On November 11, 2022, the world’s third largest cryptocurrency exchange, FTX Group, filed Chapter 11 bankruptcy protection. The press release, released via Tweet, announced they had commenced voluntary bankruptcy proceedings, while also sharing the resignation of Chief Executive Officer, Sam Bankman-Fried (SBF), and appointment of John J. Ray III as new CEO.
In the press release Ray goes on to say, “The FTX Group has valuable assets that can only be effectively administered in an organized joint process… Stakeholders should understand that events have been fast-moving and the new team is engaged only recently.” In response, Twitter went rampant, retweeting and quote tweeting the press release nearly 10,000 times, specifically calling out former CEO, Sam Bankman-Fried and his dissipating net worth.
Twitter was on to something. Just one month following the bankruptcy filing, Bankman-Fried was arrested in the Bahamas after prosecutors filed criminal charges against him in a now unsealed indictment. The 14-page long indictment contains eight charges, including conspiracy to commit wire fraud, conspiracy to commit wire fraud on lenders, wire fraud on customers, conspiracy to commit commodities fraud, and conspiracy to commit securities fraud, conspiracy to commit money laundering, and conspiracy to defraud the United States and violate the campaign finance laws. Though it is a lengthy and frightening list of charges, we can likely expect more down the pike as individual U.S. states and the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission (CFTC) will likely follow suit with their own.
Bankman-Fried is now being held without bail in the Bahamas Department of Corrections Services until the U.S. requests extradition.
Alameda Research
What led to the Chapter 11 filing and the avalanche of charges against Bankman-Fried? Officials allege FTX was unlawfully transferring billions of dollars in consumer funds to Bankman-Fried’s hedge fund, Alameda Research. Alameda Research, which was also named in the bankruptcy petition and was co-founded by Bankman-Fried, is a quantitative trading firm specializing in cryptocurrency.
Though the funneling of funds was explicitly prohibited under the exchange’s terms of service, Bankman-Fried used his customer’s funds to “prop up” Alameda following a $500-million loan with failed crypto lender, Voyager Digital, and the transference of $4 billion in FTX funds, which include customer deposits. Bankman-Fried apparently did so in silence, keeping members of the executive team in the dark.
Somehow, a member of the FTX team was on to SBF. Alameda’s balance sheet was leaked to media outlet, CoinDesk, and showed an overwhelming amount, $14 billion in assets, to be exact, of FTT, the FTX exchange token. FTT would prove to be the downfall of both Alameda and FTX because it was the collateral used for loans between the two companies.
In a swift response to a subsequent Coindesk report, Binance CEO and FTX arch nemesis Changpeng Zhao, better known in the crypto community by his acronym CZ, unleashed a thoughtful attack in the form of a series of tweets:
The tweet read, “…Due to recent revelations that have come to light, we have decided to liquidate any remaining FTT in our books.”
CZ knew that this would be a deathblow to the token, because Binance held up to $2.1 billion in Binance’s own stablecoin (BUSD) and in FTT tokens after exiting its investment in FTX in 2021.
CZ’s tweet caused the price of FTT to crash by more than 80%, and $6 billion in crypto tokens were withdrawn by FTX customers in just 72 hours following Zhao’s tweet. Alameda’s collateral was wiped out, and with it, FTX.
CZ even made an attempt to purchase FTX, signing a non-binding agreement to help with liquidity. However, that non-binding agreement was quickly squashed after news of the U.S. investigation came to light. FTX’s bankruptcy petition was filed shortly thereafter.
SBF’s Media Circus
FTX and SBF are no strangers to the media. As part of their lavish marketing campaign, FTX hired some of Hollywood’s most notable stars, including Tom Brady, Larry David, Steph Curry, and Mr. Wonderful himself, Kevin O’Leary. The FTX Group even paid $135 million to acquire the naming rights for the previously dubbed American Airlines Arena, home of the Miami Heat, along with a 19-year sponsorship agreement in June 2021. The agreement was terminated once FTX entered bankruptcy.
Marketing wasn’t the only significant spend coming from FTX. Prosecutors allege Bankman-Fried broke campaign finance laws by using customer funds that were transferred to Alameda Research to support massive monetary donations to political candidates, including $27 million to Protect Our Future PAC, $6 million to House Majority PAC, $2 million to GMI PAC Inc, and $1.3 million to America United.
Not to be outdone by his unlawful business practices, SBF made what many consider an illogical and narcissistic next move, an interview with Good Morning America. The interview, conducted by George Stephanopoulos, was released to the public on November 30, 2022. Stephanopoulous pressed the crypto-king on his awareness of the improper use of funds, to which Bankman-Fried responded, “I did not know there was any improper use of company funds”.
In the unusual interview, SBF goes on to say, “I failed to have someone in place who was managing that risk, who was managing that position, managing that account. I failed to have proper oversight.” The one time billionaire went on to mention he is living with one ATM card and just $100,000 in his bank account.
Just 12 days later SBF was arrested in the Bahamas.
Next Chapter for FTX and its Customers
In the fallout of SBF’s arrest and the FTX Group bankruptcy are the 5 million global customers. According to legal experts, customers may be left with nothing. Because cryptocurrency is notoriously unregulated by financial institutions it is unclear how or if customers will be compensated once legal proceedings begin.
On Dec 20, 2022 FTX began attempts to “claw back” donations made to political parties and charities, offering an email address where parties could voluntarily return donations.
The story of FTX and Sam Bankman-Fried is far from over. As Bankman-Fried awaits his extradition hearing and the new FTX CEO patiently waits for donation reversals, only time will tell what additional charges may be coming down the pike for both the crypto exchange and its notorious founder.
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