Crypto collapse: Regulatory altruism at FTX — Sam Bankman-Fried arrested

By Amy Castor and David Gerard

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“This isn’t sailors needing to get worried when they see the rats swimming for shore, this is watching rat-Noah march the cockroaches onto a tiny ark two by two while flipping your captain the bird.” — Cyrano4747 (SomethingAwful) on Sequoia marking their FTX investment down to $0

 

Image by npcdad on Reddit

 

What are you gonna do, arrest me?

“Take the money and run” is a plan with just two parts. Sam Bankman-Fried completely failed to get around to the second part.

After SBF’s extensive tour of confessing financial crimes to anyone from the press who would listen, the Weasel of Wall Street was arrested in the Bahamas at the request of the U.S. on Monday, December 12, where he awaits extradition. [Twitter; Twitter; CNBC]

The Southern District of New York has charged SBF on eight counts of wire fraud, commodities fraud, securities fraud, money laundering, and conspiracy to violate campaign finance laws. [press release; indictment, PDF]

The SEC filed its complaint against SBF on December 12, alleging that FTX raised more than $1.8 billion, including $1.1 billion from 90 US-based investors, in an “orchestrated scheme to defraud equity investors.” He led them to believe FTX had appropriate controls when it did not. The complaint charges him with defrauding investors — not customers. [SEC; complaint, PDF]

The SEC complaint makes one thing clear: Sam was an idiot.

83. At the same time, Bankman-Fried sought emergency funding from other investors, including U.S. investors, to cover a shortfall at FTX of approximately $8 billion. As part of this effort, Bankman-Fried circulated a balance sheet to potential investors that listed a negative $8 billion entry labeled as a “hidden, poorly internally labeled ‘fiat@ account.’” This entry was a reference to the above-described fiat@ftx.com account and reflected FTX customer funds deposited in Alameda’s bank accounts.

The CFTC has charged SBF, FTX, and Alameda with fraud on customers, and in fraudulent material misstatements and omissions. The CFTC claims SBF sought to buy Voyager and BlockFi this year, “at least in part to gain access to additional sources of capital … to fill the hole in customer funds that had been created.” [Press release; complaint, PDF]

You will enjoy Matt Levine’s detailed explanation of the SEC and CFTC complaints and what they mean. [Bloomberg]

Caroline gets a lawyer

Caroline Ellison, CEO of FTX’s trading arm Alameda, is in New York, and has lawyered up at last. Ellison is being represented by two lawyers from WilmerHale: Stephanie Avakian, a former enforcement division chief at the SEC, and Anjan Sahni, a former federal prosecutor. “Sahni and Avakian have both visited the Southern District prosecutors’ office in Lower Manhattan in the past week, but it’s unclear whether their visits were related to Ellison.” Unlike SBF, Ellison has had the good sense to shut up. [Bloomberg]

Ellison has not been charged as yet, but from the SEC complaint against Sam:

84. During a meeting with Alameda employees on or about November 9, 2022, Ellison admitted that she, Bankman-Fried, Wang, and Singh were aware that FTX customer funds had been used by Alameda.

One specific thing that Federal prosecutors are looking into is whether FTX and Alameda crashed Terra-Luna, only to be caught up in the falling dominoes. [NYT]

We’re still not clear on whether Alameda was one of the traders that crashed Terra-Luna — but that crash took down a pile of other crypto firms, and those firms crashing caused the massive hole in Alameda’s books that was then patched with customer funds from FTX. If Alameda fired the first shot directly into their own leg, that would be extremely crypto, as well as extremely funny.

Another topic of investigation is whether hundreds of millions in funds (presumably cryptos) were moved from the US to the Bahamas on the day of the Chapter 11 filing in Delaware. [Bloomberg]

FTX’s inner management had an internal chat group called “Wirefraud”. Just do all the prosecutors’ work for them, hey. Participants included SBF, Zixiao “Gary” Wang, FTX engineer Nishad Singh and Caroline Ellison. SBF tweeted denying he was in any such group — shortly before he was arrested. [AFR; Twitter]

Our question is: where’s Gary Wang, the secret third FTX guy?

SBF doesn’t speak to Congress — John Jay Ray does

Being put into a cell meant that SBF wasn’t available to testify to the House Finance Committee today, after Maxine Waters’ staff had spent so long setting it up. Just think of all the extra crimes SBF would have blithely confessed to!

We do have SBF’s planned introductory testimony. It’s a “talk” with numbered and lettered sections, subsections and sub-subsections. SBF apologises for messing up, and blames everything on others — mostly John Jay Ray’s Chapter 11 team. He thinks FTX US is solvent, and the Chapter 11 team should not have closed it. He is very upset that the Chapter 11 team isn’t interested in his assistance. There’s also a whole page blaming Binance. Sam just worked too hard and cared too much, see. [Forbes]

Ray’s introductory testimony reiterates the themes of his searing first-day declaration: this was a clown financial firm run by clowns, and worse than Enron. [Testimony, PDF]

Molly White live-tooted John Jay Ray’s testimony on Mastodon. Highlights include: [Mastodon]

• Poor documentation of loans by SBF: “in one instance he signed as both the issuer of the loan as well as the recipient of the loan.”
• Ray has been sharing his findings with the SDNY and the SEC.
• Ray distinguishes between “sophisticated” crimes at Enron, and “old-fashioned embezzlement” at FTX.
• “Our keys aren’t stored in a centralized location. We don’t know where all of our wallets are. Passwords were sometimes kept in just plaintext format.”
• The Blockchain Eight try to pin FTX’s failure on SEC chair Gary Gensler — after they’d told Gensler to back off from FTX.
• Ray can’t get information on the Bahamas bankruptcy. “The pushback that we’ve gotten is sort of extraordinary in the context of bankruptcy.” He believes that SBF was attempting to undermine the US proceeding.

Update: Here’s Molly’s writeup of the day. [Substack]

The nuanced ingredient is crime

Crypto was mysteriously starting to move off FTX on November 11 and 12 — so John Jay Ray cut off outside access to FTX servers.

Peter Greaves of PwC, the joint liquidators in the Bahamas bankruptcy proceeding, has asked the judge in the U.S. Chapter 11 proceeding in Delaware to compel Ray to give them access to the FTX platform again. PwC wants access to trading platform data, FTX email records, internal Slack chats, FTX Google Drive documents and QuickBooks accounts. Yes, the billion-dollar trading platform ran on QuickBooks. [Doc 198, PDF; CNBC]

Genesis Block Trading was an OTC (over-the-counter) desk and Hong Kong’s largest Bitcoin ATM player. Genesis Block was part-owned by Alameda. Dirty Bubble is pretty sure it was just a front for Alameda to bring in retail money: “Blockchain transfers suggest Genesis Block was little more than a nameplate, as the funds transferred to Genesis Block appear to have flowed directly to Alameda Research.” One former employee told the Financial Times: “People were literally lining up around the corner with bags of cash at Genesis Block, sometimes they shut the door saying they were out of bitcoin.” Genesis Block was involved in SBF’s supposed “kimchi premium” arbitrage origin story. [Dirty Bubble; FT, archive]

Bloomberg, the New York Times, the Wall Street Journal and the Financial Times have filed a motion in the FTX bankruptcy, requesting that FTX be required to unseal customer and creditor lists — just like in any other bankruptcy. [Doc 196, PDF]

The purchase of Voyager Digital by FTX US is officially dead. Voyager gets to keep FTX’s $5 million deposit, though. [Joint stipulation, PDF]

Earlier, we wrote about Silvergate, the actual-money banker for most of US crypto. Silvergate sent a letter to shareholders assuring them it had conducted “significant due diligence” on FTX and Alameda Research. [SEC]

Moonstone, owned by Farmington, was the tiny bank that FTX bought a share in and then pumped a lot of cash through. The local paper investigates. [Spokesman]

Sam’s parents, Joseph Bankman and Barbara Fried, will not be teaching at Stanford next year. [The Stanford Daily]

In the days leading up to FTX’s collapse, when people should have been frantically grabbing their money, Larry Cermak from The Block vigorously defended the company’s solvency. “I think the chance of FTX insolvency is near 0%. Clearly there are liquidity issues as people are withdrawing out of caution.” [Twitter, archive]

The Atlantic interviews James Block, a.k.a. “Mike Burgersburg” of Dirty Bubble Media, about his part in FTX’s downfall. [The Atlantic]

The Block: trustworthy crypto news, brought to you by your friends at FTX

Crypto news site The Block was secretly funded with money funneled to its CEO’s LLCs from SBF’s Alameda Research. [Axios; Medium, archive]

The Block’s Mike McCaffrey had three loans from SBF. $12 million (April 2021) went to buy out The Block; $15 million (Jan 2022) was used to fund The Block; $16 million was used by McCaffrey to buy an apartment in the Bahamas.

McCaffrey has resigned, and has been replaced by chief revenue officer Bobby Moran. McCaffrey is still a majority equity holder in The Block.

The writers and researchers of the Block are shocked, and say they had no idea their boss was in hock to SBF. Please ignore the pictures of them out partying with Sam, that’s just keeping up with the industry. [Twitter]

Mike Dudas founded The Block in 2018. The Block ran on a subscription model, but this wasn’t enough to pay the bills — it bled money for years. Dudas had raised $3.5 million from venture capitalists, but that was barely enough to keep the lights on. The company lost $747,000 in 2018 and was on track to lose more in 2019. [Crunchbase; Modern Consensus, 2019, archive]

McCaffrey took over in April 2020, at age 24. In April 2021, McCaffrey led a buyout of all of The Block’s seed investors. The company became employee owned, and McCaffrey was the sole director. Dudas figured McCaffrey got the money from his wealthy family, LOL. [Fortune, 2020; Axios, 2021; TechCrunch]

McCaffrey said he took the loan because The Block was in a “precarious place” in 2021. [Twitter]

You can’t make money in crypto news unless you become part of the crypto PR machine. Promote crypto, do whatever you can to lure more retail dollars into the space, and there are plenty of companies who will send you money.

Some outlets work on a patronage model — Coindesk is funded by crypto conglomerate DCG, Decrypt is a project of ConsenSys, Breaker was a project of SingularDTV. Binance has bought a share of Forbes, presumably in the hope of greater than zero influence.

If your benefactor is FTX, one of the biggest players in the crypto space, and one of Tether’s biggest customers, it is possible that your stances on certain crypto companies will adjust accordingly.

Both Amy and David have written for The Block. They pay in full on time, which is the highest praise a freelancer can give a publisher. Keep it up, guys!