This week is turning out to be a memorable one for FTX, formerly the world's No. 3 crypto exchange.
The Securities and Exchange Commission (SEC) has filed civil charges against FTX founder Sam Bankman-Fried -- known universally as SBF -- claiming he misled investors who collectively deposited nearly $2 billion with FTX, which at one point had a valuation of $32 billion.
Department of Justice prosecutors are also weighing in. Its criminal indictment, unsealed this week in the Southern District of New York, charged SBF with eight counts of wire fraud, violation of campaign finance laws, conspiracy to commit commodities fraud, and other misdeeds.
SBF's attorney, Mark Cohen, with the law firm Cohen & Gresser, did not respond to a request for comment.
On Tuesday, restructuring czar and new FTX CEO John J. Ray III testified before the House Committee on Financial Services. Mr. Ray, who has 40 years of experience overseeing bankruptcies including Enron, has made his disdain clear, declaring: “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here."
Ray's testimony was full of larger observations and insights about what happened to FTX, and why. Here are 10 claims by Ray and government regulators to keep an eye on:
- Just another case of straight-up embezzlement: In his congressional testimony, Ray said the crypto part of the FTX's business is not the issue. "This is really just old fashioned embezzlement. This is just taking money from customers and using it for your own purpose. Not sophisticated at all.”
- FTX fraud has been going on for a while. “This is not something that happened overnight," Ray testified, making the case that FTX’s financial troubles date back months, maybe even years.
- Concentrated control was a major factor in FTX's collapse. As Ray put it in his testimony: “The FTX Group’s collapse appears to stem from the absolute concentration of control in the hands of a very small group of grossly inexperienced and unsophisticated individuals 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.”
- FTX relied on Quickbooks, used mostly by small and medium sized businesses, for accounting. Nothing against Quickbooks, Ray noted in his testimony, it's "a very nice tool, just not for a multibillion dollar company."
- Alameda’s business model was inherently unsafe. As a market maker, Ray observed, it routinely deployed funds to various third party exchanges. This "inherently unsafe" practice was "further exacerbated by the limited protections offered in certain foreign jurisdictions."
- FTX's "independent" companies were not independent. “Questions have been raised as to why all of the FTX Group companies were included in the Chapter 11 filing, particularly FTX US," Ray noted in his congressional testimony. "The answer is because FTX US was not operated independently of FTX.com; Chapter 11 protection was necessary both to avoid a “run on the bank” at FTX US and to allow our team the time to identify and protect its assets.”
- SBF was instrumental in perpetuating "massive" fraud. According to the SEC, FTX's issues did not develop overnight, or even over the space of weeks or months. SBF "was orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform’s customer funds for his own personal benefit and to help grow his crypto empire,” the SEC alleged in its 28-page complaint, filed on Dec. 13 in U.S. District Court for the Southern District of New York.
- Thanks to SBF and FTX, Alameda had almost unlimited access to funds. SBF “told investors and prospective investors that FTX had top-notch, sophisticated automated risk measures in place to protect customer assets, that those assets were safe and secure, and that Alameda was just another platform customer with no special privileges," the SEC complaint says. "These statements were false and misleading. In truth, Bankman-Fried had exempted Alameda from the risk mitigation measures and had provided Alameda with significant special treatment on the FTX platform, including a virtually unlimited 'line of credit' funded by the platform’s customers.”
- SBF used FTX funds to personally enrich himself. “From the start," the SEC complaint says, SBF "improperly diverted customer assets to his privately-held crypto hedge fund, Alameda Research LLC... and then used those customer funds to make undisclosed venture investments, lavish real estate purchases, and large political donations.”
- SBF continued to enrich himself until the final moments. "Even as it was increasingly clear that Alameda and FTX could not make customers whole, (SBF) continued to misappropriate FTX customer funds," the SEC complaint states. "Through the summer of 2022, he directed hundreds of millions more in FTX customer funds to Alameda, which he then used for additional venture investments and for 'loans' to himself and other FTX executives."