A top executive of FTX’s Bahamas subsidiary warned that country’s securities authority days before the company filed for bankruptcy Nov. 11 of customer fund transfers to Alameda Research, a cryptocurrency trading firm tied to FTX, according to documents made public Wednesday. The warning prompted the regulator to immediately seek a criminal investigation, according to the documents, WSJ Pro Bankruptcy reported. Securities Commission Executive Director Christina Rolle requested that the financial crimes unit of the Royal Bahamas Police Force open an investigation into the subsidiary, FTX Digital Markets Ltd., the same day based on the warning of FTX Digital Chairman Ryan Salame. “Regrettably, the commission was informed today by [Mr. Salame]…that clients’ assets which may have been held with FTX Digital were transferred to Alameda Research,” Ms. Rolle wrote to the police commissioner. “The commission understood Mr. Salame as advising that the transfer of clients’ assets in this manner was contrary to the normal corporate governance and operations of FTX Digital,” Ms. Rolle wrote, and that “such transfers were not allowed and therefore may constitute misappropriation, theft, fraud or some other crime.”
Senate Banking Committee Chair Sherrod Brown (D-Ohio) said that U.S. lawmakers don’t need to reinvent the wheel as they consider legislation after the collapse of Samuel Bankman-Fried’s FTX crypto empire, Bloomberg News reported. The panel’s hearing on Wednesday is the second this week by Congress to scrutinize the fallout of FTX’s bankruptcy. The company imploded in November, sending shock waves across the industry and fanning criticism of weak oversight. Bankman-Fried was arrested in the Bahamas on Monday after the U.S. government filed criminal charges amid multiple probes into his possible misconduct. “If we are going to learn from FTX’s meltdown, we must look closely at the risks from conflicts at crypto platforms that combine multiple functions,” Brown said. “It means thinking about the kinds of disclosure that consumers and investors really need to understand how a token or crypto platform works.” Brown said in remarks before the hearing that lawmakers can look at existing banking and securities laws for time-tested approaches as a way of overseeing crypto businesses. Separately, Sens. Elizabeth Warren (D-Mass.) and Roger Marshall (R-Kansas) said Wednesday they are introducing a bill to address the national-security risks posed by cryptocurrencies and other digital assets. The proposed legislation would close loopholes in anti-money-laundering rules and help counter terrorism financing, they said in a statement.
Until its collapse, FTX had been one of the world’s largest cryptocurrency exchanges — and one of the most aggressive at marketing digital currencies to the masses. The company had partnerships with NBA teams, patches on Major League Baseball umpire uniforms and the naming rights to the Miami Heat arena. It ran splashy TV ads during NBA and NFL games, including last year’s Super Bowl, in which celebrities portrayed FTX as an exciting but safe place to invest money, the Washington Post reported. On Tuesday, the U.S. government brought both criminal charges and civil actions against Samuel Bankman-Fried, the 30-year-old founder of FTX, accusing him of orchestrating one of the biggest financial frauds in U.S. history. But the odds of restitution for FTX customers are slim. “We’re not going to be able to recover all the losses here,” FTX’s new chief executive John J. Ray III told the House Financial Services Committee on Tuesday. So plaintiffs are trying a different approach. Working with Coral Gables, Fla., lawyer Adam Moskowitz, their lawsuit seeks to shift the focus from FTX executives to what Moskowitz sees as a larger circle of complicity that includes some of the world’s most celebrated actors and athletes. Moskowitz argues that FTX’s interest-bearing accounts were a security, which would require NFL quarterback Tom Brady and other promoters to reveal the details of their payments from FTX. The complaint claims “they have never disclosed the nature, scope, and amount of compensation they personally received in exchange for the promotion.” Instead, they appeared in ads featuring such moments as an enthusiastic Brady dialing up everyone in his contact list to pitch crypto trading on FTX, asking again and again: “You in?”
York County and Rock Hill (N.C.) will have to wait a bit longer in efforts to recover public money given to the failed Carolina Panthers’ $500 million practice facility and headquarters after a federal judge on Dec. 14 delayed the confirmation of bankruptcy proceedings, the Rock Hill Post and Courier reported. GT Real Estate, the development company controlled by the NFL team’s owner David Tepper, had sought the judge’s approval of its plan to pay off debts incurred during construction at the site along Interstate 77, closing out bankruptcy proceedings first filed in June. Tepper’s company also sought approval of separate settlement agreements recently struck with the county and city over the combined $41 million in public funds contributed to the project, intended to cover the cost of roads and other infrastructure. But Bankruptcy Judge Karen Owens raised concerns on the proposal from Tepper’s lawyers on waivers that would bar subcontractors from seeking further repayment from the general contractor and Tepper entities. The judge will not approve the bankruptcy proceedings until Tepper’s companies can present a restructuring plan that is satisfactory, she said in court. Owens and Tepper’s lawyers are scheduled to meet Dec. 15 to discuss a suitable outcome. It is unknown when a final decision from the judge is expected. In the plan Tepper’s lawyers presented to Judge Owens yesterday about $150,000 in funds to subcontractors would go unpaid. The lawyers argued in court that this number was fair because $60 million was being paid to subcontractors in the process of their restructuring. The billionaire hedge fund manager pulled out of the landmark project, which was expected also to include retail, a hotel, offices and medical facilities in addition to the practice facility and team headquarters, more than halfway through construction, having spent $170 million.
U.S. prosecutors on Tuesday accused Sam Bankman-Fried, the founder and former CEO of crypto currency exchange FTX, of fraud and violating campaign finance laws by misappropriating his customers' funds, saying the investigation is ongoing and "moving very quickly," Reuters reported. U.S. Attorney Damian Williams in New York said Bankman-Fried made illegal campaign contributions to Democrats and Republicans with "stolen customer money," saying it was part of one of the "biggest financial frauds in American history." "While this is our first public announcement, it will not be our last," he said, adding Bankman-Fried "made tens of millions of dollars in campaign contributions." Williams declined to say whether prosecutors would bring any charges against other FTX executives, emphasizing that the investigation was ongoing. He also declined to say whether any FTX insiders were cooperating with the investigation. Bankman-Fried made a court appearance on Tuesday in the Bahamas, where he was arrested on Monday and where FTX is based. A lawyer for Bankman-Fried requested that his client be released on $250,000 bail. Bahamian prosecutors have asked that Bankman-Fried be denied bail if he fights extradition. Read more.
In related news, Bahamas government officials worked closely with Sam Bankman-Fried and tried to help him regain access to key computer systems of bankrupt FTX Trading, lawyers for FTX said in a court filing before the failed crypto magnate was arrested on Monday, Bloomberg News reported. Before Bankman-Fried was blocked from FTX systems, the Bahamas asked him to mint new digital coins worth hundreds of millions of dollars and then transfer those tokens to the control of island officials, according to the legal team in control of FTX. The accusations escalate a battle between an American team of restructuring executives trying to collect FTX assets to repay creditors, and officials in the Bahamas. Liquidators in the island nation have asked a U.S. judge for access to FTX data controlled by their American counterparts. “It is a request for live, dynamic access that would be provided immediately to the government of the Bahamas and to Messrs. Samuel Bankman-Fried and Gary Wang, who are located in the Bahamas and working closely with Bahamian officials,” American lawyers wrote in a court filing yesterday. Wang is an FTX co-founder. In attempting to paint a portrait of coziness between Bankman-Fried and Bahamas authorities, the company’s U.S. lawyers called out a Nov. 9 email — just days before the bankruptcy — in which Bankman-Fried said he would be “more than happy” to open up withdrawals for all Bahamanian customers, allowing them to be made whole. “It’s your call whether you want us to do this — but we are more than happy to and would consider it the very least of our duty to the country, and could open it up immediately if you reply saying you want us to,” Bankman-Fried wrote, according to court papers. Read more.
Also, a growing group of non-U.S. customers of FTX.com, which currently counts up to around $1.6 billion in lost funds, has lawyered up and is looking to create an official customer committee in order to protect their rights of ownership over their assets on the exchange, CoinDesk.com reported. The non-U.S. FTX customers, led by Eversheds Sutherland attorneys Sarah Paul and Erin Broderick, had already formed the first FTX ad hoc group. “The rights of the non-U.S. customers and why they’re differently situated is really important,” said Paul, a former federal prosecutor in the U.S. Attorney’s Office for the Southern District of New York. “First, there is an irreconcilable conflict between the interests of the non-U.S. customers and the creditors of the other silos. The starkest example of that is the transfer of the $10 billion to Alameda from FTX.com. The terms of service situate the assets differently, as customer funds, as opposed to property of the estate.” Read more.
FTX was one of the largest overseas crypto exchanges, based on a Caribbean island with a friendly regulatory regime, and arguably beyond the reach of U.S. rules that govern how trading firms deal with investors and consumers, the Wall Street Journal reported. The lawsuits filed yesterday show how U.S. regulators have found a way to police global crypto conduct they don’t closely regulate. The Commodity Futures Trading Commission alleged, for instance, that Bahamas-based FTX affected the price of commodities sold in the U.S. That gave the CFTC authority to file a civil fraud lawsuit against FTX founder Samuel Bankman-Fried and his companies. Crypto exchanges including FTX don’t register with U.S. regulators such as the CFTC or the Securities and Exchange Commission and aren’t subject to inspections that check for compliance with American rules. But they are still subject to U.S. laws that prohibit fraud if they deal with local customers or work inside the U.S. The CFTC wields another advantage in fraud cases, thanks to a change in law that Congress passed in 2010. The newer statute says the CFTC doesn’t need to prove market manipulation. Instead, regulators only have to show that a defendant committed fraud and that the conduct affected commodity prices. The CFTC’s lawsuit alleges that FTX misused customer money to fund its sister trading firm, Alameda Research, and made misleading statements about the firms’ financial stability and risk-management practices. When the exchange collapsed last month, the price of bitcoin futures fell more than 23%, the CFTC said. The agency alleged a clear connection between FTX’s conduct and the price of digital commodities such as bitcoin and ether.
Poor management practices and inexperienced leaders led to FTX's implosion, the crypto exchange's new chief executive told lawmakers on Tuesday, shortly after U.S. regulators charged founder Samuel Bankman-Fried with defrauding investors, Reuters reported. "The FTX group's collapse appears to stem from absolute concentration of control in the hands of a small group of grossly inexperienced, non-sophisticated individuals," said John Ray, who was named CEO of FTX after Bankman-Fried stepped down and the company filed for bankruptcy on Nov. 11. Ray also said there was virtually no distinction between the operations of FTX and Alameda Research, Bankman-Fried's crypto trading firm, which maintained close ties with his exchange. "I've just never seen an utter lack of record keeping — absolutely no internal controls whatsoever," Ray told the U.S. House of Representatives Financial Services Committee. A representative for Bankman-Fried did not immediately respond to a request for comment on Ray's testimony. He said he was shocked to learn FTX was using Quickbooks — software geared toward small and mid-size businesses — for accounting and approving invoices via Slack messages. Asked why he had testified that he did not believe the audited financial statements were reliable, Ray said: "We've lost 8 billion dollars of customer money. So by definition, I don't trust a single piece of paper in this organization." It will take weeks, perhaps months, to secure all the group's assets, Ray said, warning it would be a lengthy process. "At the end of the day, we're not going to be able to recover all the losses here," he said. Read more.
To view a replay of yesterday's hearing and access Ray's prepared testimony, please click here.
The Senate Banking Committee will hold a hearing today at 10 a.m. ET titled "Crypto Crash: Why the FTX Bubble Burst and the Harm to Consumers." Witnesses currently scheduled to testify include Prof. Hilary J. Allen of the American University Washington College of Law, Kevin O’Leary, an investor, Jennifer J. Schulp Director Of Financial Regulation Studies at the Cato Institute's Center for Monetary and Financial Alternatives, Cato Institute and actor and author Ben McKenzie Schenkkan. Click here to access the live web stream for today's hearing.
Lawyers for bankrupt lender Celsius are seeking to claw back $7.7 million from the estate of rival Voyager, as judges wrangle over the exact legal status of Celsius’ assets, CoinDesk.com reported. The Bankruptcy Code allows clawback of transactions that took place up to three months before Celsius filed for chapter 11 bankruptcy on July 13, documents filed in a court in the Southern District of New York in the early hours of Wednesday morning said. “Voyager maintained Earn accounts with Celsius, which earned significant rewards for its users,” the filing said, citing Voyager transactions of $7.7 million between Celsius accounts, of which $5.9 million was withdrawn, during the crucial 90-day period. “Section 547 of the Bankruptcy Code allows Celsius to claw back that cryptocurrency.” Other withdrawals and transfers could also be subject to challenge, Celsius said, but added that the figure was still small in Voyager’s total pool of $1.85 billion in unsecured claims. Voyager itself had filed for bankruptcy July 5, and claims against the company were supposed to be filed by Oct. 3. But Celsius is begging for a deadline extension — saying that it had been too preoccupied with its own legal case, and that Voyager had sent its legal notice to an out of date address for Celsius’ U.K. arm.
FTX founder Sam Bankman-Fried was arrested in the Bahamas at the behest of U.S. prosecutors on Monday, the day before he was due to testify before Congress about the abrupt failure last month of one of the world’s largest cryptocurrency exchanges, Reuters reported. The arrest marks a stunning fall from grace for the 30-year-old entrepreneur widely known by his initials SBF, who rode a boom in bitcoin and other digital assets to become a billionaire many times over until FTX's rapid demise. The exchange, launched in 2019 and based in the Bahamas, filed for bankruptcy Nov. 11 after it struggled to raise money to stave off collapse as traders rushed to withdraw $6 billion from the platform in just 72 hours. Since then it emerged Bankman-Fried secretly used $10 billion in customer funds to prop up his trading business. The arrest came as Bankman-Fried prepared to lash out at his former lawyers at Sullivan and Cromwell, new FTX CEO John Ray and rival exchange operator Binance at a Congressional hearing. In the testimony, a draft copy of which was seen by Reuters, Bankman-Fried planned to say he was pressured by Sullivan and Cromwell lawyers to nominate Ray as CEO following the sudden exodus of customer funds. And when within minutes he changed his mind, following an offer of billions of dollars of fresh funding, he was told it was too late. Bankman-Fried will now be unable to testify, according to Congresswoman Maxine Waters, who said in a statement she was surprised to hear of his arrest. Ray's testimony will go ahead. Read more.
The House Financial Services Committee’s hearing is scheduled today at 10 a.m. ET to investigate FTX’s collapse. Click here to access a live web stream of the hearing.
Additionally, the Senate Banking Committee will hold a hearing tomorrow at 10 a.m. ET titled "Crypto Crash: Why the FTX Bubble Burst and the Harm to Consumers." Witnesses currently scheduled to testify include Prof. Hilary J. Allen of the American University Washington College of Law, Kevin O’Leary, an investor, Jennifer J. Schulp Director Of Financial Regulation Studies at the Cato Institute's Center for Monetary and Financial Alternatives, Cato Institute and actor and author Ben McKenzie Schenkkan. Click here to access the live web stream for tomorrow's hearing. Read more.
U.S. regulators filed civil securities fraud charges today against Sam Bankman-Fried, the founder of the collapsed FTX crypto exchange, who was arrested last night at his home in the Bahamas, the New York Times reported. The Securities and Exchange Commission charged him with misleading big investors, who committed nearly $2 billion to FTX in recent years, about the financial health of the crypto exchange and its sister crypto trading platform, Alameda Research. The SEC also said that Mr. Bankman-Fried misled customers by taking in billions of dollars to trade crypto on FTX and telling them it was safe. But the SEC said that money from customers was commingled with funds at Alameda and used to finance investments in outside ventures, buy real estate and make political donations. “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 S.E.C. chair, Gary Gensler, said in a statement. Read more.
At least $73 million of political donations tied to Sam Bankman-Fried’s FTX may be at risk of being clawed back as bankruptcy lawyers sort through the remnants of his crypto empire in search of assets to repay creditors, Bloomberg News reported. Just a few months ago, Bankman-Fried, the 30-year-old founder of the crypto exchange, had pledged to give as much as $1 billion in the 2024 presidential election cycle. While there’s precedent for forcing political entities to return contributions in cases of fraud, recovery prospects are unclear in FTX’s case. Recouping campaign funds as part of the bankruptcy proceedings is a complicated and lengthy process, and the scope of the total funds eligible for clawback depends on myriad federal and state laws. It is also subject to the bankruptcy lawyers’ judgment on what money, which may be long spent by the time the FTX trustees try to go after it, is worth the effort.
