Molly White's Citation Needed - The stones left unturned in the Sam Bankman-Fried trial

Episode Date: November 30, 2023

From billions of mysterious Tethers to the apparent identity theft of Thai sex workers, many questions remain about what happened at Bankman-Fried's crypto empire. Originally published on November 14, 2023.

I'm Molly White, and you're listening to the audio feed of the citation-needed newsletter. You can see the text version of the newsletter online at newsletter.mollywhite.net. The stones left unturned in the Sam Bankman-Freed trial. From billions of mysterious tethers to the apparent identity theft of Thai sex workers, many questions remain about what happened at Bankman Freed's crypto empire. This issue was originally published on November. 14th, 2023. Now that Sam Bankman Freed has been convicted in one of the largest financial fraud cases in history, the crypto industry would like people to please hurry up and move on. The trial is over,

and it's just so dang inconvenient that Bankman Freed so publicly ruined the general reputation of an industry rife with scams and frauds by making it seem as though it is an industry rife with scams and frauds. However, this ignores the web of Malfourns. feasins that surrounded his companies, and much more apparent wrongdoing, perpetrated not only by its executives, but by others in the industry. Bankman Fried's criminal trial was focused on securing a fraud conviction, not untangling the knot of curious threads that, if pulled, could unravel dozens of different fraud sweaters. Prosecutors painted a picture for the jury that clearly outlined criminal activity that supported

Bankman-Freed's wire fraud, conspiracy, and money laundering charges, without getting too deep into the weeds or chasing tangents that might only confuse. Regularly throughout the trial, prosecutors, witnesses, or even Bankman-Freid's own defense team made brief mention of topics that sounded ripe for deeper investigation, only to move on and never mention them again. While some of these topics might resurface in Bankmanfried's next criminal trial, should it happen at all, as a part of adversary proceedings in the FTX bankruptcy case, or in separate legal cases, the limits of investigative resources and jurisdictional cooperation may indefinitely condemn the rest to remain unsolved mysteries. Tether

The elephant in the room throughout the trial was Tether. Tether is a shadowy stable coin. provider that powers truly massive portions of the cryptocurrency industry. The organization has been fined and banned from doing business in New York after the office of the Attorney General discovered they were lying about the coin's backing. And though the company has spent years promising to publish audits of the more than $80 billion in Tether, abbreviated to USDT, in circulation, they have produced none. Besides exchanges, Alameda Research was Tether's largest customer.

We know that the company received around 40 billion of the tokens, almost half of the token's current circulating supply, and 20% of the tokens ever issued by the company. What we don't know is why, or with what money, they purchase such a massive quantity of tokens. Although many companies routinely purchase USDT from Tether with dollars, and then redeem USDT $4 in the opposite direction, Alameda research appears to have only ever redeemed a small portion,

around $4 billion, of the USDT they bought. In the past, Alameda has claimed they used USDT to profit from arbitrage opportunities, that is, obtaining USDT from tether at $1, and selling it on the markets at above $1 to people who don't have the institutional access required to purchase USDT directly. However, whether there was truly demand for $40 billion of the stable coin seems questionable at best. Exchanges like FTX also regularly facilitate the exchange of dollars for stable coins by their customers, but again, not to the tune of $40 billion.

Some, like Jacob Silverman in the nation, have suggested that Alameda and FTX may have been in fact using the tokens to enable money laundering and capital flight, particularly out of China, which has strict capital controls. Others, like David Z. Morris, have questioned whether Alameda ever actually sent Tether the roughly $40 billion in cash that would be needed to properly back the tokens, or if the tokens could have been minted with no backing, which would mean that a substantial portion of USDT on the market today could never be redeemed if it ever came down to it. Moonstone Bank

Sometimes lost among all the other shady business surrounding the world. FTX is that time that Alameda Research went out and bought a bank. Until 2020, Farmington State Bank was just a tiny bank in a rural town in Washington State. Then it was snapped up by a company called FBH, which is chaired by Jean Chalepin, who's also chairman of the Bahamas-based Del Tech Bank and Trust, which has been a major bank for both Alameda Research and for Tether. Under new ownership, Farmington State Bank applied for Federal Reserve approval and began taking on cryptocurrency clients, despite promises to state regulators and the Fed that it would not do so. In June 2021, the bank became a part of the Federal Reserve System.

In March 2022, Alameda Research sent $11.5 million to the bank, which only days prior had adopted the name Moonstone. as a reference to the two industries it hoped to pivot to serve, cryptocurrency to the moon, and cannabis getting stoned. As yet unanswered, why did Alameda research sink $11.5 million over twice the bank's net worth into this once tiny bank? Was it an effort to obtain uninterruptible access to the U.S. banking system for cryptocurrency companies? After FTX and Alameda's collapse, the bank was forced to shut down for reneging on its promises.

But the questions of how the Bahamas-based Jean Chalepen, Deltech, and Alameda research managed to gain control of a U.S. bank and achieve Federal Reserve approval remain open, as does the question of what they hope to achieve with it under their control. The Mobile Coin Thief As you may have noticed, if you read my article, for the New York Times last week, I've been fascinated by the new details we learned during Bankman Fried's trial about an exploit of FTX by a trader who took large positions in mobile coin and BTMX tokens. Although the public learned of the 2021 hack shortly after

FTCS's collapse the following year, thanks to reporting from the financial times that cited people with knowledge of the matter, the trial gave us more details. We learned that the total loss to FTX was around $800 million, though Bankman Freed refused to admit during his testimony that there had been any loss at all. We learned that Bankman Fried had been concerned about just liquidating the account when other executives raised concerns that it was attempting to exploit FTX, quote, because they were otherwise a valuable customer. And we learned, thanks to questioning from his very own defense team for some reason, that Bankman Fried himself, quote, overrode F-TX's standard risk procedures there and personally took responsibility for that account.

This, by the way, somewhat contradicted his testimony during cross-examination the previous day when he claimed that the automatic risk engine, quote, didn't shut it down as quickly as I would have wanted it to. What we haven't learned is who this customer was, or why they were so valuable that Bankman Freed thought it was worthwhile to avoid liquidating them, even when facing a threat of an exploit that could, and did, cost the company almost its entire annual revenue that year. There has also been no evidence that FTCS ever tried to recoup the funds via legal action against the customer, whose identity should presumably have been known to FTCS as a part of their

standard know-your-customer process, which Bankman-Fried also described in his testimony. Why not? The Mid-Collapse Hack Only hours after FTX declared bankruptcy, crypto priced at hundreds of millions of dollars, later estimated at around 477 million, was stolen. Some of those funds were ultimately frozen by stablecoin providers, and the thief lost more to fees as they exchanged centrally controlled stable coins for unfreezeable tokens and then laundered them.

But the thief still found themselves with a massive pile of crypto. an FTCS's financial condition, and thus that of its creditors, was worsened by the nearly half a billion dollar loss. In an ironic twist, one of the services used to launder the stolen funds in attempts to prevent them from being recovered by law enforcement was Renbridge, a cryptocurrency bridge owned by Alameda Research. After the early race to convert and launder the funds, most of the assets remained dormant, that is, until the days before Bankman Fried's criminal trial began, when the funds went on the move again, as the thief attempted to cash out. Not long after the theft, Bankman Fried claimed in a recorded phone call with Tiffany Fong that he had, quote, narrowed it down to like eight people, using the subject as an opportunity

to express his frustration that the new change. team in charge of his company in bankruptcy had so unfairly shut off his access to company data as he was suspected of massive fraud. He further stated that he believed the hacker was either an ex-employee or that someone had installed malware on a former employee's computer. I don't know exactly who because they shut off all access to the systems when it's halfway through exploring it. I've never heard it down to like any people.

I don't know which one it was. But I have a pretty decent sense. I think it is, again, either it was an ex-employee or someone installed malware on an ex-employee's computer. And I don't know for sure which of those it is, and I don't know for sure which one it is, because access is totally shut down right now because it would be dangerous to allow people to carry data.

However, such claims have not been corroborated by anyone else, and any investigations of the theft as yet have occurred behind closed doors. The Frozen Funds and Bribes of Chinese Officials. Trial testimony featured Alameda Research CEO Caroline Ellison and others talking about statements like, quote, negative 150 million from the thing, which Ellison stated was coded language to avoid putting the existence of a multi-million dollar bribe to foreign officials in writing. After the Chinese government requested an unnamed cryptocurrency firm freeze around $1 billion of funds belonging to Alameda research as part of a money laundering investigation, which Alameda has claimed was not targeted at them. FTX and Alameda executives tried several creative routes to trying to get their hands on the money.

When lawyers didn't work, the executives tried setting up accounts using the stolen identities of Thai prostitutes, a claim to, that I think everyone in the courtroom was disappointed not to hear prosecutors ask more about. Finally, the executives decided to send a $150 million bribe to the officials who subsequently released the frozen assets. The good news here is that if Bankman Fried's second trial in March goes forward, we may hear more about this particular saga. One of the charges he's set to face is conspiracy to violate the anti-bribery provisions of the Foreign Corrupt Practices Act. The donations The topic of Bankman Freed's massive donations flew mostly under the radar during his trial,

in no small part because prosecutors dropped a specific charge pertaining to that activity and instead had to lump the behavior in with the wire fraud charge. As a result, they were somewhat limited in how detailed they were allowed to get in describing his behavior, so as not so as not the behavior. to suggest that he was charged with a campaign finance crime. Nishad Singh, who pleaded guilty to a campaign finance charge, did describe some of the malfeasance in that area, but it was fairly brief. Ryan Salem, the other exec to plead to a campaign finance charge, is not cooperating

with prosecutors and did not testify. Many questions remain when it comes to the huge political and charitable donations made by Bankman Freed, which were often sent via a mix of his comfort. and their executives in order to conceal their true origins. For one, it seems like Bankmanfried, Singh, and Salem were far from the only people involved. Group chats, published in government exhibits, show conversations with Bankman Fried's brother Gabe and various others at Gabe's Guarding Against Pandemics Organization, in which they appear to be well aware of the illegal financial maneuvers.

Gabe Bankman Fried stepped down from the organization shortly after, after FTX's collapse, claiming he, quote, didn't want to be a distraction. But Keenan Lance, the interim executive director who stepped up to replace him, himself featured heavily in chats produced during the trial, where dark and straw donations were being openly discussed. Shortly after Bankman Fried's conviction, guarding against pandemics announced it was shutting its doors. There are also questions about the recipients of those donations,

A signal discussion between Bankman Freed and Guarding Against Pandemics, Keenan Lance, of a $1 million donation to Beto O'Rourke's campaign suggested that Bankman Freed might have demanded it back after it made the news in Texas. Bankman Freed states, there's a claim made by Texas that I gave $1 million to Beto. Lance responds, all right, update on this is that through the application of social, political, and legal pressure, we're getting $900,000 back. which is probably the best possible outcome. They'll hang on to it until November 4, at which point the refund won't be reported until January. This gives plausibility to the type of error, extra zero on the contribution,

and minimizes PR issues for all involved parties. Lance then went on to inform Bankman Freed of a docusign request that involved a mutual non-disclosure agreement. This seems to contradict the O'Rourke campaign's public telling of the story shortly after FTX's collapse, which is that they received the donation by surprise and returned it because it was unsolicited. Another conversation between political consultant Michael Sadowski and Nishad Singh raises questions about whether Congresswoman Becca Ballant, Democrat from Vermont, knew that straw donations made via a pass-through donation to the LGBT Victory Fund Political Action Committee

were in fact coming from FTX, taking the winding route via the LGBT fund to avoid the appearance that she was accepting Super PAC money after being pressured by an opponent to denounce such a thing at a debate. Ballant has denied having such knowledge of this donation and where it came from. Chats also referred to a $107,000 donation to the New York State Democratic Committee that was originally to come from Sam Bankman-Fried until, quote, we were asked to update this to a 107K contribution from Nishad Singh, according to Lance. One back and forth referred to sending, quote, 500K dark, end quote, to Senator Patty Murray, a Democrat from Washington, with Gabe Bankman Freed describing it as, quote, half of what they asked.

Another conversation sought a correction in a misreported story that erroneously attributed a $500,000 donation by Singh to the Democratic Party of Oregon Political Action Committee as having come from Prime Trust, an unaffiliated cryptocurrency custodian that is somewhat ironically now dealing with its own woes. Amusingly, at the time, only days before FTX's fall, the correction itself sparked concerns about straw donations from Oregon Live. The prevalence of dark donations and attempts to mask funds

by sending them through various political groups is no secret to anyone who's even vaguely familiar with the American political system. But the openness with which these groups seem to discuss such activities with the eventual recipients of the donations sure seems like it would be cause for concern among those tasked with scrutinizing election fairness and compliance with campaign finance requirements. Paper Bitcoin During November and December 2022, during the media tour in which Bankman Freed seemed

determined to publicly admit to as many crimes as possible, a participant in a group interview on Twitter spaces asked Bankman Freed to answer a simple question. When a trader thought they were sending dollars to FTX to buy Bitcoin, was that Bitcoin ever actually purchased or was the company just holding on to the dollars to use for its own purposes? In other words, was FTCS issuing paper Bitcoin or notional Bitcoin to traders representing tokens that did not actually exist. Bankman Fried replied, I believe that was a part of the story. So I put money on, I want to deposit money into FTCs. I deposit money into Silvergate Bank, which is the United States Bank. I put the money into the into the bank. That money lands up

in Alameda's bank account, right? So now that now you've got let's say I take $100, I deposit $100 into FtX, but what I actually do is I'm depositing into Silvergate's account on Alameda and the account name is Alameda. So now Alameda has $100 of my money and then I want to buy a Bitcoin for a let's say I put $20,000 in and I want to buy a full Bitcoin. The money is, tell me where the money is sitting now though, because this is the part that I'm confused about. Yeah, I'm not surprised you're confused because it's confusing and I and it confused me and I there were a lot of poor decisions made there on on our part. Um, my understanding and again, I'm, I'm not a hundred percent confident in all this.

I am still trying to piece together all of this, again, without access to data in retrospect. But, but my, my general understanding is that, and here you're referring, I think, to the, you know, especially the sort of 2019, 2020 era, um, where there were no FtX bank accounts, but where some customers were wiring straight to Alameda research. Yeah, I'm just trying to, I'm trying to work out if the money ever left Alameda and was stored in a custodian. and somewhere else which really represented a balance on the exchange or whether there was a money deposited into Alameda, which we'll talk about in a second, and then you just gave me a notional balance on FTX, which was just a digital number on a screen, and you let me use that money to trade potentially notional Bitcoin because actually I didn't have physical balance

on the exchange because the money was sitting in an Alameda account. That's the part that I'm that I'm trying to understand. Because that would make sense as to why, Alameda had so much money to invest in projects, and FTC didn't have any money to pay out to customers, right? Yeah, so I believe that was part of the story. And again, I'm not 100% confident. I'm working with what I have here, but I believe that what you said is effectively part of what happened. Although it's pretty clear by now that FTCS was experimenting with its own clearly fraudulent form of fractional reserves, by failing to keep on hand the total value of assets its spot trading customers.

believed they held, not much time has been spent discussing the types of assets it failed to keep on hand. FTX failing to keep sufficient U.S. dollar reserves is not going to affect the value of the U.S. dollar, but FTX failing to keep sufficient reserves of Bitcoin, Ethereum, or whichever other token they supported, could substantially affect these thinly traded markets. Tokenized Stocks Similar allegations around backing have come out against FTAGELD, FtX's tokenized stocks offering, which allowed customers to purchase synthetic versions of shares in public companies. Although FTX claimed that all tokenized stocks were backed by real shares and could be redeemed for them

through a partnership with a German investment firm called CM Equity AG, that partnership ended in late 2021, raising questions as to whether those shares were properly backed from that point on. Besides the backing questions, there are also regulatory questions. Binance backed down from its tokenized stock offerings in mid-2020, after German regulators warned them that its version of the product likely violated securities laws. FTX's offering was substantially similar. The VC reciprocity Sequoia Capital invested around $225 million into FTCS in several of its funding rounds. F.X and Alameda together invested around 200 million into Sequoia.

Alameda Research invested 25 million into a fund managed by Paradigm Capital. Paradigm Capital invested 278 million into FTCs. This is not the end of the list of circular investments, where money traveled from Bankman Freed's companies into VC funds only to loop back to FTX or vice versa. Bankman Freed invested in funds run by UVM Cig. Altimeter Capital Management, and Multi-Coin Capital, and those funds invested in FTX. Altogether, Bankman Freed's companies poured more than half a billion dollars into various VC firms, but some of it came right back.

What was the purpose of this money shuffling? And both Sequoia and Paradigm have written their investments off to zero, but what happened to the funds that went in the other direction? The Auditors FTX boasted of its audited financial statements, which were produced by the likes of Arminino and Prager-Metis. However, we've since heard in great detail about the absolute cluster fuck of napkin math, quickbooks, and eight-tabbed, quote, alternative balance sheet spreadsheets that was FTX and Alameda's gesture at accounting. How did auditors not catch this?

Beyond just making sure numbers in a spreadsheet add up, auditors are supposed to also identify possible organizational and managerial deficiencies that could introduce risk to a company. The FTCS organization and management, if it could even be called that, was nothing but deficiency and risk. Bankman-Fried biographer Michael Lewis spoke of having to try to cobble together a list of employees and their job titles from the company. therapist, or sorry, professional coach, for God's sake. The Missing Executives If you've been reading my work for a while now, you'll know of my conspicuously missing executives list. It's gradually dwindled as people like Ryan Salem, the former CEO of FTX's Bahamian

entity, belatedly reached plea deals, or as executives like Romnik Aurora, leader of the company's venture investing, were placed on the prosecution's list of possible witnesses. Two names that have remained are Sam Trebucco and Daniel Friedberg. Last we heard...