FTX collapse: the latest in the downfall of the cryptocurrency exchange
It has been a busy day of developments in the fallout of FTX, the company that was once the world’s second-largest cryptocurrency exchange before it filed for bankruptcy last month.
Former chief executive officer Sam Bankman-Fried was arrested in the Bahamas last night, less than 24 hours before he was scheduled to testify in front of Congress and answer to the alleged corporate wrongdoing that led to his company’s demise.
He faces a number of charges from multiple US agencies:
Two counts of security fraud from the Security and Exchange Commission
Two counts of fraud from the Commodity Futures Trading Commission
Eight criminal charges from the justice department, including defrauding customers and lenders as well as violating US campaign finance laws
His arrest was in connection to the criminal charges filed by the justice department. In a press conference Tuesday afternoon, US attorney Damian Williams said that Sam Bankman-Fried made “tens of millions of dollars” of illegal campaign contributions to both Republicans and Democrats.
Williams said the investigation into the FTX founder is ongoing and “moving very quickly” and that other actors in the demise of the company could also be investigated. “To anyone at FTX who has not yet come forward, come see us before we come see you,” he said.
Bankman-Fried appeared in a Bahamas courtroom on Tuesday for an arraignment hearing. Local news outlets reported that the former executive planned to fight attempts to extradite him to the US. His attorney is reportedly asking Bankman-Fried be let out on bail.
The former FTX executive had been scheduled to speak in front of Congress on Tuesday morning as part of the first of what is promised to be several hearings regarding the collapse of the company. In his absence, members heard exclusively from newly appointed FTX chief executive officer John J Ray III.
Ray spoke for four hours in front of the House of Representatives committee on financial services, detailing the fallout of the company’s collapse. The industry veteran said he has worked with a dozen large-scale bankruptcies in his career and has “never seen such an utter lack of record keeping” at a company.
“There were no corporate controls, no corporate oversight, no independent board,” he said. “The owners, business and senior management had virtual control of all the accounts and could move money or assets as they desired, undetected by customers.”
“To the extent there were rules and there were very few, obviously they were made to be broken,” he said. He said the process of tracking down lost funds will take months.
“At the end of the day, we are not going to be able to recover all the losses here,” he said. “There was money spent that we will never get back.”
Congress members during the hearing took an adversarial tone towards the crypto industry as a whole, promising deeper investigation into what they characterized as a lack of regulation that allowed the FTX collapse to occur, and promised more hearings in the new year.
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Sam Bankman-Fried charged with fraud
Sam Bankman-Fried, the founder and former chief executive of the cryptocurrency exchange FTX, has been charged with fraud, conspiracy to commit money laundering and conspiracy to defraud the US and violate campaign finance laws.
The eight criminal charges filed by the US attorney’s office for the southern district of New York on Tuesday follow civil charges brought by the US Securities and Exchange Commission (SEC) accusing the 30-year-old former billionaire of defrauding investors by building a company that was a “house of cards”.
“This is one of the biggest financial frauds in American history,” said Damian Williams, United States attorney for the southern district of New York. He said that while only Bankman-Fried had been charged so far: “We are not done.”
On Monday, police in the Bahamas arrested Bankman-Fried after receiving formal notification from the US of criminal charges against him.
Among other charges, Bankman-Fried is accused of using FTX customers’ deposits to pay debts and expenses to Alameda Research, his hedge fund. The indictment also alleges that Bankman-Fried and others conspired to violate federal rules on political donations.
Bankman-Fried was one of the Democrats’ largest donors, but he has said he also gave to the Republicans, hiding the donations as “dark money”. Other FTX entities gave cash to both parties as they lobbied politicians for favourable cryptocurrency regulation.
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Federal prosecutors describe 'one of the biggest financial frauds in American history'
Prosecutors at the US attorney’s office for the southern district of New York have outlined criminal charges in the alleged billion dollar fraud by FTX founder Sam Bankman-Fried, who was arrested last night in the Bahamas and appeared in court there today.
Damian Williams, US attorney, said that Sam Bankman-Fried made “tens of millions of dollars” of illegal campaign contributions to both Republicans and Democrats.
He said the investigation into the FTX founder is ongoing and “moving very quickly”.
An extradition process is going on to bring SBF back from the Bahamas to the US to face criminal and civil charges.
Williams added: “To anyone at FTX who has not yet come forward, come see us before we come see you.”
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First congressional hearing closes
And with that, “Investigating the Collapse of FTX, Part I” – the first congressional hearing on the matter – has come to a close.
Former FTX CEO Sam Bankman-Fried did not testify as originally planned after he was arrested in the Bahamas last night. Instead, new CEO John J Ray III fielded questions for four hours about the collapse of the company, the corporate wrongdoing that led up to the disaster, and what will happen next.
“The collapse of FTX appears to stem from absolute concentration of control in the hands of a 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 entrusted with other people’s money or assets,” he said.
Congressman and incoming chair of the committee Patrick McHenry said in closing statements the next hearing on FTX collapse will take place in the new year.
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AOC targets FTX bankruptcy and arrest timeline
In her questioning of Ray, Alexandria Ocasio-Cortez of New York seemingly alluded to potential corruption, suggesting Bankman-Fried could stand to benefit from liquidation proceedings taking place in the Bahamas.
She noted that Bahamian customers were able to withdraw $100m from FTX before assets were frozen and suggested an investigation into communications between Bankman-Fried and Bahamian authorities.
“I certainly don’t have a full timeline and that’s something that we look forward to learning,” she said.
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Ray: ‘It’s possible assets could have escaped the system’
Ray said they are working to track down all of the funds from FTX and acknowledged some of the missing currency could be in “cold storage”, or offline digital wallets.
We don’t know whether the founders could have taken crypto and put it in a cold wallet that we just don’t have an awareness of. If they did, hopefully we can we can trace that. It’s possible that assets have escaped the system and exist in a thumb drive that we just don’t have knowledge or possession of.
He has repeatedly said in questioning that the poor bookkeeping at FTX makes it difficult to track down missing funds, and that the process will take months.
Congress takes an aggressive tone against crypto
Many in the cryptocurrency world have feared that backlash from Congress to the collapse of FTX could create a hostile regulatory environment for the technology.
Some Congress members during Tuesday’s hearing took the opportunity to voice their distaste. Democratic representative Emanuel Cleaver said he would like to make a motion to rename crypto “creepy dough”.
Brad Sherman of Missouri said he has for years been trying to ban investments in crypto and bragged that he was the only member of Congress to receive an “F” rating from one crypto advocacy group.
“My fear is that people will look at Sam Bankman-Fried as one snake in a Garden of Eden,” he said. “But the fact is, crypto is a garden of snakes.”
Juan Vargas of California said he believes cryptocurrency is only useful if you are a “terrorist or someone who wants to hide money”.
“I don’t get the point of blockchain and cryptocurrency,” he said. “It’s like keeping track of how many times you chew gum – like, who cares?”
Representative Rashida Tlaib said cryptocurrency “get rich schemes” are “predatory” and “bullshit”.
“That cryptocurrency can be a solution for financial inclusion is not only laughable, it’s dangerous,” she said.
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Legal expert: SBF case is ‘highly unusual’
Duncan Levin, managing partner at Levin & Associates and a former federal prosecutor, said the speed of the charges brought against Sam Bankman-Fried was “highly unusual”.
“This case came together shockingly fast,” he said. “Usually white collar cases are under investigation for months if not years before action takes place. Clearly this is a very high priority case.”
Levin, who has represented clients including Harvey Weinstein and Anna Delvey, said from his reading of the legal documents part of that speed was because prosecutors had decided that at its heart this is a simple fraud case.
“People are discussing this like it’s a complicated crypto case,” he said. But the court documents show that prosecutors believe Bankman-Fried “devised a scheme to defraud FTX customers by misappropriating their deposits,” he said. “It appears to be a traditional Ponzi scheme.”
To win a conviction, the prosecution will have to prove Bankman-Fried intentionally defrauded customers, said Levin. “That is going to be the core of the case.”
While it is difficult at this stage to calculate what kind of prison sentence Bankman-Fried faces if found guilty, Levin said sentencing is guided by financial losses. Given that FTX’s losses “seem to be close to $2bn, that could drive sentencing to the absolute max,” he said.
At the moment, said Levin, it’s hard to say whether if convicted Bankman-Fried is facing an “Elizabeth Holmes (11 years) or a Bernie Madoff (150 years)”.
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Representative Tom Emmer of Minnesota has asked Ray to commit to sharing internal documents regarding any communications between FTX representatives and the SEC.
The questioning alludes to unproven theories circulating in the crypto sphere that FTX was working directly with SEC chair Gary Gensler on favorable crypto regulation.
Emmer previously tweeted that his office was investigating whether Gensler was “helping SBF and FTX work on legal loopholes to obtain regulatory monopoly”. These claims have not been substantiated.
Ray committed to “fully cooperating” regarding the investigation.
Ray: ‘We are not going to be able to recover all the losses here’
New FTX CEO John J Ray III said on Tuesday that it was going to be difficult to recover the more than $7bn in lost funds from FTX, and that the process would take “months not weeks”.
“At the end of the day, we are not going to be able to recover all the losses here,” he said. “There was money spent that we will never get back.”
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Ray: ‘I don’t trust a single piece of paper at this organization’
Congress members’ questioning on Tuesday underscored how difficult it is to track the scale and scope of FTX’s collapse given the lack of bookkeeping at the company and the fluctuating value of cryptocurrencies.
Ray repeatedly said he was unable to share specific numbers on losses or numbers of customers impacted. He said the funds lost were in “excess of $7bn” and that there were 7.6m accounts on FTX and 2.7m based in the US, but it is unclear how many lost money.
“There were no corporate controls, no corporate oversight, no independent board,” he said. “The owners, business and senior management had virtual control of all the accounts and could move money or assets as they desired, undetected by customers.”
“To the extent there were rules and there were very few, obviously they were made to be broken,” he said.
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Representative Bill Huizenga, a Republican from Michigan, has asked if Sam Bankman-Fried’s parents were involved in the fraud at FTX.
“That is being investigated,” Ray said. He added that the parents, who were law professors at Stanford University, did receive payments related to FTX.
Thus far Bankman-Fried is the only person charged in connection with the collapse of the company. His former girlfriend Caroline Ellison – who helmed FTX-adjacent trading firm Alameda Research – has reportedly hired an attorney.
Sam Bankman-Fried appears in court
As the US Congressional hearing regarding the collapse of FTX continues, former chief executive Sam Bankman-Fried has reportedly made an appearance in court in the Bahamas for his arraignment.
UPDATE: While the US House hears from the FTX CEO in D.C., these are scenes from outside the courthouse in Nassau, Bahamas where Sam Bankman-Fried is present for his arraignment hearing.
— Bloomberg Crypto (@crypto) December 13, 2022
Live blog: https://t.co/VdbmQNTgZq pic.twitter.com/On0FP0aGEh
Bankman-Fried was arrested in the Bahamas on Monday evening on criminal charges, and is likely to be extradited to the US.
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Democratic representative Emanuel Cleaver has moved to submit planned testimony from Sam Bankman-Fried, which he called “disrespectful”, into the record.
In the testimony, which Forbes has published in full, Bankman-Fried planned to open by telling Congress “I fucked up.”
“Absolutely insulting,” Cleaver said of the language. “I mean, there’s not a person up here would like to show this to their children.”
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The criminal charges against Sam Bankman-Fried
Congressman Al Green read aloud selections from an indictment that led to Sam Bankman-Fried’s arrest on Monday.
To recap, here are the charges from the indictment issued by the Justice Department’s Southern District of New York, which was unsealed Tuesday morning.
Conspiracy to commit wire fraud on customers
Wire fraud on customers
Conspiracy to commit wire fraud on lenders
Wire fraud on lenders
Conspiracy to commit commodities fraud
Conspiracy to commit securities fraud
Conspiracy to commit money laundering
Conspiracy to defraud the United States and violate the campaign finance law
These charges could lead to hefty prison time for Bankman-Fried.
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Democratic representative Brad Sherman, a tough critic of crypto, said he has been trying to ban crypto investments for five years. He said he believes crypto’s ultimate goal is to compete with the US dollar.
“My fear is that people will look at Sam Bankman-Fried as one snake in a Garden of Eden. But the fact is, crypto is a garden of snakes.”
He urged Congress not to pass the Stabenow-Boozman bill, legislation backed by FTX that would change how crypto is regulated.
“Don’t trash Bankman-Fried and then pass his bill,” he said.
Ray: ‘Literally no record keeping whatsoever’
In his testimony, Ray, an industry veteran who said he has worked with a dozen large-scale bankruptcies in his career, said he has “never seen such an utter lack of record keeping” at a company. There were “absolutely no internal controls whatsoever”, he said.
He added that record keeping at the company was primarily carried out on Quickbooks, accounting software targeted for small or mid-sized businesses. Invoices were coordinated over messaging platform Slack.
“This is unusual in the sense that there was literally no record keeping whatsoever – an absence of record keeping,” he said.
Ray said it will take “weeks and perhaps months to secure all the assets” of most creditors who lost funds in FTX.
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In opening statements, new CEO John J Ray III detailed what he said were “unacceptable” management processes used at FTX. He read from testimony submitted in advance, which you can read in full here.
“The collapse of FTX appears to stem from absolute concentration of control in the hands of a 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 entrusted with other people’s money or assets,” he said.
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In his own opening statements, Congressman and incoming chair of the committee Patrick McHenry called the actions of FTX “old school fraud, just using new technology”, and implied it does not implicate cryptocurrency at large.
“Let me be clear, I believe in the promise of digital assets and those around the world building on blockchain technologies, and that’s why I’ve worked and will continue to work to provide clear rules of the road for the digital asset ecosystem here in the United States,” he said.
“That’s how we protect American consumers and investors in this marketplace and allow innovation to occur here in the United States.”
The hearing is underway. Congresswoman and committee chairwoman Maxine Waters started with an opening statement on the collapse of FTX.
She shared her disappointment that Bankman-Fried would not appear as planned to testify, saying it “denies the public the opportunity to get the answers they deserve”.
“Rest assured that this committee will not stop until we uncover the full truth behind the collapse of FTX,” she said.
As we await testimony, here’s a look back at the remarkable rise and fall of FTX, courtesy of my colleague and UK tech editor Alex Hern.
New FTX CEO John J Ray III to testify after Bankman-Fried's arrest
US Congress will commence a hearing today on the collapse of cryptocurrency exchange FTX, less than 24 hours after its former chief executive officer was taken into custody.
The House of Representatives committee on financial services is holding a hearing called “Investigating the Collapse of FTX, Part I,” and had invited Bankman-Fried to speak.
FTX, formerly the second-largest cryptocurrency exchange in the world, is under investigation after filing for bankruptcy a month ago, after a report revealed inconsistencies in its balance sheet created a digital run on the bank.
Bankman-Fried was taken into custody on Monday evening by authorities in the Bahamas, where FTX was previously headquartered.
In a statement, Congresswoman Maxine Waters who chairs the committee said she was disappointed Bankman-Fried would not be appearing at the hearing tomorrow.
“Although Mr Bankman-Fried must be held accountable, the American public deserves to hear directly from Mr Bankman-Fried about the actions that’ve harmed over one million people, and wiped out the hard-earned life savings of so many,” she said. “The public has been waiting eagerly to get these answers under oath before Congress, and the timing of this arrest denies the public this opportunity.”
The company’s new CEO, John J Ray III, is still set to speak, marking his first public appearance since taking over the company. Ray, an insolvency expert who guided energy firm Enron through bankruptcy proceedings in the early 2000s following its collapse, has raised alarm about the state of FTX and its bookkeeping measures.
“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,” he wrote in a statement preceding the hearing.
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