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  1. #1

    FTX Founder Samuel Bankman-Fried

    He has been arrested in the Bahamas: https://www.cnbc.com/2022/12/12/ftx-...l-charges.html

    In a statement, Bahamian Prime Minister Philip Davis said, “The Bahamas and the United States have a shared interest in holding accountable all individuals associated with FTX who may have betrayed the public trust and broken the law.”

  2. #2
    The Securities and Exchange Commission has now officially charged Samuel Bankman-Fried with fraud.

    The complaint alleges that he orchestrated a years-long scheme to conceal from FTX’s investors

    (1) the diversion of FTX customers’ funds to Alameda Research LLC, his privately-held crypto hedge fund;
    (2) the special treatment afforded to Alameda on the FTX platform, including providing Alameda with a virtually unlimited “line of credit” funded by the platform’s customers and exempting Alameda from certain key FTX risk mitigation measures;
    (3) risk stemming from FTX’s exposure to Alameda’s significant holdings of overvalued, illiquid assets such as FTX-affiliated tokens.

    The complaint further alleges that Bankman-Fried used commingled FTX customers’ funds at Alameda to make (undisclosed) venture investments, lavish real estate purchases, and large political donations.

    From the SEC's press release, Dec. 13, 2022 —

    "We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto. The alleged fraud committed by Mr. Bankman-Fried is a clarion call to crypto platforms that they need to come into compliance with our laws. Compliance protects both those who invest on and those who invest in crypto platforms with time-tested safeguards, such as properly protecting customer funds and separating conflicting lines of business. It also shines a light into trading platform conduct for both investors through disclosure and regulators through examination authority. To those platforms that don’t comply with our securities laws, the SEC’s Enforcement Division is ready to take action."

    "FTX operated behind a veneer of legitimacy Mr. Bankman-Fried created by, among other things, touting its best-in-class controls, including a proprietary ‘risk engine,’ and FTX’s adherence to specific investor protection principles and detailed terms of service. But as we allege in our complaint, that veneer wasn’t just thin, it was fraudulent. FTX’s collapse highlights the very real risks that unregistered crypto asset trading platforms can pose for investors and customers alike. While we continue to investigate FTX and other entities and individuals for potential violations of the federal securities laws, as alleged in our complaint, today we are holding Mr. Bankman-Fried responsible for fraudulently raising billions of dollars from investors in FTX and misusing funds belonging to FTX’s trading customers."
    Last edited by AllenBuilding; 12-13-2022 at 08:30 AM.

  3. #3
    Join Date
    Nov 2007
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    Vermont
    ^ a recent Business Week had a good article about the lack of regulation in crypto...events like this are going to have an effect...a lot of people have been waiting for this kind of malfeasance to bubble up.

  4. #4
    Join Date
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    Quote Originally Posted by AllenBuilding View Post
    The Securities and Exchange Commission has now officially charged Samuel Bankman-Fried with fraud.

    The complaint alleges that he orchestrated a years-long scheme to conceal from FTX’s investors

    (1) the diversion of FTX customers’ funds to Alameda Research LLC, his privately-held crypto hedge fund;
    (2) the special treatment afforded to Alameda on the FTX platform, including providing Alameda with a virtually unlimited “line of credit” funded by the platform’s customers and exempting Alameda from certain key FTX risk mitigation measures;
    (3) risk stemming from FTX’s exposure to Alameda’s significant holdings of overvalued, illiquid assets such as FTX-affiliated tokens.

    The complaint further alleges that Bankman-Fried used commingled FTX customers’ funds at Alameda to make (undisclosed) venture investments, lavish real estate purchases, and large political donations.

    From the SEC's press release, Dec. 13, 2022 —

    "We allege that Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto. The alleged fraud committed by Mr. Bankman-Fried is a clarion call to crypto platforms that they need to come into compliance with our laws. Compliance protects both those who invest on and those who invest in crypto platforms with time-tested safeguards, such as properly protecting customer funds and separating conflicting lines of business. It also shines a light into trading platform conduct for both investors through disclosure and regulators through examination authority. To those platforms that don’t comply with our securities laws, the SEC’s Enforcement Division is ready to take action."

    "FTX operated behind a veneer of legitimacy Mr. Bankman-Fried created by, among other things, touting its best-in-class controls, including a proprietary ‘risk engine,’ and FTX’s adherence to specific investor protection principles and detailed terms of service. But as we allege in our complaint, that veneer wasn’t just thin, it was fraudulent. FTX’s collapse highlights the very real risks that unregistered crypto asset trading platforms can pose for investors and customers alike. While we continue to investigate FTX and other entities and individuals for potential violations of the federal securities laws, as alleged in our complaint, today we are holding Mr. Bankman-Fried responsible for fraudulently raising billions of dollars from investors in FTX and misusing funds belonging to FTX’s trading customers."

    Boy, that makes me feel super inadequate with my accomplishments by 30.

  5. #5
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    Nov 2007
    Location
    Vermont
    Hearing strong rumors that Stanford wants to endow a plush prison wing to house Sam, Liz Holmes, Sunny Balgwani and other high profile alums. Someplace nice in California.

  6. #6
    Prosecutors in the Southern District of New York have unsealed their indictment. It's 14 pages that describe 8 different count that range over a variety of wire fraud; conspiracies to defraud investors, lenders, and the United States; commodities and securities fraud; money laundering; and violations of federal election laws (by making political donations to federal candidates and fundraising committees between 2020 and November 2022 in excess of legal limits). There doesn't seem to be a stone left unturned.

    Social media seems abuzz with questions about why the prosecutors chose *this* moment to proceed, as it preempted SBF from testifying under oath in Congress today. There are new conspiracy theories floating about from much the same people who'd been saying SBF's political donations would prevent him from being arrested in the first place.

    Less conspiratorial-minded thinking suggests it's possible there were concerns that SBF testifying would further pollute the jury pool, or that the indictment was actually returned days (or weeks) ago but it took time for Bahamas police to act.

  7. #7
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    Bethesda, MD
    Quote Originally Posted by budwom View Post
    ^ a recent Business Week had a good article about the lack of regulation in crypto...events like this are going to have an effect...a lot of people have been waiting for this kind of malfeasance to bubble up.
    There is room for disagreement, but this economist would much prefer that crypto not be brought into the highly-regulated banking system. We should prosecute fraud and malfeasance, of which there seems to have been plenty, but you'll note that the "systemic" consequences of FTX fraud have been minimal. Bringing crypto under the banking regulatory tent would open it up to more political dealing, more implicit guarantees of government protection and, inevitably, more implicit guarantees to the people who lend money to firms like FTX. In other words, they'd become like banks. I don't think that would be a good thing.

  8. #8
    Join Date
    Feb 2007
    Location
    Ashburn, VA
    Great write-up from Molly White (of 'Web 3 is Going Great') on the House Financial Services Committee hearing yesterday.

    Obviously SBF wasn't in attendance given his recent arrest, so John Jay Ray (the Enron bankruptcy attorney who is now been put in charge of FTX) did all the talking.

    https://newsletter.mollywhite.net/p/...-bankman-fried

    Notable highlights:

    Some things were repeatedly established: there was effectively no separation between the various companies under SBF’s control, and despite SBF’s recent claims that he’s had practically nothing to do with Alameda in the past few years, Ray said that FTX, Alameda, and the other entities were operated “as one company”. “There was a public distinction between the two,” he said, but that was about the extent of it, and assets were completely commingled.

    ...

    As to be expected, questions along the lines of “where the hell did all the money go?” were pretty frequent. The answer, as best they can tell today, seems to be: a mix of massive trading losses at Alameda, and personal loans made to SBF and other high-ups that were then used for investments, real estate, etc. Ray went on to say that the investments seem to have been made without any pro forma or valuation. "I'm really not quite sure how some of the purchase price numbers were derived, so it gives you a worry obviously that the purchases were overvalued."

    ...

    Some asked about the frankly shady business that seems to be happening with Bahamian regulators, who may be acting in concert with SBF, and Ray was frank:

    Ray: Unlike Chapter 11, there's no transparency in the process in The Bahamas. We repeatedly asked [the Bahamian provisional liquidators] for clarity on what they've been doing and we've been shut down on that.

    Rep. Steil (R-WI): They did not reply or it was unsatisfactory?

    Ray: They put out statements that it was in the interest of Bahamian creditors, although our view is that it violated the automatic stay in bankruptcy.

    Steil: "Do you believe that at that time Mr. Bankman-Fried was attempting to undermine Chapter 11 by expanding the scope, by moving assets to accounts under the control of Bahamian authorities?”

    Ray: "It appears so."

    Steil: "So it appears that he may be working to undermine the scope of US federal bankruptcy law."

    Ray: "That's what it appears, yes."

    Ray later said that “The pushback that we've gotten [from Bahamian liquidators] is sort of extraordinary in the context of bankruptcy. It raises questions, it seems irregular to me, there's lots of questions on our part, and obviously we're investigating.” When asked by Representative Ocasio-Cortez if SBF’s decision to briefly re-enable withdrawals for Bahamian customers might have been in exchange for the ability to retain control over FTX, Ray said, “We intend to investigate that very thing.”

    ...

    SBF’s repeated claims of ignorance on various goings-on at FTX and Alameda also came up a lot. Representative Gonzalez (R-OH) asked if it was possible, as SBF has claimed, that SBF might not have known about the backdoor in FTX’s trading systems to allow the movement of assets without raising red flags. “No,” said Ray.
    A text without a context is a pretext.

  9. #9
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    Quote Originally Posted by WillJ View Post
    There is room for disagreement, but this economist would much prefer that crypto not be brought into the highly-regulated banking system. We should prosecute fraud and malfeasance, of which there seems to have been plenty, but you'll note that the "systemic" consequences of FTX fraud have been minimal. Bringing crypto under the banking regulatory tent would open it up to more political dealing, more implicit guarantees of government protection and, inevitably, more implicit guarantees to the people who lend money to firms like FTX. In other words, they'd become like banks. I don't think that would be a good thing.
    Heard an interesting discussion on Bloomberg recently about whether crypto should be regulated as a currency, a commodity, or a security. I know some supporters like to say that it is all three (and perhaps it is) but those are three very different regulatory structures.

  10. #10
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    Nov 2007
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    Vermont
    Quote Originally Posted by WillJ View Post
    There is room for disagreement, but this economist would much prefer that crypto not be brought into the highly-regulated banking system. We should prosecute fraud and malfeasance, of which there seems to have been plenty, but you'll note that the "systemic" consequences of FTX fraud have been minimal. Bringing crypto under the banking regulatory tent would open it up to more political dealing, more implicit guarantees of government protection and, inevitably, more implicit guarantees to the people who lend money to firms like FTX. In other words, they'd become like banks. I don't think that would be a good thing.
    Yeah, I pretty much don't care personally what is done with crypto, because I'm not going to "invest" in it any more than I'd buy into a chinchilla farm...but quite clearly there are some major issues with some crypto and obviously with exchanges.

    Either these guys clean up their collective act, or some level of regulation is going to follow, as undesirable as that may be...multi billion dollar frauds garner attention, that's for sure.

  11. #11
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    Feb 2007
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    Los Angeles
    As usual, Andy Borowitz is right on it in his New Yorker satirical mini-piece entitled "World Shocked That Man Running Business Based on Imaginary Money Might be Fraud."

    Here it is:
    https://www.newyorker.com/humor/boro...might-be-fraud

  12. #12
    How do you clean up "I'm going to sell you 'title' to a prime number as 'coins' on my block chain."? It is too complicated for you to understand but trust me it is the wave of the future. Every generation has its snake oil.

  13. #13
    I love this guy's last name Bank Man Fried. Hopefully he does not kill himself and tells the truth.

  14. #14
    Quote Originally Posted by sciencegeek View Post
    I love this guy's last name Bank Man Fried. Hopefully he does not kill himself and tells the truth.
    Huh? WTH?

    Tl;DR version:

    Bankman-Fried stole money from FTX and used it to make bad investments at Alameda. People came to get their money from FTX and it was gone. Bankman-Fried arrested.

    Longer version:

    It's pretty well reported what happened. Alameda was a hedge fund controlled by Bankman-Fried. It had unlimited access to FTX funds through a backdoor installed by the CTO at Bankman-Fried's orders. This bypassed risk controls and over-site.

    Alameda made some bad bets. Not quite sure what they were yet. Maybe over investing in FTX's own coin (FTT)? Maybe converting customer funds/crypto into FTT to prop it up? Regardless, they used funds from FTX (illegally) to either cover loses or actually make those bets. End of the day Alameda had a ton of FTT. The Binance CEO got into a tiff with Bankman-Fried. He knew that FTX and Alameda were sitting on a stockpile of illiquid FTT coin. Binance also had a ton of FTT because FTX used it (instead of cash or Bitcoin) to pay Binance,, for its stake in FTX. The Binance CEO caused a run on FTX by dumping his FTT holdings and spooking investors and FTX customers. The house of cards came crashing down because FTX didn't have the funds for customer withdrawals. That's because it has FTT instead of the customer's cash/crypto. The price of FTT was nose diving creating a downward spiral. FTX tries to sell FTT which decreases it's price and would have to sell more to cover withdrawals. No one wants FTT because it's trash.

    There is nothing unique about the fraud or the lavish spending or the sex&drugs. It's just the massive size of the lose and the high profile of Bankman-Fried that makes this matters. If Alameda had made better bets or Bankman-Fried didn't get into a public spat with the Binance CEO ,we would have never know about any of this.

  15. #15
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    Feb 2007
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    Hot'Lanta... home of the Falcons!
    The fact that FTX, a company that was controlling billions of dollars of assets, was using Quickbooks to do its accounting for a global business is beyond astounding. And no one saw the collapse and fraud coming?

    Why are you wasting time here when you could be wasting it by listening to the latest episode of the DBR Podcast?

  16. #16
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    Feb 2007
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    Ashburn, VA
    Quote Originally Posted by Kdogg View Post
    Huh? WTH?

    Tl;DR version:

    Bankman-Fried stole money from FTX and used it to make bad investments at Alameda. People came to get their money from FTX and it was gone. Bankman-Fried arrested.

    Longer version:

    It's pretty well reported what happened. Alameda was a hedge fund controlled by Bankman-Fried. It had unlimited access to FTX funds through a backdoor installed by the CTO at Bankman-Fried's orders. This bypassed risk controls and over-site.

    Alameda made some bad bets. Not quite sure what they were yet. Maybe over investing in FTX's own coin (FTT)? Maybe converting customer funds/crypto into FTT to prop it up? Regardless, they used funds from FTX (illegally) to either cover loses or actually make those bets. End of the day Alameda had a ton of FTT. The Binance CEO got into a tiff with Bankman-Fried. He knew that FTX and Alameda were sitting on a stockpile of illiquid FTT coin. Binance also had a ton of FTT because FTX used it (instead of cash or Bitcoin) to pay Binance,, for its stake in FTX. The Binance CEO caused a run on FTX by dumping his FTT holdings and spooking investors and FTX customers. The house of cards came crashing down because FTX didn't have the funds for customer withdrawals. That's because it has FTT instead of the customer's cash/crypto. The price of FTT was nose diving creating a downward spiral. FTX tries to sell FTT which decreases it's price and would have to sell more to cover withdrawals. No one wants FTT because it's trash.

    There is nothing unique about the fraud or the lavish spending or the sex&drugs. It's just the massive size of the lose and the high profile of Bankman-Fried that makes this matters. If Alameda had made better bets or Bankman-Fried didn't get into a public spat with the Binance CEO ,we would have never know about any of this.
    Agree with the summary, but what I can't understand is why CZ instigated the FTT run in the first place. That's a HUGE risk in terms of contagion and broader market fallout and negative retail sentiment just to get one over on your competitor. Plus, now we have increased DOJ and other investigations into Binance, as well as some large withdrawals of BTC off the exchange in the past several days.

    Is this a 'cut your nose to spite your face' scenario or am I missing something? Maybe CZ is really arrogant enough to believe he'll come out of this stronger and with less competition, but I personally hope it backfires. Not because I feel bad for FTX in any way, but because I hope both fail, given everything I've seen and read on him to date.
    A text without a context is a pretext.

  17. #17
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    Quote Originally Posted by JasonEvans View Post
    The fact that FTX, a company that was controlling billions of dollars of assets, was using Quickbooks to do its accounting for a global business is beyond astounding. And no one saw the collapse and fraud coming?

    And here I thought Louis in that clip was the Bahamian regulators.
    A text without a context is a pretext.

  18. #18
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    Quote Originally Posted by snowdenscold View Post
    Agree with the summary, but what I can't understand is why CZ instigated the FTT run in the first place. That's a HUGE risk in terms of contagion and broader market fallout and negative retail sentiment just to get one over on your competitor. Plus, now we have increased DOJ and other investigations into Binance, as well as some large withdrawals of BTC off the exchange in the past several days.

    Is this a 'cut your nose to spite your face' scenario or am I missing something? Maybe CZ is really arrogant enough to believe he'll come out of this stronger and with less competition, but I personally hope it backfires. Not because I feel bad for FTX in any way, but because I hope both fail, given everything I've seen and read on him to date.
    If he thought FTX was going to crash anyway then it seems like the only call to make unless he wanted to be left holding the FTT bag, and based on the reports of how the company was operating I would say even if this hadn't happened a collapse was probably inevitable. I guess you could argue he should have sold off more slowly, but we don't know how much time he thought he had (and I'm sure spite was part of it, I don't think money makes you immune to that particular emotion).

  19. #19
    Quote Originally Posted by snowdenscold View Post
    Agree with the summary, but what I can't understand is why CZ instigated the FTT run in the first place. That's a HUGE risk in terms of contagion and broader market fallout and negative retail sentiment just to get one over on your competitor. Plus, now we have increased DOJ and other investigations into Binance, as well as some large withdrawals of BTC off the exchange in the past several days.

    Is this a 'cut your nose to spite your face' scenario or am I missing something? Maybe CZ is really arrogant enough to believe he'll come out of this stronger and with less competition, but I personally hope it backfires. Not because I feel bad for FTX in any way, but because I hope both fail, given everything I've seen and read on him to date.
    I think you hit the nail on the head. There's a soap opera quality to the whole thing. Bankman-Fried's been more vocal about at least some crypto regulations. He was increasingly throwing more shade at CZ. Binance make significant income from illicit crypto trades (Iran, Russian, N Korean, criminals, etc). I think CZ burned down FTX as a form of retaliation. He was willing to take the hit to what was left of his FTT because in the long run he thought he would make it back. He thinks he can weather this storm. Criminals are still going to criminal after all. It's one thing to laundry a few hundred thousand but where else can they launder tens of millions. I don't have that kind of hubris but I also don't have access to billions of dollars.

    I also agree that I would like to see both go down in flames. CZ isn't some hero.

  20. #20
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    Quote Originally Posted by Kdogg View Post

    I also agree that I would like to see both go down in flames. CZ isn't some hero.
    I actually did agree with something he said recently!

    https://decrypt.co/117214/99-people-...changpeng-zhao

    “For most people, for 99% of people today, asking them to hold crypto on their own, they will end up losing it,” he said in a Twitter Space discussion held on Wednesday.

    “Most people are not able to back up their security keys; they will lose the device,” he said. “They will not have the proper encryption for their backup; they will write it on a piece of paper, someone else will see it, and they will steal those funds. And also today, very fundamentally, if a person passes away, they don’t have a way to give to their next of kin.
    Of course, his point was that people should be putting on exchanges like his instead, and that's where we differ.

    My opinion, given all we've seen thus far, and to echo his statement: "For most people, for 99% of people today, asking them to hold crypto on exchanges, they will end up losing it".

    Two bad options. What was that War Games quote - something about the only winning move is not to play?
    A text without a context is a pretext.

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