In November 2022, the cryptocurrency exchange run by Sam Bankman-Fried, FTX, collapsed after a run on the bank. Like many an average bank, FTX didn’t have enough cash on hand to satisfy every customer at once. Unlike many an average bank, FTX didn’t have the cash anywhere (and definitely was not FDIC-insured). As a result, most investors lost lots of money, including some big names, and Bankman-Fried went into hiding in the Bahamas. He has since been extradited, but the money is still missing.
To replace Bankman-Fried, FTX’s board appointed John Jay Ray III as the new CEO. Ray has a long history of salvaging or liquidating bankrupt companies, namely Enron, but also underwear maker Fruit of the Loom, GT Technologies, and others. As he works to track down the $8 billion FTX lost, it is worth looking at his history. Where does the money sunk into bankrupt corporations go, and how does it get back to wronged parties?
The Enron Experience
FTX, Ray has said, is in worse shape than Enron (no small feat). While he says Enron was a far more sophisticated company, his goals are the same: To get as much money back to the consumers and investors as possible, and to complete bankruptcy restructuring. As with Enron, which was restructured and completed liquidation in 2006, FTX will need to be reduced to its most essential assets and then sold. The trick will be getting as much money as possible out of the debris field.
The first step at Enron, following its billions of dollars in losses and failure to save itself via a Dynegy merger, was to declare bankruptcy. Once Enron had bankruptcy protection, Ray and his colleagues turned their attention to Enron’s creditors. By filing lawsuits against these financial institutions, Ray was able to extract money through settlement agreements. Essentially, he demonstrated that the creditors helped conceal Enron’s financial missteps, making them partially responsible for the losses. Settlement dollars could then be passed on to former investors.
For every dollar lost, Enron was expected to return between 14 and 18 cents to creditors; however, under Ray’s leadership, the company did much better. By the time the dust settled in 2008, Enron had returned 50 cents on the dollar to most creditors. According to comments made at the time, this was a substantial victory. Enron repaid between $21.7 and $21.8 billion to creditors by 2011.
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Ray’s Recovery Strategy
While working with Enron, Ray chased down the creditors, individuals, and organizations that had allegedly helped Enron cook their books. Enron itself was out of money, but plenty of its associates had made substantial gains before everything collapsed. Lawsuits aimed to regain some of those funds. The largest individual settlement, with Citigroup, totaled $1.66 billion. While this fell far short of the amount Enron had been suing for, Ray was reportedly pleased with the result.
Similarly, FTX-related lawsuits have been picking up speed. In July 2023, Ray and FTX sued Bankman-Fried and three others integral to FTX’s leadership team for $1 billion. It is alleged that this money was misappropriated as everything from political donations to personal bonuses. FTX is also suing K5 Capital, one of its former lawyers, and Shaquille O’Neal, as well as several other representatives. FTX has also begun selling itself and its subsidiaries to generate funds.
Notes for Leaders
Although Ray isn’t a household name, he has been a determined and effective leader of the companies that have recruited him. Some of his qualities and practices are noteworthy:
- “No” is not the right answer: His peers have described Ray as stubborn, comparing him to a pit bull. John Ray got half of Enron’s investors’ money back by repeatedly going after it and only settling when an acceptable agreement was reached.
- Hiring go-getters: Ray also found some dogged process servers who had been forced to serve O’Neal by throwing papers at his moving car following months of evasion. He has been able to surround himself with people who are prepared to go the distance.
- Playing to win: Ray isn’t just suing Bankman-Fried and hoping for the best. Instead, he is pursuing a variety of people who were actively involved in the fraud. He is also not mincing words during congressional hearings. Distinguishing Enron’s fraud from FTX’s amateurish misappropriation, Ray told the House Committee on Financial Services: “This is really old-fashioned embezzlement. This is just taking money from customers and using it for your own purpose.”
Drawn to Chaos
If Ray has taken on the hardest task of his 40-year career, he is up for the challenge. Simply playing to stay afloat isn’t good enough for FTX; Ray wants to compensate investors. “I am drawn to crisis,” Ray told the Wall Street Journal. “There is something about the sheer chaos and human panic that creates an unbridled energy.” Perhaps that attraction to chaos is why FTX lawyer James Bromley described him as the “Red Adair” of putting out corporate blazes.
Ray has attributed the failure of investors to conduct due diligence and a herd mentality as part of the reason they got swept up in the FTX hype. “Part of it is intellectual laziness,” he told a Manhattan event. “It’s kind of insane, but when a reputable company makes an investment, everyone seems to fall in line.” Ray’s success, of course, will be judged by how much money he is able to reclaim. But his track record and never-say-quit approach suggests there is no one better placed to salvage as much as possible from the ashes.