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FTX Crypto Exchange Scandal and Bankruptcy

FTX Fraud
Written by Andy

The swift collapse of the cryptocurrency exchange FTX has sent shockwaves through the crypto industry, with investors estimated to be losing a combined $1bn in assets at minimum. Since its establishment in 2019, FTX reportedly placed billions of dollars worth of its own cryptocurrency on the balance sheet of Alameda – a crypto hedge fund owned by FTX’s founder, Sam Bankman-Fried – and used it as collateral against loans. Citing ‘recent revelations’ when considering the purchase of FTX, Binance CEO Changpeng Zhao sold his $500m FTT holding – FTT being the proprietary token of FTX – leading to panicked and rapid selling on the part of retail investors.

Now it seems that the big crypto blowup at FTX is just a fraud from top to bottom.  This will not be the last such scandal in this industry…  Events at FTX have convinced more folks that this industry – as I have long warned – is full of charlatans and worse. The lack of due diligence at all of the investors in FTX is totally shocking, to say the least. Anyone with any funds held with NEA, IVP, Iconiq Capital, Third Point Ventures, Tiger Global, Altimeter Capital Management, Lux Capital, Mayfield, Insight Partners, Sequoia Capital, SoftBank, Lightspeed Venture Partners, Ribbit Capital, Temasek Holdings, BlackRock, Thoma Bravo or any of the other funds, should all question the leadership capacity and oversight of these firms. What other businesses are included in their portfolios? It seems that basic grade-school level investing skills were not apparent here.

The worst thing seems to be that FTX and a lot of other crypto scams, sorry, “businesses”…basically puffed up their balance sheets by simply inventing tokens and creating an extremely superficial market in them, thus giving these new tokens massive market caps. Et voila, suddenly you have about $10bn in “assets”. Except when they become worth zero overnight.

Who was in charge here? Well, SBF of course.

SBF controlled FTX, Alameda and many other entities in the SBF/FTX ecosystem.

He was the “man in charge”

He signed the checks.

What happened?

The really important thing that happened is that:

SBF moved customer funds (deposits) from FTX (and possibly other entities) to Alameda (his personally wholly owned trading firm) and then possibly to himself personally.

Allegedly but SBF has admitted this…

So let’s make it comprehensible to our non-crypto brethren

You deposit money at JP Morgan Chase.

One day your money is gone.

Where did it go?

To Jamie Dimon’s personal trading firm and Jamie Dimon personally…

How much money?

Well nobody knows for sure, but it appears to be in the range of $10 billion which is an awful lot of money anyway you count it.

This is going to be one of the largest (alleged) misappropriations of customer funds in human history.

SBF/FTX also allegedly did a whole of other things that may be inappropriate or illegal (e.g. AML/KYC violations, securities violations, market manipulation, use of company assets for personal use and so on).

Allegedly there are a lot of these too, but don’t get distracted!

Now $10B is a lot of money to be missing.

Why wasn’t there a whistleblower? Why didn’t lawyers, accountants, staff notice?

Well because allegedly SBF built a special custom-made accounting system to hide the missing assets.

So to recap, the CEO and control owner of a firm, allegedly:

✅ Took $10B of customer deposits
✅ Moved them to a company he owns 100%
✅ Further moved them to himself
✅ Made special software to hide the transfers from others

Of course, these are all allegations for now…

But given that:

✅ SBF has sortof agreed this is what happened
✅ And withdrawals are frozen at FTX

I think we (not the court system) can assume for now that the rough outline of the story is correct…

So, ok what is the proper and normal societal response and takeaway to this?

Well, I am pretty sure that the normal response is that it is “really really really bad”

It is allegedly one of the greatest thefts in human history if true…

What are things we should have close to zero interest in right now?

❎ How this affects SBF’s “philanthropic” efforts
❎ What SBF thinks of CeFi or crypto
❎ What SBF thinks of regulation
❎ “what went wrong”
❎ “was SBF about to raise fresh capital”

Let’s take the completely implausible SBF take that “he was about to raise more money”

So what?

SBF was literally days earlier allegedly stealing customer funds.

Why would we have even 1% confidence he wouldn’t steal the new money too?

It is *fantastic* news that SBF did not raise more money.

Very obviously, nobody should trust SBF to be in a custodial position with anyone’s funds ever again.

This is independent of any criminal or civil liability.

This is simply: “not being a complete moron”

here is a whitewashing effort that SBF is attempting now to soften the public perception ahead of possible legal troubles.

The general theme of whitewashing effort is: “we were young and inexperienced and disorganized and bad at risk management and we made mistakes”

This whitewashing is unadulterated bullshit.

SBF is a lot of things, but he is not cognitively challenged.

He was raised by top university professors and famously attended the Massachusetts Institute of Technology which is famously not a safety school.

He was running one of the world’s largest exchanges and a prop trading operation, with a vast global presence, while running an extensive lobbying operation, testifying in Congress and so on.

Even doing this “immaturely” is a huge lift, elite tier work, very few could do it.

The issue is here is not that “FTX grew too fast, did not have the proper accounting controls and failed”

The issue is that when SBF had to make a decision about whether he should allegedly take his customers’ funds for himself, he thought:

“Why, yes, I think I will”

An alternative view of the situation is not “there were no accounting controls because SBF is dumb” but “there were no accounting controls to facilitate the alleged misappropriation”

In other words, the lack of accounting controls was a feature for SBF, not a bug.

I remind you when SBF wanted to hide the transfers, he allegedly made a fake accounting system to do so.

So when he needed to build fake accounting controls, he was more than mentally capable of doing so.

Hard to find an innocent explanation for this to be honest.

I am surprised with the relatively mild treatment SBF is getting in the media.

The generous view is that there are so many parts to the SBF story and so many allegedly inappropriate things that happened that people are getting confused.

But that is a generous view

I think the rough outline of the main alleged misappropriation is clear.

And if that is the case, the focus right now should be on preserving evidence and preventing evidence tampering.

We are in the law enforcement, not media tour, phase now.

Evidence preservation is going to be a herculean task.

It is a lot of money, a lot of crypto, a lot of non-existent accounting controls and, in fact, accounting controls used to obfuscate the truth.

I think there should also be an assumption that assets (probably crypto based) may still be under SBF’s or colleagues’ control.

In other words, while the $10B alleged misappropriation is the big deal, it does not mean that there might not be $100M in a side wallet.

The United States government has more capacity on crypto tracing than you may imagine, in different departments and units. This is an excellent time and opportunity to make use of it, for the public good.

The focus right now should be on recovery for the victims. Which means evidence/asset preservation. People deserve the maximum recovery and the real facts on what happened.

In time, we will learn (or I hope we will learn) what things in this episode were:

✅ Massive irresponsibility
✅ Civil violations
✅ Criminal violations

None of this could have without his knowledge and his own *direct action*.

FTX FILLED ITS BANKRUPTCY FILLING RECENTLY IT IS EVEN WORSE THAN ANYONE IMAGINED…

1) FTX LENT SAM BANKMAN OVER $1 BILLION DOLLARS FOR PERSONAL USE

FTX Related Parties

2) FTX USED CUSTOMER FUNDS TO BUY HOUSES FOR EMPLOYEES

FTX Fraud

3) FTX DIDNT HAVE A LIST OF EMPLOYESS AND WHAT ALL THEY DID

FTX Scandal4) FTX DID NOT KEEP ANY BOOKS OR RECORDS OF ITS DIGITAL ASSETS

FTX Digital Assets5) ALAMEDA RESEARCH WAS EXEMPTED FROM AUTO LIQUIDATION ON FTX

Alameda Research6) FTX BUILT A SOFTWARE TO HIDE THE MISUSE OF CUSTOMER FUNDS

FTX Client Funds Misuse

7) FTX HAD $400 MILLION IN UNAUTHORIZED TRANSFERS THE DAY THEY FILED FOR BANKRUPTCY

FTX Unauthorized Transfers8) FTX HAD BILLIONS IN INVESTMENTS OTHER THAN CRYPTO BUT THERE ARE NO BOOKS OR RECORDS OF ANY OF IT.

FTX Investments

9) SAM BANKMAN MADE ALL BUSINESS DECISIONS ON APPS THAT AUTO DELETED EVERYTHING AFTER SOME TIME HE ENCOURAGED ALL EMPLOYEES TO DO THE SAME

FTX Fraud

Where were the Signs of this Fraud?

This is what renowned short-seller Lucian Miers had to say about this.  The signs were everywhere, people just didn’t bother to look and question the business. Lucian highlights this as a study of folly, greed and incompetance. It has everything (certainly sex and drugs and maybe even rock and roll) and gives out a great many examples as to the crazy environment that we have been living in for so long.

  • Jim Cramer of the influential financial TV channel CNBC (fresh from calling disgraced Elizabeth Holmes of Theranos “the new Steve Jobs”) gushingly referred to Sam Bankman Fried as the JP Morgan of crypto.
  • The New York Times wrote many uncritical puff pieces and naturally he was on the front cover of several glossy financial magazines.
  • Sam Bankman Fried was the second largest donor to the Democratic party after George Soros.
  • Gary Gensler’s boss at MIT (Massachusetts Institute of Technology) is the father of Caroline, Co-Ceo of Alameda Research. SBF, the founder of FTX also went to MIT and helped create Alameda Research.
  • There are the less culpable useful idiots such as Tom Brady (the Lionel Messi of American Football) who were paid to promote FTX and the more culpable investment names like Softbank (as usual) and
  • Sequoia Capital who invested other people’ money into this obvious fraud with zero due diligence affording comfort to the retail investors and depositors, the real victims of this crime.

This graphic from Visual Capitalist is wild – it is helpful to highlight the depth of the fraud at crypto company FTX.

FTX's balance sheet

About the author

Andy

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