The Breakdown - Sam Bankman-Fried Arrested for Wire Fraud and Conspiracy to Defraud the United States

Starting point is 00:00:00 Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is sponsored by nexo.io, Circle, and Cracken, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, December 12th, and I have a pretty good idea that you have a pretty good idea what we're talking about today. Before we get into that, however, if you're enjoying the breakdown, please go subscribe to it. rating, give it a review, or if you want to dive deeper into the conversation, not that there's anything to talk about these days, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. I'm excited to also share that this week the podcast

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Starting point is 00:01:28 Stay for the occasional rap from yours truly. Check it out at galaxy.com slash research. All right, friends, well, last night, 31 days after putting the company into bankruptcy, 40 days after Coin Desk published Alameda's balance sheet, it finally happened. Sam Bankman Fried was arrested in the Bahamas. Now, until the news broke, everyone had been gearing up for today's house hearing. Remember, Sam was due to testify after John J. Ray, who is, of course, the new CEO of FTX overseeing the bankruptcy.

Starting point is 00:02:02 As it always is, John Ray's advance testimony was published. and good God was it savage. In it, he repeats a line that he's said frequently. Never in my career have I seen such an utter failure of corporate controls at every level of an organization. Although our investigation is ongoing and detailed findings will have to await its conclusion, the FTX groups collapse appears to stem from the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals

Starting point is 00:02:29 who failed to implement virtually any of the systems or controls that are necessary for a company that is entrusted with other people's money or assets. Ray goes on to identify some of what he calls the unacceptable management practices, including, quote, the use of computer infrastructure that gave individuals in senior management access to systems that stored customer assets without security controls to prevent them from redirecting those assets. The storing of certain private keys to access hundreds of millions of dollars in crypto assets without effective security controls or encryption. The ability of Alameda, the crypto hedge fund within the FTX group to borrow funds held at FtX.com to be utilized for its own trading or investments without any effective limits.

Starting point is 00:03:05 The commingling of assets, the lack of complete documentation for transactions, involving nearly 500 investments made with FTCS Group funds and assets, etc., etc., etc. Now, one of the big things that people honed in on came a little later when he wrote, questions have been raised as to why all of the FTX group companies were included in the Chapter 11 filing, particularly FTXUS. The answer is because FtXUS was not operated independently of FtX.com. Chapter 11 protection was necessary both to avoid a run on the bank at FTXUS and to allow our team to identify and protect its assets. Summing up, he writes,

Starting point is 00:03:40 While many things are unknown at this stage and many questions remain, we know the following. First, customer assets from FtX.com were co-mingled with assets from the Alameda trading platform. Second, Alameda used client funds to engage in margin trading, which exposed customer funds to massive losses. Third, the FTC group went on a spending binge in late 2021 through 2022, during which approximately $5 billion was spent buying a myriad of businesses and investments, many of which may be worth only a fraction of what was paid for them. Fourth, loans and other payments were made to insiders

Starting point is 00:04:07 in excess of $1 billion. So this is pretty damning stuff. Adam Cochran tweets, there it is, in writing from John Jay Ray's testimony for tomorrow. Alameda had the ability to have unlimited withdraws and borrowers of user funds, the same backdoor employees mentioned. This wasn't a mislabeled account. This was knowingly set up theft of funds. Former federal prosecutor Renato Marriotti wrote, Ray's testimony makes clear that Sam Bankman-Fried and FTX have serious liability. This much is clear. FTX promised customers their dollars would remain there.

Starting point is 00:04:37 FtX sent the dollars to Alameda and SBF fee a loan. If SBF both knew and had the intent to defraud, he's guilty of fraud. Nick Carter writes, that's curtains for SPF. FTX CEO, John Ray testifies before him tomorrow. Sam will be utterly hamstrung by this. 219.Eath writes, yeah, that's going to be infinity years in prison. No wonder he's out there trying to be.

Starting point is 00:04:57 to prove a mental illness. It's literally his only shot. You can fuck with the barbarians. You can fuck with Americans who made the choice to go play with the barbarians. But when you fuck with Americans on American dirt, oh boy. Now, little did anyone know that the reckoning would be coming just a few hours later. At 6.25 p.m., right before I was supposed to be getting my kids ready for bed, by the way, Autism Capital tweeted, please verify, hearing rumors from Albany residents that SBF was just taken into custody from his apartment right now. The apartment was declared a crime scene. If this is confirmed false, we will delete this immediately. We are not trying to engagement farm. We understand the gravity of this claim and take the responsibility seriously.

Starting point is 00:05:36 Nine minutes later, it was confirmed. The Attorney General of the Bahamas put out a statement that said on 12 December 2022, the Office of the Attorney General of the Bahamas is announcing the arrest by the Royal Bahamas Police Force of Sam Bankman-Fried, former CEO of FTX. SBF's arrest followed receipt of formal notification from the United States that it has filed criminal charges against SBF and is likely to request his extradition. Responding to SBF's arrest, Prime Minister Davis stated, 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.

Starting point is 00:06:08 While the United States is pursuing criminal charges against SBF individually, the Bahamas will continue its own regulatory and criminal investigations into the collapse of FTX, with the continued cooperation of its law enforcement and regulatory partners in the United States and elsewhere. Now, at first there was tons of suspicion. Sam had been vocal about wanting to stay within the Bahamas' jurisdiction, so was it possible, just possible, that he had been taken into custody as a way to avoid testifying the next day? The short answer was no, and it didn't take long for that to become clear. At 652, the Southern District of New York tweeted earlier this evening, Bahamian authorities arrested Samuel

Starting point is 00:06:41 Bankman freed at the request of the U.S. government based on a sealed indictment filed by the SDNY. We expect to move to unseal the indictment in the morning and we'll have more to say at that time. Now, this didn't totally stop some politicians for being miffed. Lee Zeldin tweeted, tomorrow Sam Bankman-Fried was scheduled to testify in front of the House Financial Services Committee. House GOP was ready to grill him six ways to Sunday. Now breaking tonight, SBF was just arrested. Why not allow him to first testify tomorrow and answer are many questions. Chairwoman Maxine Waters also released a statement saying, I am surprised to hear that Sam Bankman-Freed was arrested in the Bahamas at the direction of the United States Attorney for the Southern District of New York. It's about time the process to bring Mr. Bankman-Fried to justice has begun.

Starting point is 00:07:21 However, as the public knows, my staff and I have been working diligently for the past month to secure Mr. Mr. Bankman-Freid's testimony before our committee tomorrow morning. Although Mr. Bankman-Freed must be held accountable, the American public deserves to hear directly from Mr. Bankman-Freed about the actions that have harmed over 1 million people and wiped out the hard-earned life savings of so many. While I am disappointed that we will not be able to hear from Mr. Bangman-Fried tomorrow, we remain committed to getting to the bottom of what happened.

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Starting point is 00:09:28 or visit crackin.com slash breakdown to join. Meanwhile, the rest of us were just waiting for the details, and this morning, they came hard. SDNY unsealed the indictment, as they said, and there were eight counts. Count one, conspiracy to commit wire fraud on customers. Count two, wire fraud on customers. Count three, conspiracy to commit wire fraud on lenders. Count four, wire fraud on lenders. Count five, conspiracy to commit commodities fraud.

Starting point is 00:09:58 Count six, conspiracy to commit securities fraud. 7. Conspiracy to commit money laundering. Eight. Conspiracy to defraud the United States and violate campaign finance laws. The New York Times reporting the night before had given a summary of some of these, but it did not get the violate campaign finance laws and conspiracy to defraud the United States. Autism Capital summed up many of our thoughts when they tweeted, Sam is turbo-ficked. Put all thoughts of they're going easy aside. They're going full force.

Starting point is 00:10:26 Now, the thing is, it wasn't just the Department of Justice going after Sam. It was also the SEC and CFTC, who both filed complaints as well. Gregory Schneider, who is General Counsel at Hedera and goes by Latoshi on Twitter, wrote, The allegations in the SEC complaint against SBF are shocking. It's now plain that in the month since taking over as CEO, John Ray has been working closely with many federal authorities. Now, a few of the things that are pointed out from the SEC complaint. The first is that customer deposits were controlled by Alameda from the outset. The complaint writes,

Starting point is 00:10:55 Bangman-Free diverted FTCS customer funds to Alameda in essentially two ways. one by directing FTCS customers to deposit fiat currency into bank accounts controlled by Alameda, and two, by enabling Alameda to draw down from a virtually limitless line of credit at FTCS, which was funded by FTCS customer assets. As a result, there was no meaningful distinction between FTCS customer funds and Alameda's own funds. Bankman Fried thus gave Alameda carte blanche to use Ft's customer assets for its own trading operations and for whatever other purposes Bankman Freed saw fit.

Starting point is 00:11:22 In essence, Bankman Fried placed billions of dollars of FTCS customer funds into Alameda. He then used Alameda as his personal piggy bank to buy luxury condominiums, support political campaigns, and make private investments, among other uses. None of this was disclosed to FTX equity investors or the platform's trading customers. Next, Latoshi writes, it wasn't until 2022 that Alameda began a belated attempt to separate FTX customer money from its own. That attempt failed because it meant Alameda would have to pay interest on its quote-unquote loan. SBF directed the account to be changed, causing further accounting chaos.

Starting point is 00:11:53 The SEC complaint writes, In 2022, FTCS began trying to separate Alameda's portion of the liability in the Fiat at FTCS.com account from the portion that was attributable to FTCS, i.e, to separate out customer deposit sent to Alameda controlled bank accounts from deposits sent to FTCS controlled bank accounts. Alameda's portion, which accounted for more than $8 billion in FTCS customer assets that had been deposited into Alameda controlled bank accounts, was initially moved to a different account in the FTCS database. However, because this change caused FTCS's internal systems to automatically charge Alameda interest on the more than $8 billion liability, Bankman Free directed that the Alameda

Starting point is 00:12:26 liability be moved to an account that would not be charged interest. This account was associated with an individual that had no apparent connection to Alameda. As a result, this change had the effect of further concealing Alameda's liability in FTX's internal systems. Next on the hit list, Alameda had an effectively unlimited line of credit. From the complaint again, on multiple occasions Bankman Free directed FTX to increase the amount by which Alameda could maintain a negative balance in its account. In effect, this gave an unofficial line of credit to Alameda since Alameda was able to draw down on its FTX customer account and use those funds, which were actually the funds deposited by other FTX customers for its own trading. At Bankman-Fried's direction, Alameda's line of credit

Starting point is 00:13:04 was continually raised to the point where it grew to tens of billions of dollars and effectively became limitless. No other FTX customer had a similar line of credit. Now you'll note here that Sam seems awfully in charge, and indeed, this basically says that he never stopped being CEO, even when he is technically no longer CEO of Alameda. Now, one thing that people were worried about when we found out last night that the SEC was also filing a complaint was that they were going to sneak some securities designation onto tokens in through this action. Ryan Selkis of Masari wrote last night, the SEC is going to try to sneak in bullshit tokens or securities related precedence to the FTC charges tomorrow so that the industry is forced to file amicus briefs in support of FTC,

Starting point is 00:13:41 who we all despise as frauds and sellouts. Luckily, that didn't actually happen. The security in question for the SEC was FTC equity itself. The complaint makes it clear throughout that the fraudulent terms of service, which said that customer funds weren't commingled or lent out, were used as part of the pitch to secure investors. He also told investors that FTX had no exposure to FTT at all from the complaint. In late summer 2021, Bangman-Fried told a potential U.S. investor in FTCS.'s series B fundraising round that FTX did not hold FTT, and consequently, the investor would not have any exposure to FTT. The investor ultimately invested $30 million. Lastly, and probably most disgustingly to me, was Sam's use of customer funds for political donations, luxury real estate, and the like.

Starting point is 00:14:25 From the complaint. The FTX funds transferred to Alameda were used not only for Alameda's proprietary trading, but also to fund loans to FTCS executives, including Bankman Freed himself, and to fund personal real estate purchases. Between March 2020 and September 2022, Bankman Freed executed promissory notes for loans from Alameda totaling more than 1.3 $338 billion, including two instances in which Bankman Freed was both the borrower in his individual capacity and the lender in his capacity as CEO of Alameda. Bankman Fried also used commingled funds from Alameda to make large political donations and to purchase tens of millions of dollars in Bahamian real estate for himself, his parents, and other FTX executives.

Starting point is 00:15:02 Nishad Singh and Gary Wang also borrowed $554 million and $224.24 million, respectively, by executing promissory notes with Alameda in 2021 and 2022. Like I said, this is one of the hardest ones for me to stomach with all of the bullshit I'm going to give it all away act. And what the hell did Nishad need $554 million for? It's just absolutely preposterous. And by the way, this behavior didn't stop. Even after Luna and 3AC in July, Sam loaned himself another $136 million. So that was the SEC and the CFTC also wanted to get in on the action. A few more things from that complaint.

Starting point is 00:15:37 One that made it even clearer than the SEC complaint about just how involved Sam was. Even after stepping down as CEO of Alameda, Bankman Fried continued to main control over Alameda. For example, Bankman Fried remained a signatory on Alameda research's bank accounts and an authorized trader for Alameda's accounts with CFTC registered futures commission merchants. Bankman Fried also maintained direct decision-making authority over all of Alameda's major trading, investment and financial decisions. This authority was exercised at least in part through Bankman Fried's regular,

Starting point is 00:16:06 often daily participation in various in-person and mobile chat communications with senior personnel at Alameda. Next, like the SEC complaint, there is some good news for folks out there who thought that the CFTC might use this for sneaky rulemaking. Instead, the complaint calls Bitcoin, ether, and tether digital commodities. Next, the CFTC complaints reinforces how, as Meet TC on Twitter put it, quote, it was the exception not the rule to actually move funds from Alameda accounts to FTC exchange accounts. And in fact, even after FTX got its own banking in 2020, it never moved funds over. The CFTC complaint also calls out what everyone had suspected in terms of the acquisition strategy pursued this summer, that it was not to save the rest of the industry, but in fact,

Starting point is 00:16:46 to cover FTX holes. From the complaint, Bankman-Fried stated privately that he was pursuing an aggressive acquisition strategy during this time, at least in part, to gain access to additional sources of capital that could be used to support his existing businesses and fill the hole in customer funds that had been created. Now, I think the biggest thing that stands out from this one is the contrast between the way that Sam has tried to say that he really wasn't involved in what was going on in Alameda compared to how involved he actually was. In fact, he was so involved that in September he proposed

Starting point is 00:17:15 shutting Alameda down. From the complaint. Bankman-Fried went on to lay out a number of reasons for the suggestion to shut down Alameda, including the fact that we didn't hedge as much as we should have alone cost us more an expected value than all the money Alameda has ever made or ever will make. In the current environment, capital is really expensive and Alameda doesn't justify it. And, quote, Alameda is making some money trading, but not enough to justify its existence. These admissions were directly contrary to contemporaneous public statements that Bankman Fried in Alameda were making regarding Alameda's profitability. Now here's one more really juicy nugget, especially in light of Sam talking about how solvent FTX was, something he's brought up in numerous

Starting point is 00:17:50 interviews. As everything was going down in that early part of November, he directed Alameda to $185 million to FtX U.S. From the complaint on or about November 7th, FtX executives were also asked to evaluate the solvency of FtX U.S. The FtX executives ultimately identified a shortfall did not understand and were unable to quantify on FTXUS. Bankman-Fried quickly indicated that he would fill the hole at FTXUS from liquidation of Alameda assets. On November 8th, Bankman-Fried directed Alameda traders to prioritize, meeting U.S. capital requirements and to send excess capital to FTXUS. Alameda sent in excess of 185 million to FTXUS to fill its shortfall. A last note is that these complaints make it clear that all this fraudulent behavior was right there

Starting point is 00:18:34 from the very beginning. It wasn't some 22-desperation thing. It was just how Sam ran everything. Which of course makes more sense in the light of other revelations like the loans to block CEO Mike McCaffrey. So the summary is that Sam was a fraud right from the get-go and is now facing down a huge number of criminal and civil charges. I've seen estimates from 115 to 165 years of possible jail time if he were to be convicted on everything. From my standpoint, it's hard to describe exactly how I feel. I certainly feel some relief, I think, on him being held to account. I think it would be impossible to move forward in some ways if he hadn't been. But at the same time, it's not like this fills me with glee.

Starting point is 00:19:12 The sheer tonnage of wreckage around Sam isn't going to be cleared up just by him being punished, although that's a necessary step. So, I don't know, right now it just kind of feels gross and exhausting. But the hearing did go on with just John Ray testifying. One of the big takeaways is that Gary Gensler is facing some heat. ranking member and future chair Patrick McKenry said, Next year I look forward to hearing from Mr. Gensler early and often, how we can provide clarity on the application of our security's laws to trading platforms,

Starting point is 00:19:40 which he has failed to do. Tom Emmer also grabbed a quote from the SEC document and tweeted, So Gary Gensler knew that FTX was fraudulent from its inception. This is egregious considering he had more meetings with Sam Bangman Free than anyone else in the space to discuss a crypto regulatory framework designed to benefit FTX alone. He will be held accountable. Now, speaking of the hearing and speaking of Tom Emmer, most of it was just grandstanding BS as these hearings are wont to be. But Emmer closed his time with the best statement that has come out of it so far.

Starting point is 00:20:10 I encourage my colleagues to understand Sam Bankman-Feed's con for what it is. A failure of centralization. A failure of business ethics and a crime. It is not a failure of technology. I've worked across the aisle since I came to Congress. so the future of crypto reflects American values, the same way the Internet does today. For the most engaged members of Congress on crypto policy, the FTX collapse remind us of why we care so deeply about this technology. Decentralization is the point.

Starting point is 00:20:44 Here here, Tom, here. Now, meanwhile, as this has all been happening, Binance continues to see withdrawals a couple billion in the last 24 hours, and inflation surprise to the downside, but all of that will have to wait till tomorrow. For now, I want to say thanks again to my sponsors, nexus.com.I.O., Circle, Cracken, and Galaxy brains. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Sam Bankman-Fried Arrested for Wire Fraud and Conspiracy to Defraud the United States

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