FTX founder Sam Bankman-Fried will need to walk a legal tightrope on Tuesday to ensure that his scheduled testimony before the House Financial Services Committee steers clear of suggested wrongdoing.
And one legal expert says he’ll be listening for Bankman-Fried to explain what he knew about the company’s financial moves and corporate governance failures while serving as its CEO.
“I’d want to go through the chain of events that led to the bankruptcy, so there’d be a chronological, sequential approach to this," Mark Kornfeld, an asset recovery and bankruptcy litigation attorney, told Yahoo Finance. Kornfeld served as senior counsel in an asset recovery effort in Bernie Madoff’s infamous Ponzi scheme.
Bankman-Fried founded FTX in 2019 and stepped down last month after the company's abrupt spiral from a $32 billion valuation into bankruptcy in a matter of days. In filing for bankruptcy, FTX reported $8 billion in missing customer funds.
“I’d be asking questions about the protection of customer funds, the use of customer funds through Alameda Research…when investors, by all accounts, were expressly told that would not happen,” Kornfeld said.
Kornfeld also said he’d like Bankman-Fried to be presented with, and account for, documentation showing specific fund transfers from FTX to Alameda, and to answer why company emails were programmed to automatically delete.
Knowledge, or lack thereof, as to how the crypto platform handled its customers’ funds — as well as other funds — will ultimately determine whether Bankman-Fried, or other decision makers from the now bankrupt firm, will face civil claims or criminal accusations tied to the collapse.
If Bankman-Fried intentionally misled or omitted disclosures that investors relied upon in making their decisions to put money on the FTX platforms, he could face civil claims as well as criminal accusations.
In the weeks following the company's implosion, Bankman-Fried has repeatedly made the unusual choice of engaging with reporters in on-the-record interviews and consistently tweeting about issues related to FTX.
In an hour-plus interview at The New York Times' Dealbook Summit, Bankman-Fried responded to a series of questions from Andrew Ross Sorkin, asking him about Alameda’s access to and use of FTX’s customer funds.
“I wasn’t running Alameda. I didn’t know what was going on,” Bankman-Fried told Sorkin. “I didn’t knowingly commingle funds…” he added. “I didn’t ever try to commit fraud on anyone.”
The former CEO went on to say that he didn’t know of times when he lied about the company’s use of customer funds, and that he failed to adequately control risk across the company’s entities. “I wasn’t spending any time or effort trying to manage risk on FTX,” he said.
FTX's new CEO, John Ray III, is also scheduled to testify before the House committee on Thursday.
In prepared remarks ahead of the hearing, Ray wrote: “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."
Ray went on to list more specific "unacceptable management" actions by Bankman-Fried and the company's prior management that led to the company's collapse, including:
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; and
The absence of independent governance throughout the FTX Group.
With Ray's level of experience, Kornfeld said, he's an important person to be heard from.
"Presumably, he's seen a lot of information that you and I haven't, and so that's...the place where he can be of significant significant value to all of this," Kornfeld said.
"I think [Ray] is giving you a pretty good window," Kornfeld said. "You never just look at one thing. You look at the entirety of it."
Alexis Keenan is a legal reporter for Yahoo Finance. Follow Alexis on Twitter @alexiskweed.
Read the latest financial and business news from Yahoo Finance
Download the Yahoo Finance app for Apple or Android
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, and YouTube