The FTX cryptocurrency exchange may have been built on the promises of blockchain technology, but according to the bankrupt company’s new chief executive John J. Ray III, it ran an “old-fashioned embezzlement” operation that took money from customers for its own purposes.

Ray spoke Tuesday at a nearly four-hour U.S. Congressional hearing in Washington, DC. Sam Bankman-Fried, the ex-CEO and founder of the exchange that just a couple of months ago was valued at US$32 billion, didn’t get to speak at the hearing following his arrest in the Bahamas on Monday. 

Bankman-Fried was denied bail by Bahamian judge on Tuesday, who said he is a flight risk, and faces extradition to the U.S. 

On the same day as the hearing, the U.S. Securities and Exchange Commission (SEC) said Bankman-Fried orchestrated a years-long fraud on investors. A U.S. Justice Department indictment, also unsealed Tuesday, charges him with multiple counts of securities fraud, wire fraud, conspiracy, money laundering, and violating campaign finance rules. 

If convicted, he could face decades in prison.

Ray – who served as chief restructuring officer of the US$60 billion energy giant Enron’s bankruptcy in 2001 – has alleged that Bankman-Fried transferred billions of dollars in FTX customer funds to his hedge fund, Alameda Research. 

In his testimony, Ray said the exchange’s troubles began “months, if not years” before it filed for bankruptcy on Nov. 11. Ray added that his team has been able to secure over US$1 billion in assets, but he did not say how long it could take to recover more funds. Earlier bankruptcy filings stated that FTX might have as many as a million creditors that lost funds in the platform.

The bankruptcy lawyer said unraveling what happened at FTX is complicated because the exchange used “unsophisticated” accounting and invoicing. They included messaging apps and the business software QuickBooks, which is built for small businesses to track billions of dollars in assets.

Bad Timing? 

The hearing was led by the House Financial Services Committee and its Chairman, Congresswoman Maxine Waters, who said she hopes the arrest will hold Bankman-Fried accountable for his fraud, but that “unfortunately, the timing of his arrest denies the public the opportunity to get the answers they deserve.”

Similarly, ranking member of the Financial Services Committee, Congressman Patrick McHenry, said the arrest of Bankman-Fried was welcome news, but more needs to be known about who else is responsible.
“Frankly, I look forward to getting his lies here on the record, under oath,” he added.

Congressman William Timmons expressed frustration over the timing, asking “wouldn’t it have been helpful to have the defendant testify before Congress for six hours answering questions under oath prior to his trial?”

He added: “I look forward to figuring out why the Department of Justice (DOJ) issued a provisional arrest warrant to preclude Sam Bankman-Fried from testifying before us this afternoon.”

Bad Bahamas?

Congresswoman Alexandria Ocasio-Cortez confirmed from Ray that he was unaware of the timing of the Department of Justice’s initial request for the extradition of Bankman-Fried. She noted that the arrest by Bahamian police occurred hours after new evidence concerning the FTX founder’s relationship with Bahama authorities was made public.

The evidence which was filed in bankruptcy court shows an email between Bankman-Fried to the Attorney General of The Bahamas on Nov. 9. In it, Bankman-Fried said FTX “segregated” funds belonging to Bahamian customers and offered to open withdrawals exclusively to Bahamian clients. The exchange had frozen withdrawals for customers elsewhere.

On Nov. 10, FTX announced on Twitter that they began to facilitate withdrawals of Bahamian funds in accordance with the country’s regulations and regulators. 

In a Tuesday statement, The Securities Commission of the Bahamas accused Ray of making “misstatements” to “advance questionable agendas” related to the FTX case. 

Representative Jake Auchincloss requested Ray to update the committee with any findings of improper collusion between Bankman-Fried and any authorities in the Bahamas. 

Leaked testimony

While Bankman-Fried did not appear at the hearing, Forbes released what is said was a copy of his planned testimony in which Bankamn-Fried took shots at Ray’s management and expressed regret over “giving in to pressure” to file for bankruptcy.

The testimony read: “I have reached out to Mr. Ray and the Chapter 11 team numerous times. Sometimes I’ve been requesting access to my own data, but other times I’ve been attempting to alert them to potentially important information for their jobs and duties to creditors and customers of FTX.”  

Ray told the hearing that he has not spoken to Bankman-Fried and that he plans to keep him uninvolved in the proceedings following his arrest. Ray also rejected claims in Bankman-Fried’s testimony that FTX US remains solvent. 

“There was a public distinction between and FTX US, but what we’re seeing now is that the crypto assets for both were housed in the same database,” Ray said, adding that executives had free rein across assets from all Bankman-Fried’s companies. 

A Senate hearing on FTX will be held by the Banking Committee on Wednesday, December 14th, starting at 10 a.m. in Washington, with former FTX spokesman Kevin O’Leary set to attend.

Congressman Patrick McHenry concluded the Tuesday House Financial Services Committee session by noting that the title of the hearing was Investigating the Collapse of FTX, Part I. He added, “part two will be next year.”