdictions.

We are also making progress in repairing the regulatory relationships of the FTX

Group around the world. I would like to especially say to regulators – in the U.S. and abroad –

that I completely understand the depth of outrage and frustration with what happened. I have

instructed my team to cooperate as comprehensively and completely as possible, and much of

our time so far has been spent on the truly herculean task of gathering and organizing

information responsive to the many requests we have received.

I know that the resolution of the Chapter 11 process, as well as the investigation

into the causes of the FTX Group’s collapse, are of keen interest to this Committee and to your

constituents. Additionally, there are many others who need and deserve answers, including

customers, creditors, investors, counter-parties, employees, and regulators. We are positioning

ourselves to provide each of these constituents with the answers they deserve.

Although a bankruptcy proceeding of this unprecedented nature will take some

time to run its course, I want you to know that I am committed to working as quickly as possible

to investigate what happened in the lead-up to November 11 in order to formulate conclusions

that can hopefully help to inform this Committee’s work.

I should note that my ability to comment on certain matters today will be

materially limited by the state of the FTX Group’s books and records, ongoing bankruptcy

proceedings, and the numerous, ongoing investigations by U.S. law enforcement and regulators.

But I look forward to answering your questions to the best of my ability.

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