Who Is Mr Ray Working For?

I'll preface this with my usual caveat, I'm not an attorney, and all I really know of business is what I learned from reading people in my career in tech. However, I pointed out yesterday that although most commentators, if they mention new FTX CEO John Ray at all, seem to see him as some sort of corporate Dudley Do-Right of the Mounties who fixed Enron and will now fix FTX. Little as I know, I do know that Mr Ray is a lawyer (and a highly capable one), but lawyers work for clients and are obligated to promote their clients' interests. So who are Mr Ray's clients?

This sent me to the FTX bankruptcy filing, available on line, readable, and as far as these things go, informative. Mr Ray identifies himself at the start:

I am the Chief Executive Officer of the above-captioned debtors-in-possession (Collectively, the "Debtors"), having accepted this position in the early morning hours of November 11, 2022. I am administering the interests and affairs of the Debtors from my offices in the United States.

So his clients are the debtors-in-possession of FTX. Investopedia describes debtor-in-possession as:

a person or corporation that has filed for Chapter 11 bankruptcy protection but still holds property to which creditors have a legal claim under a lien or other security interest.

So Mr Ray has been designated CEO by otherwise unidentified debtors-in-possession who hold FTX assets. His job is basically to maximiize those assets and establish their value in preparation for a sale to satisfy FTX creditors. This leads to another puzzle, which is who those unidentified debtors are. As Ferdinand Lundberg pointed out in The Rich and the Super-Rich (1968), ownership of stock and securities at the large investment level is often concealed via devices like street names, and clearly entities that have made bad bets on failing companies would prefer to avoid the publicity.

We can surmise from what's public knowledge, however, that Sam Bankman-Fried himself held a large ownership stake, about 50%, in FTX. As Forbes put it,

Most of his wealth, which peaked at an estimated $26.5 billion, was tied up in ownership of about half of FTX and a share of its FTT tokens.

This would have made it difficult to remove him as CEO, which had to be done to bring in Mr Ray. Mr Ray himself gives an intriguing account in the bankruptcy filing of how this happened:

. . . negotations were being held between certain senior individuals of the FTX Group and Mr Bankman-Fried concerning the resignation of Mr Bankman-Fried and the commencement of these Chapter 11 cases. Mr Bankman-Fried consulted with numerous lawyers, including lawyers at Paul, Weiss, Rifkind, Wharton & Garrison LLP, other legal counsel and his father, Professor Joseph Bankman of Stanford Law School. A document effecting a relinquishment of control was prepared and comments from Mr Bankman-Fried's legal team incorporated. At approximately 4:30 AM EST on November 11, 2022, after further consultation with his legal counsel, Mr Bankman-Fried ultimately agreed to resign, resulting in my appointment as the Debtors' CEO. I was delegated all corporate powers and authority. . .

Oh to be a fly on the wall at that meeting, huh? Mr Ray is being highly circumspect; he doesn't idenfify "certain senior individuals of the FTX group", nor "other legal counsel", but what sticks out is Sam's father, Prof Bankman. I can only infer that Prof Bankman was the most influential person overseeing developments as FTX's finances collapsed, and I would go a little farther to offer him as the answer to the question I had yesterday: who was the person at FTX who could bring white-shoe Sullivan & Cromwell on board? Indeed, who was the person who could influence equally white-shoe Paul, Weiss, Rifkind, Wharton & Garrison LLP to represent his hippie son Sam in this all-night sitdown?

However, Paul, Weiss lasted only a week representing Sam the hippie altruist.

Paul Weiss said Friday [Nov 18] it has stopped representing embattled crypto mogul Sam Bankman-Fried, citing conflicts of interest.

Bankman-Fried, the former CEO of bankrupt crypto exchange FTX, is losing the firm’s help as US lawyers for the platform claim he is disrupting reorganization efforts through “incessant and disruptive tweeting.”

“We informed Mr. Bankman-Fried several days ago, after the filing of the FTX bankruptcy, that conflicts have arisen that precluded us from representing him,” Paul Weiss counsel Martin Flumenbaum said in a statement.

Ethically, Paul, Weiss is required to say nothing in such an announcement that would damage the client's interests, though citing "incessant and disruptive tweeting" is going pretty far in itself. But although mentioning "conflicts" is extremely broad and generic as a reason to withdraw, it suggests to me that there's a basic problem for any counsel that gets involved in this case: Sam Bankman-Fried resigned as CEO, but he still controls about half of FTX, and that makes him a major debtor-in-possession. But now it looks like his father, Prof Bankman, is acting as a proxy for Sam as well. Are Sam's interests the same as the other debtors-in-possession? Almost certainly not. The same applies to Prof Bankman, who seems to be acting as both a proxy for Sam and a key leadership figure for the other debtors -- but their interests are also not the same. No wonder Paul, Weiss skedaddled.

But the plot thickens. Once Paul, Weiss withdrew due to its conflict, Prof Bankman stepped in again:

Former FTX CEO Sam Bankman-Fried will no longer be represented by his legal counsel at Paul, Weiss, Rifkind, Wharton & Garrison, a white-shoe law firm, less than a week after retaining the firm to represent him.

Semafor reported on Thursday that Bankman-Fried will now be represented by David Mills, a criminal law and white-collar crime professor at Stanford University’s law school – where Bankman-Fried’s father, Joseph Bankman, also teaches law.

Mr Ray, who it seems clear was appointed FTX CEO by a group of Debtors led by Sam's father, Prof Bankman, is also caught in this dilemma. The bankruptcy filing concludes with these words:

[T]he Debtors have made clear to employees and the public that Mr. Bankman-Fried is not employed by the Debtors and does not speak for them. Mr. Bankman-Fried, currently in the Bahamas, continues to make erratic and misleading public statements.

Darn right they'd better make things clear; hippie Sam is headed for court, and the other Debtors have to get as far away from him as they can -- except that Sam's dad seems to be running the show. I would assume, though, that if Prof Bankman has had the foresight to line up a defense attorney for his hippie son, he knows he'd better be planning for his own defense as well. But shouldn't he then be backing out of any involvement with the FTX Debtors? Well, it may not be that simple, huh?

Nevertheless, even if Sam is not employed by the Debtors, he continues to be one of them, and he's making erratic and misleading public statements on his own behalf and in conflict with the interests of the other Debtors -- of whom his father, Prof Bankman, appears to be a leading figure, who however himself now has a conflict.

All these data points suggest to me that there are other reasonable inferences to make about who was running the FTX swindle from the start. My position all along is that an adult with a serious case of ADHD is simply not capable of the detailed planning and consistent execution needed to run a $50 billion Ponzi scheme. In fact, I wouldn't rule this out for him as a legal defense, especially if his defense can point to someone else as a more credible perp. I'll get to this tomorrow.