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tv   Tech Check  CNBC  December 13, 2022 11:00am-12:00pm EST

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us that nothing in all the world is more dangerous than sincere ignorance and conscientious stupidity. mr. bankment freed has pretty much indicated that he just made a big mistake, that he was doing the best that he could to be -- good tuesday morning we will get a tech check you have been listening to house financial services today on the collapse of ftx as knew ceo john ray takes the hot seat notably absent is the man of the hour, originally scheduled to take that stand but was arrested in the bahamas last night after u.s. prosecutors filed criminal charges against him. unsealed this morning, they include defrauding investors and customers and what the sec calls, quote, a house of cards on a foundation of deception
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while telling investors it was one of the safest buildings in crypto they will pop on this hour but let's begin with highlights on what you might have missed from the hearing in the past hour elon >> well, karl, this has really been a nuts and bolts hearing so far with lawmakers trying to understand and untangle ftx's complicated business dealings and the lease between its 100 different divisions. we heard from current ftx ceo say there were no internal controls or separation whatsoever between these businesses he said sbf owned 90% of alameda and top executives had free rein across the companies. >> the operation of alameda really depended, at least on the way it was operated, for the use of customer funds. that's the major breakdown here. funds from ftx.com, which was
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the exchange for non-u.s. citizens those funds were used at alameda to make investments and other dispersements. >> you also saw the foreshadowing of a regulatory fight to come with the chairwoman of the committee maxine wateris saying if they hd been registered with the sec, it would be subject to disclosures. but the sec missed warning signs and he committed to calling sec chairman before the committee once mchenry takes the gavel of in committee some time early next year. we will keep you posted as this hearing is expected to last several hours. guys, we will keep watching and keep following for you. >> thank you for that. let's get back to the hearing as q & a continues. >> to the others who would take
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advantage of people,this is no going to be tolerated. i thank you for what you have done i read your testimony. based on your testimony, it seems to me we have more than sincere ignorance and conscientious stupidity. i yield back the balance of my time. >> thank you the gentleman from texas, mr. sessions. >> mr. ray, thank you very much for being here i think members have been sincere in saying thank you for your professionalism in adding this to your career of other restructuring that you have not only experience in but bringing to bare. i have never questions and perhaps you could answer them which would help me. at its best largest point of investor exposure by an american investor, what amount of money do you think that was that was
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held in ftx? >> i'm not in a position really to give you individual numbers at this point. we do know with the u.s., there is hundreds of millions of dollars that were at stake of course in the dot com, which is the international exchange, that's in the billions of dollars. one of the difficulties we have is that there is millions of accounts some of those accounts, you know, could be by multiple users. so we're not process of really analyzing how those accounts roll up to individual customers. >> are you aware of the sec at any point asking questions, coming to visit, providing paperwork about these hundreds of millions or billions of dollars that drew some attention from the sec about this american
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investment or what i would say exposure >> i'm not, but you have to recognize that i, you know, parachuted in on november 11 so i have no history with the company whatsoever >> so you do not know about any questions, interaction have you heard about whether there was an attempt to avoid any of this? was any of it ever discussed by any of the people that you have gained information from? >> i'm not privy to anything on a pre-petition basis. >> thank you you have an idea about the value of assets that was lent to ftx, by ftx or alameda to mr. bankment freed, the amount of money that they loaned him
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>> well, we know that the size of the loss, you know, measured essentially at this period of time is several billions of dollars. but you have to remember that asset values fluctuate so how much the assets were worth at the time that they may have been transferred to ftx.com may be a different number than the loss as of any particular date we do, of course, know that we have several billion dollars of losses and we know that there was billions of dollars lent out, billions of dollars of other investments. so we essentially have a road map to figure that out. >> the road map that you are speaking about in your past i don't claim you necessarily know it now were irs forms that were filled out by the company, were they properly filled out to see whether they were compliant with the irs law?
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>> we are looking into that very thing. we have hired ernst and young. we're reviewing the return that was filed in 2020, 2021 and of course they're looking at all the transactions within 2022 so that review is ongoing, and we certainly will look at that in detail. >> as an expert, i would consider you an expert in this arena. would you think that it would be important that the sec -- and i don't know the law, but would have access to, as part of their -- any due diligence they were doing to look at that irs filing to determine perhaps whether someone was or was not following the law? would that be part of a due diligence? >> we would certainly make anything like that available to any of the regulatory agencies, whether it is the sec or the irs
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and we were fully cooperative to them anything that would aid in their investigation, it would be able to them. >> do you think it would be pertinent for this committee to be able to receive that irs information going back so that we would make a determination about whether proper utilization of a recite was being done. >> we want to cooperate with the committee as well and we can certainly work with staff to address what you might need. >> thank you very much thank you, chairman. chairwoman >> thank you the gentleman from kleber, is now recognized for five minutes. >> thank you, madam chair. mr. ray, thank you so kindly for being here today have you read the full testimony that was plan ned by our missing
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guest? >> i have not read his full testimony. some pieces of it have been relayed to me, but i have not read one word of it, actually. >> i don't know him personally and probably wouldn't want to, but this testimony is so disrespectful. i mean, there is not a person up here that would like to show this to their children in line two of this -- of this message he says, and i quote, i would like to start out by firmly stating under oath -- >> you can't say it. >> yeah. i can't even say it publically the next two words absolutely insulti ing to this congress of the united states. i would like to submit this, madam chair, for the record. >> without objection, if you are inserting it into the record
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as you were. >> i want to follow up on mr. sessions' discussion, the discussion mr. sessions was having with you on the issue one requirement is you are supposed to submit to each customer and the irs the form 109b, right? >> yes. >> what else are you required to do >> i have to defer to the tax folks. they're experts in that field. and i'm sure they will do a thorough review of what should have been submitted. >> no. i'm -- what do you know now that you are supposed to submit other than the 109b to every customer
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and for the internal revenue service? >> i don't know personally at this point, you know, what was required to be submitted you know, that's part of our review with our independent accou accountants. >> well, could you expand or maybe even update us on the extent of the poor controls in the area previously identified in your november 17th declaration? >> you know, it is an extensive list it really crosses the entire spectrum of the company from lack of lists of bank accounts, hundreds of bank accounts dispersed all over the world, lack of a -- you know, just a complete list of employees and their functions by a group or name, extensive use of independent contractors as opposed to employees
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lack of insurance that you normally would see in certain businesses, either inadequate insurance or complete gaps in insurance. for example, the alameda silo had no insurance whatsoever. so those are -- the list goes on and on you know, we could spend all day on that. >> we have time. but i wonder if you would support a resolution i have been thinking about introducing, changing the name of crypto currency to creepy dough currency i'm going to discuss this with my colleagues as an appropriate name i just want to know if you would support changing it to creepy dough. >> i'll leave that skill set to
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the committee. >> all right thank you. i yield back >> thank you the gentleman from missouri is now recognized for five minutes. >> thank you, madam chair. >> mrs. ray, dsit is reported ta they couldn't get a bank account. they used alameda's bank accounts does this raise any red flags for you, the fact they couldn't find a way to get a bank account? >> there is a few red flags. obviously, the bank situation should have been a real red flag for someone being asked to deposit money into an account that was not the exchange account certainly should have been a red flag for customers. >> is alameda a u.s. chartered bank or is it offshore or the bank they were using. >> it is really not a bank most of the entities in the
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structure are unrelated entities. >> it doesn't have a bank account, per se. >> oh, it has bank accounts, absolutely. >> in the u.s. >> yes. >> okay. so here we have a company that's offshore, can't get a bank account offshore have to come in to the u.s. to be able to do its banking business in order for these companies to exist, they have to be able to change their digital assets into hard u.s. dollars at some point. so they need a bank account. so they needed alameda to be able to do that. is that roughly correct? >> yeah. any of the silos had bank accounts that certainly is -- exists. separate bank accounts do exist. i think the real issue for us is that money was issued from one account to the other seemingly without limit.
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that is the issue. >> okay. you talked about the accounting issues you know, it's interesting from the standpoint that we're talking today about a problem with these crypto currency firms, with securities firms, and we can't have an accounting system that actually works you know, this should be a really big red flag for all of us in the financial services world regards to the chinese services we're making and we can't get accounting on those firms. what else is going on with those firms similar to the debacle here at ftx. that's just a sideline comment one of the questions i have is with regard to farmington state bank this is an investment that alameda made into and it is a little bitty bank according to "the new york times" article 26th smallest bank out of 4,800
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in the country had a net worth of $5.7 million and they dropped to $11.5 million for a percentage of the ownership. do you know what the percentage of ownership was in the bank that they purchased? >> i believe that ownership was approximately 10%. >> that's what i heard, too. so roughly they played 20 times book, which is off the charts outrageous, so it should be a red flag all over the place. yet, they were able to purchase that the sec allowed that to happen and they changed names to moon stone bank they dropped roughly $79 million according to this article. have you looked at this relationship at all yet to see what's going on here and whether there is any resolved? >> we are looking at it. it is certainly one of the things that came to our attention fairly quickly we're looking at what the dollars were that went from the ftx group to that bank and we're
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looking at the connections of that bank to -- to the bahamas >> the way this all transacted here, is this common, by the way, that they purchase busines businesses and dumps excess amounts of money based on the fact that they had it? this looks like an excessive investment to buy a bank to be able to do something with it, stuff it full of money so i don't know. is there money laundering going on here? is there some missing dollars? is somebody stuffing something in their back pocket to at some point down the road take off with it? t is that what's going on here >> there is a lot more questions than answered. it is highly irregular and that's what has gotten our attention. >> well, i thank you for your comments this morning. it is concerning when you see this sort of lack of accounting and you see somebody dealing in this sort of level of money and there is no -- and there is lots
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of different companies that shift back and forth and you wonder by living offshore in the bahamas if there is not some far away bank account stuffed full of money that we will never find i hope you do your job and do it well thank you. >> thank you the gentleman from colorado, who is also the chair of the subcommittee on consumer protection and financial institutions, you are now recognized for five minutes. >> thanks, madam chair mr. ray, i have so many questions it is hard to even figure out what questions to ask. so let's just start with easy ones how long have you been on this job. >> four weeks. >> four weeks. do you know when the madoff bankruptcy was filed >> probably circa 2008. >> do you know they just made a distribution out of that bankruptcy last week >> that's what i understand, yes. >> so that's, what, 14 years
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how old are you? >> is that a question? >> because i want you to add 100 to whatever your age is when you finally untangle this. the reason i say that is we watched this ftx, but a bunch of other crypto companies start thrashing about say, nine, ten, twelve months ago. as the house of cards started falling down, the thrashes became more. we had something like that in colorado back in the '80s when the savings and loans were failing and everybody was sort of trading their funny money we called it trading cats for dogs to hide lousy loans, you know, to not show the failures of those particular banks. here, you know, your job, i think, as -- as the bankruptcy
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trustee or conservator or whatever you are, is to go gather as many assets as you can. and that could be from some very innocent people who got paid money to then spread it out equally among who you think the real creditors are is that sort of a fair statement? >> it's a general statement. it's not far off. >> well, because we, on this committee, and a number of us has to deal with the madoff stuff. one of the things you are going to face is some guy say, i'm more innocent than that guy. you know, i should get to keep my money even though i got paid yesterday. but i'm an innocent guy. you are going to be dealing with so many preferences, so many fraudulent transfers have you any idea what the total money in and the total money out of ftx was >> we don't have a fully accounting at this early stage,
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no. >> do you know how much was in tokens let's say i have doji coin i don't know how to say it but i have ten doji coin i have ten doji coins. a year ago ten for the sake of argument was worth a thousand dollars, so $100 a coin. i put that in there. but doji coin today is worth i don't know what. say not nearly that much how are you going to evaluate that as to what i should get out of the bankruptcy? >> well, at first it starts with doing an accounting and a tracing of all the assets, both the ins and the outs that's made difficult by the comingles of assets. so perhaps you may have invested
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in a certain coin or an old coin we'll have to trace what happened to that coin because, again, what we have explained here today and through our testimony is there is comingling of assets, so that makes it a bit more complicated than how much is my coin worth, right so it's going to be a pain staking process of looking for the ins and outs, what happened to your crypto of course at the bankruptcy at the time of the bankruptcy, we know when that occurred, you have a very specific time when that bankruptcy occurred, and we will look at customer accounts as of that date. and that will be determined essentially with what your account position was but of course assets vary in terms of fluctuating in value. and, again, because of the circumstances we find ourselves in and the lack of documentation, the potential comingling between silos and
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then also what happened with alameda taking funds from ftx.com, it isn't as simple as how many coins did i have in my account. >> i guess what i'm saying is if i put a thousand dollars in and it's gone and i put ten doji joins in and it's gone, eventually you will have to figure it out. you will be back here in a year when you have a better handle on the numbers when you can talk to this committee thank you. i yield back. >> thank you you know mr. pearlmutter is a bankruptcy attorney. i would like to enter into the record the indictment of sam bankment freed by the southern district of new york that was unsealed this morning and the separate filings from the securities and exchange commission and the commodity
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futures trading commission, both of which were filed this morning. thank you. with that, the gentleman from michigan is now recognized for five minutes >> thank you, madam chair and mr. ray. i will get my colleague to shift a little bit or get up thank you. one quick question have you been sharing your findings with the sec at all as you have been going through this >> yes. >> okay. how about the southern district of new york? >> yes. >> okay. i'm going to get to a couple of practical questions because i think these were the things i was going to ask you and then also ask mr. bankment freed. you say the, quote, ftx.com platform was not available to u.s. users, close quote. earlier this month the cftc chairman suggested in testimony that 2% of funds housed at
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ftx.com were from u.s. individuals. can you confirm whether there were u.s. individuals or persons in fact customers of ftx.com. >> yes, there -- we found there is a small number of u.s. customers that had engaged as customers. >> is 2% small in your estimation or is it less or more >> we don't have those kind of numbers on an investor basis we have it on a customer basis, but you are talking about less than a couple hundred. >> but it could amount to billings you said earlier it was billions that was in there. or it would be millions or hundreds of thousands. do you know that number? >> billions would sound very, very high. >> well, you mentioned there was billions in it. >> yeah, but clearly -- >> i'm giving you the change. >> clearly as u.s. customers, we don't have an accounting of what those particular customers had in the dot com exchange. >> will determining that be part
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of your work through this process? >> absolutely. >> which assets belong to which customers, more specifically customers of ftx.com >> yes we will try to identify both the sources and the use of all the funds. >> so whether it is ten customers that had a lot of money or a thousand customers that had some money. >> absolutely. >> okay. can you provide some indication of whether customer funds from ftx.com were in fact transferred to alameda research? well, it is definitely assets of customers in the dot com silo were transferred, no question about it we have not seen this at this stage from the u.s. silo but of course we have one concern, and that's the concern we are chasing down which is whether or not there is comingling between the dot com silo and the u.s. exchanges. the reason for that is we know there is control and access of
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authorized users at this most senior management level amongst all the assets it is something we have to focus on we haven't seen evidence right now of that. but that's something we need to investigate and trace. >> okay. in my remaining two minutes, i will turn to operations. is there any evidence of his parents' involvement in the operations >> we're investigating that, as well as any other players. >> e-mail, slack, signal >> it is billions of records it is a very vibrant environment. >> okay. so i hear that you haven't discovered that? i mean, it would seem interesting that -- that they didn't either give legal advice or business advice or parental advice maybe. >> well, certainly, clearly, in our first eight papers we indicated that mr. bankman had given legal advice. >> okay. had he been an employee of ftx
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as reported? >> i don't know if he had employee status, but he certainly received payments from -- the family did receive payments. >> okay. that sounds like employment to me he got a payment for -- okay well, i raise that because on december 8 of 2021, i met with sam bankment freed in my office before he came to the hearing. he was at least 15 minutes late and his father accompanied him in that meeting. i focused on what types of regulation he was under, his engagement with regulators and how that affected ftx. but it seems to me that there is a lot more to uncover here certainly mr. bankman freed has, let's say, wooed many in new york, silicon valley, around the world and, yes, certainly here in d.c he was -- they loved everything. everybody loved the exciting idea of a politically
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progressive smart entrepreneur who was going to reimagine capitalism and change the world, feeling better about themselves all while making them gobs of money. i'm glad to see it's finally unravelled so my time is up and i yield back. >> thank you the gentle woman from ohio, the chair of the sub committee on diversity and inclusion is recognized for five minutes. >> first of all, let me just say thank you to chairwoman waters and our ranking member and certainly to you, mr. ray. we have heard a lot, a lot of this has been difficult to digest, primarily because of what has happened to so many people and so much money involved mr. ray you mentioned in your testimony that one of your primary goals is to limit to the greatest extent possible the harm suffered by ftx customers
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hundreds and hundreds of million dollars have been removed from crypto wallets, and in its estimates that about one million people have money frozen in the exchange can you -- if you can't answer that question, i have the information. >> would you repeat the question you were interrupted there. >> i'm sorry i'm at home so i apologize for any connection hundreds of dollars had been removed from crypto wall ets an it is estimated one million have
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money frozen in their exchange can you tell us how many users have lost money? and when will they get their money back >> well, our process is such that, you know, we are securing our assets every day every day we are out looking for wallets and the keys to those wallets to maximize the recovery of value so that's an ongoing process we secured all the cash in the bank accounts to the extent that we can at this point we have secured crypto assets. we're still in the process of doing that i mean, ultimately that's a question of months the litigation as has been pointed out by other mens will certainly take a longer time frame. but that is our number one focus, is to, you know, to generate value to repay those customers. i don't have a customer account for you today. but we do know that there was 2.7 million users in the u.s.
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silo, which, again, is -- over states the customer relationships because people have multiple trading accounts in the dot com silo. we had over 7.6 million users. again, overstating the actual customer relationships due to the multitude of accounts by any particular customer. so we need to get to the bottom of those customer numbers. >> thanks. let me ask you this. despite the fact that ftx told customers it would not trade customers' funds, we know now that ftx loaned out i think about $10 billion in customer assets for proprietary trading do you know how it was possible to access funds in violation of its own terms of service that
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noted without clients' permission and exposes customers to such massive loss. >> well, as i indicated there was no corporate controls, no independent board. and the owners of the business had virtual control of the accounts of each of silos and could move money or assets as they desired, undetected by customers. to the extend there were rules, there were very few. obviously meant to be broken >> let me ask you the last question could you tell us what regulatory changes could prevent is unauthorization or unauthorizing customer funds in the fur ture based on your weal
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of experience. >> without speculating, i have said in my earlier testimony the critical thing is transparency. >> okay. and lastly, in your five points that you outlined, and i'm sorry if you said before is there a timetable that you think you can get to that? and that can be a yes or no. i think i'm getting close to my time. >> there is no particular time frame, but it's as quickly as possible in my experience with enron -- >> is that months? weeks? as quickly as possible. >> it is certainly not weeks it is definitely months. and the causes of action could take longer. but we will marshall assets on a weekly basis, on a monthly basis and we will do that as quickly as possible. >> thank you so much for taking the time to try to help us out
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i yield back. >> thank you the gentleman from kentucky, mr. bar, is now recognized for five minutes. >> thank you, madam chair. mr. ray in your declaration, you said that many of the companies in the ftx group did not appropriate corporate governance and that this situation is unprecedented. you also, in your testimony today, said that the ftx collapse stems from the lack of an independent board and a complete failure of any internal controls or governance whatsoever can you elaborate in describing the governance structures for ftx.com that led you to make those comments >> well, first and foremost, you know, there is no independent board of directors so one of the first things that i did was put out an independent board of directors led by our chairman, who is the former u.s. attorney and honorable joseph farnan, a u.s. district court
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judge. put in separate officers, new officers of the company. i put in a new cfo, a new chief information officer, new head of administration, all independent with some background and experience in these sectors. none of the employees -- there is a lot of titles in the company, but no experience to back it up >> can you -- can you explain how the ftx.com structure differs from ftx us? >> there was no difference. >> have you examined the flow of assets to the ftx foundation or its various affiliates, including ftx community, ftx climate or the future fund >> we are digging into that. we have not completed our review. >> i am curious in your work whether or not you will determine whether those entities were accomplished properly as nonprofits or whether or not the funds received were improperly
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transferred customer accounts. do you have any visibility into that yet >> we are looking at that right now. we asked the folks at ernst and young to look at the tax side of it and we're investigating the tax transferring to make sure to dig into those details. >> was the ftx in those other nonfor profit entities, were they completely separate from any of the for profit entities >> they were owned by sam bankman freed. i can't tell you they were separate because they got funds from alameda we know the source of their funding was from the ftx group there was separate ownership but not separate funding. >> so comingled assets in that case as well >> absolutely. >> one firm gave ftx a higher score for governance than exxon
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mobile given your testimony that the collapse stems 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 necessary for a company that is entrusted with other people's money or assets, what would you say about this esg governance rating, which rated ftx higher than exxon mobile? >> i'd get my money back. >> can you identify which entities had audited financial statements >> yes, i can. there was no audit at alameda. there was audit at the u.s. silo and also audit at the dot com silo i can't speak to the integrity or quality of those audits we're reviewing the books and records. as i said earlier, you know, much of those books and records were maintained on a fairly
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unsophisticated ledger and work books. >> and you testified of the lack of recordkeeping. >> yes, sir. >> so there is a whole lot of financial statements that are either not audited or not available. is that fair to say? >> that's fair to say. >> in your declaration, you stated you did not believe those audited financial statements were reliable. can you elaborate on why you believe that to be the case? >> well, we have lost $8 billion, all right, of customer money. so by definition, i don't trust a single piece of pain inner this organization. >> his testimony on december 8th of last year said ftx designed an offer to partner with the market structure that is risk reducing those actors attract the headlines. but ftx is not one of them was that statement incorrect >> false >> thank you let me conclude by describing what is going on here by a
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popular crypto commentator if you set up an exchange where you are the market maker, you are the issuer, you are the prime broker and you trade against your own customers, you have a vested interest in promoting the assets and manipulating the price of the assets what you have is a crypto casino i yield back. >> thank you the gentleman from california, mr. vargas, is now recognized for five minutes >> thank you very much, madam chair. i'd like to begin by thanking you, once again, for taking the lead to hold bad actors accountable and pursue transparency in the crypto currency space and also, mr. ray, i want to thank you for being here today to testify i think i start off a little bit like paul krudman does in "the new york times." i really don't get the point of block chain and crypto currency. it is like keeping track of how many times you chew gum.
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like who cares there is other ways that are i think less fraudulent to make transactions but anyway, that being said, how many times have we talked here about the potential for abuse, fraud in the crypto market quite a bit. we have had a lot of cheerleading from some people, especially on the other side of the aisle here today haven't heard it yet but i do want to hear it like we normally hear it, how wonderful it is and how it shouldn't be regulated by the sec and they're too tough on it. i imagine we won't be here today especially after what we saw with ftx but we do want to see order and transparency in this industry and throughout the financial markets. if you are an issuer of crypto currency or a manager and you conduct business with u.s. customers, consider this ftx collapse as your public service announcement come into compliance with the
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securities act of 1933, 1934 and all other applicable federal and state laws do not skirt the law and mishandle u.s. citizens funds and claim innocence. now, that wasn't happening, was it, mr. ray, under this particular company. >> no, sir. >> why wasn't it >> again, you have control in a small group of individuals without any oversight whatsoever you know, from an independent board or experience managers it's just a recipe for problems. >> what government entity is responsible for this fiasco? >> that's not for me to say. >> no, it is for you to say. you're right there i'm asking you if you had to opine, that's why you are there in the hot seat. who is it? should the sec have been more aggressive even though we had a lot of friends on the other side
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saying they shouldn't have been? shouldn't the sec have been more aggressive. >> i'm not experienced i'm not a regulatory lawyer. i'm not here to express views about who should regulate it i have said very clearly that we need transparency. customers need to have segregated accounts. they need to have ownership. it is their money and assets it is really no different from a bank you would expect the same level of scrutiny of funds you have on deposit with someone else. that is a minimum. >> i agree with everything you have said, but at the same time i have to say that the product that they get is a hybrid product, is it not >> well, certainly it's an alternative currency, yes. >> so then who should regulate it >> i don't have an opinion on it. >> you don't okay well, that's the whole problem i think. i don't get the point of currency to begin with other
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than if you are a terrorist or someone that wants to hide money. other than that, i get the point. but if we are going to have it, we have to regulate it someone has to be in charge. we have to make sure that we don't continue to defraud the american people. that's where the government comes in somebody has to take charge of it i think it is the sec. i have a lot of pushback from my friends on the other side. i don't hear them pushing back as i normally do i would love to see them but, again, someone has to regulate this if it is going to exist. don't you agree? >> i certainly think there has to be more controls in this sector we would regulate it i defer to this committee. >> that, madam chair, i yield my time back. thank you. >> thank you now the gentleman from texas, mr. williams, is now recognized for five minutes. >> thank you, madam chair, and thank you, mr. ray for being
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here appreciate it. there has been many comparisons made as people examine what happened at ftx from bernie madoff to enron. you have a unique perspective because of the fact you worked on the enron conspiracy. i would be interested to see how you think it compares. you got cut you have earlier and i'd like to hear about that. >> enron was a different company. you know, was a -- crimes that were committed there were highly orchestrated financial match nations by highly sophisticated people to keep transactions off balance sheets you know, this is really old-fashioned embezzlement this is just taking money from customers and using it for your own purpose. not sophisticated at all
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sophisticated is perhaps in the way they were able to sort of hide it from people. frankly right in front of their eyes but this isn't -- this isn't, you know, sophisticated whatsoever this is just plain old embezzlement, old school. >> old school, there you go. it seems like he had interesting ideas on how to stay relevant in the ftx world. even after stealing customers money and driving it into bankruptcy i have read he wants to be retained as an outside consultant and critical of your appointment into his position. all of his wishes seem even more unlikely after his arrest last night. what role, if any, should he play in ftx going forward? >> the role he's currently playing, zero. >> good. you stated that ftx was a platform allowing for users to
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trade digital assets were users engaged in simple exchanges of assets or were users permitted to engage in leverages, complex transactions? >> yes i'm sorry. could you repeat your question >> sure. you stated ftx was a platform aligned for users to trade digital assets were users engaged in simple exchanges of assets or permitted to engage in leveraged complex transactions >> yes. >> okay. you also stated that you have recovered over $1 billion in assets can you give a description of the nature and type of assets you have recovered to date >> we have recovered over $1 billion of crypto assets these are coins of various nature and we have secured those. that's been our primary focus. we have certainly also secured our cash in all of our bank accounts the bank accounts were frozen. we have control over those accounts with new authorized
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users which certainly puts myself but our main goal is to secure the cash and crypto assets and that is an ongoing venture. >> thank you for being here. and i yield my time back >> thank you very much the gentleman from guam is now recognized for five minutes. >> thank you, madam chair. thank you for being with us here today. there is a lot of people following this trying to understand, trying to understand what happened for a variety of reasons. of course your primary responsibility will be to make sure that the creditors are made whole as well as depositors and everybody else who has a stake in varying degrees within the company. my first question is have we within able -- have you been able to pinpoint the specific
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cause for ftx's collapse i know that there is all kinds of stories about loans to the owner and no internal controls, loans to alameda comingling. but is there a specific -- a specific trigger point or a specific cause that has resulted in the ftx collapse? >> you know, i think i have described it it is really just the unlimited ability of those in control positions to borrow customer funds or take customer funds and then deploy them for their own use. that use involved margin trading, which is inherently, you know, risky. and, of course, they spent enormous amounts of money beyond that but it's really the misuse of funds and it's as simple as that you know, on a large scale basis. >> so what is -- what is the --
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the big picture balance loss as a result of this bankruptcy? how much has ftx lost as a result of this. >> we don't have exact numbers, but it is in excess of $7 billion. >> in excess of billion we'r saying that the, the sam bankman-fried and company basically took or missalicated $7 billion and that's why ftx has collapsed. >> right so funds were taken from customers, funds were invested, trading losses occurred in alomaya andcernly there's some value there and we'll try to get that value, sell those assets. oftentimes even when he made those sorts of investments
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whether directly or through others and management, sometimes he would do that really without any pro forma or any valuation not really quite sure how some of the purchase price numbers were derived, so it gives you a sort of worry obviously the purchases were overvalued. so there's a concern there as well >> so alameda lost $11 billion as a result of investment decisions and margin trading >> there's a multitude of reasons that caused, you know, the gap in assets between customer balances and what's there today and what we hope to gain it can't be pinpointed just on losses on trading activity >> the reason i'm asking, i'm just kind of narrowing it down because my time's expiring, but it's important for us to very clearly understand what causes the collapse when we had the 2008 financial
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crisis and we could have gone in there and pointed to all these different reasons that could have potentially contributed to it, but the underlying reasons there were subprime prices and underlying liquidity that allowed us to have a regulatory response to prevent that kind of thing from occurring in the future. are these lack of controls, and are these environments that resulted in the ftx collapse, are those still existing today, and could the same thing happen in similar operations such as binance, for example, could they also engage in the same activities under the current regulatory regime and if things go wrong, have the same outcome? >> just three points i'd make. first of all, we are going to detail the sources and uses and what happened to all the funds that will tell us exactly, you know, how the losses were incured. some of those may be lessons learned, some frankly payments
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made from other people's money >> the circumstances that led to ftx's collapse those circumstances still exist and can other companies that exist collapse under the same? >> i don't know how those companies operated obviously our company operated in a distinct way that led to losses but i think every company is different >> gentleman from arkansas, mr. hill, is now recognized for five minutes. >> i thank the chairman. i appreciate you being here, mr. ray. glad to have you before the committee, and i want to thank the ranking member, chair waters for working constructively in the digital asset space over the past four years. and i want to remind my colleagues that mr. mcenry talked about bond ripoffs in the
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railroad expansion in the 1880s. true fannie mae and freddie mac leading down the primrose path in the early 2000s in the market and there were frauds and fraudulent actors but it didn't mean we didn't want to invest in railroads in the united states for the history of the country, and it didn't mean we don't need a vigorous single family housing market or secondary market in our country, so let's not confuse the mag fesance and disgusting activity of ftx with the thought we need a proper thoughtful overnightsoever digital assets 14 years ago this week bernie madoff was arrested and charged with operating the largest ponzi scheme in american history its collapse injured 70,000 investors and led to major reforms at the securities and exchange commission and
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oversight. bankman-fried was arrested in the bahamas last night in many ways the fall of ftx with court filings suggesting over 1 million creditors are somewhere in the lurch in the ftx silo americans were hurt, and i want everyone listening to know in today's hearing this is the first step congress is taking in understanding what happened and how to create the appropriate regulatory environment we do want to understand the decisions that led to the collapse and the impact on our customer and other market participants and how to prevent it from happening again. mr. ray, thanks for stepping up in your leadership capacity. and in looking at the bankruptcy filing -- was the audit firm for the dot comsilo. their firm says they're the first ever cpa in the metaverse. looking at their website they have 24 offices, 600 staff, 100
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partners principally california, new york, and new jersey you stated you're not familiar with pregger mettis, is that correct? >> that is correct >> are they cooperating in your role as bankruptcy trustee >> we're reaching out to both firms and everybody seems to be cooperating at this point. >> you anticipate they'll actively participate in the forensic accounting you're doing? >> absolutely not. we are taking information that we get from execs and professionals i take our investigation from there >> can you tell us who's in charge of the audit at that firm >> i can't tell you off the top
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of my head >> do those names ring a bell? >> no, it's not. >> could you provide that to us please >> absolutely. >> thank you and then the second auditing firm you say you are familiar with them and that's part of a london-based firm. >> yes >> so do you feel the same way about their performance based on the books and records you've seen that they also were inadequate as serving as an audited firm >> i certainly don't want to disparage that firm. we have to look through the books and records and at the audits themselves and see how comprehensive they were. certainly we're going to look at the related party disclosures. we need to go back and look at all those audits just from a look back perspective to determine what maybe could have been done that wasn't done
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>> you anticipate the united states being a creditor in these proceedings either for tax purposes >> it's premature to tell. we're looking at that ourselves and to the extent we find any igregularities in the tax area we'll certainly be notifying the irs. nothing we've seen at this point, but, again our investigation is so early. >> you state the internal controls were the weakest you've seen in your experience. but ftxus, and ftx.com essentially there's no distinction between those. whether you're a domestic investor or an international investor that's the same pot >> that's fair to say. we are focused on commingling and we're worried the silos weren't respected from purposes of the crypto assets >> gentleman's time has expired. gentleman from connecticut mr. himes who's the chair of the
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subcommittee on security and monetary policy and development is recognized for five minutes >> thank you for being here and undertaking this remarkably complicated task at the end of the day our job here is to learn from the mistakes that were made, who made them. this whole thing has a feeling of a hollywood blockbuster exotic products, token, and crypto assets. it feels to me, though, as i look through particularly the indictment unsealed this morning here a lot of what we're seeing is wire fraud, it's misleading investors -- >> pretty remarkable q&a today from house financial services as
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john ray talks about at ftx and other lack of recordkeeping. i don't trust a single piece of paper in this organization we'll keep our eye on the hearing. as we've lost our highs. obviously s&p got to 4,100 this morning, that is a two-month high two-year was at 412, back up to 419. busy morning let's get to the half. carl, thank you very much, and welcome, everybody, to the half time report i'm scott wapner front and center this hour, a game changer for stocks. is that what today's cpi is? is it a game changer for the fed and how high it might hike we'll discuss that with the investment committee joining me for the hour stephanie link, josh brown, and jim labenthal. dow still good, but only up 112. s&p still up near 1%, not nearly as high as it was. it's cut in half that gain

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