FTX’s Sam Bankman-Fried seeks dismissal of charges; DCG’s Barry Silbert on the ropes

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FTX founder Sam Bankman-Fried (SBF) appears to be conceding that charges of fraud and money laundering filed against him have merit.

On Monday, SBF’s attorneys filed pretrial motions to dismiss 10 of the 13 charges filed against him by the U.S. Department of Justice (DoJ). SBF was indicted on eight criminal counts last December for his inept oversight of the FTX digital asset exchange and its affiliated market-maker Alameda Research.

SBF was originally charged with wire fraud, commodities fraud, securities fraud, money laundering, conspiracy to commit all of the above, and campaign finance law violations. In February, the DoJ added charges of bank fraud, to which bribery of Chinese officials was added in March.

The motions ask the U.S. District Court for the Southern District of New York to dismiss all criminal charges except those alleging that SBF conspired to commit commodities fraud, conspired to commit securities fraud, and conspired to commit money laundering. SBF’s legal team is still contesting those three charges.

The Court has given the DoJ until May 29 to respond to Monday’s motions before Judge Lewis Kaplan hears oral arguments on June 15. SBF’s trial is tentatively scheduled for October.

Pretrial Motion #1 supporting the dismissal requests claims that FTX succumbed to “market forces” sparked by 2022’s crypto winter, aka the implosion of a smorgasbord of overly leveraged Ponzi schemes. This claim blatantly ignores the ample evidence that SBF was orchestrating a fraud that Bernie Madoff would have found audacious.

The motion accuses the DoJ of filing “vague and non-specific charges” against SBF in “a classic rush to judgment” that pre-empted “traditional civil and regulatory processes following their ordinary course to address the situation.”

SBF’s attorneys further claim that the DoJ’s superseding indictments—which were “not only improperly brought but legally flawed”—violated the Extradition Treaty that saw SBF repatriated from his Fortress of Ineptitude in the Bahamas. The DoJ allegedly failed to obtain the Bahamian government’s “express consent” to charge the former crypto wonder boy with additional crimes after returning to U.S. soil.

Other motions challenge the “invalidity of the ‘right to control’ theory of property fraud” and the DoJ’s alleged failure to “identify a valid property interest that [SBF] obtained from Alameda’s lenders or from FTX customers in violation of the wire fraud statute.”

The DoJ also apparently failed to “state an offense” related to the commodities fraud charges and “allege facts occurring almost entirely outside the United States and fail to allege the required ‘connection with’ regulated sales or transactions.”

SBF’s attorneys aren’t short of chutzpah, stating that “the Government, in hindsight, may dislike or disapprove of business practices of the cryptocurrency industry, FTX, or even [SBF]––but this does not give it license to turn them into federal crimes.”

Besides, SBF valiantly “tried to step in and stabilize the collapse” of the “cryptocurrency ecosystem” in 2022. Of course, he was doing so with FTX customers’ money, and his prime motivation for his many proposed bailouts was getting his hands on the digital assets held by bankrupt crypto firms so he could plug the holes in his Swiss cheese balance sheets.

Buy LedgerX now, and we’ll throw in a set of steak knives

Meanwhile, the U.S. Bankruptcy Court in Delaware overseeing what’s left of FTX has approved the Debtors’ sale of the LedgerX derivatives trading platform. M7 Holdings—a private equity group affiliated with Miami International Holdings, owner of multiple traditional securities exchanges—has agreed to pay $50 million for LedgerX.

That sum isn’t one-sixth of what FTX paid for LedgerX in 2021, back when SBF planned to use the derivatives platform—which held a license issued by the U.S. Commodity Futures Trading Commission (CFTC)—as a backdoor method of adding derivatives to the offering of FTX’s U.S.—based exchange FTX.US.

Fire sale or not, the Debtors expressed relief at increasing the supply of hard cash they needed to repay FTX’s numerous creditors. This week, the Debtors also recovered nearly $58 million in FTX-owned digital assets from the OKX exchange.

Last month, the Debtors reported recovering $7.3 billion in cash and digital assets of varying liquidity, nearly $4 billion short of FTX’s outstanding debts to its former customers and commercial clients.

Debtors seek Genesis billions

The Debtors are now looking to Genesis Global Capital (GGC) to make up much of that $4 billion shortfall. The Debtors claim they are entitled to claw back $3.9 billion in payments made by FTX to GGC “and non-debtor affiliates” shortly before FTX’s early-November bankruptcy filing. GGC, a wholly-owned crypto lending subsidiary of Digital Currency Group (DCG), suspended withdrawals shortly after FTX’s bankruptcy and itself declared bankruptcy in January.

Crypto’s overly incestuous entanglements meant that GGC’s demise also wrought havoc on numerous other firms. Many of these impacted firms cried foul when they learned that FTX’s market-maker Alameda had repaid $1.8 billion in loans to GGC shortly before SBF’s world collapsed. At the same time, GGC and affiliated entities also withdrew another couple of billion.

The creditors claim GGC and related DCG parties were effectively made whole with FTX customer cash. All these repayments/withdrawals occurred within the 90-day period prior to FTX’s bankruptcy, which under U.S. law should permit the creditors to claw back these funds.

The Court will hear arguments by the respective parties on May 25. The judge is basically being asked to play Solomon here, given that one bankrupt company is asking for another bankrupt company’s cash. Regardless of the outcome, there’s simply insufficient cash to pay all creditors, so someone’s walking away from this debacle empty-handed.

DCG, Silbert on the ropes

DCG is itself flirting with collapse after GGC creditors claimed that the parent company—and DCG founder Barry Silbert—wasn’t contributing anywhere near enough to cover its subsidiaries’ obligations. In February, an agreement in principle was reached between DCG, digital lender Gemini Earn and other GGC creditors, but this deal appears to have fallen apart.

DCG issued a statement on April 25 claiming that “a subset of creditors have decided to walk away from the prior agreement…and raised all new demands.” While DCG insisted it was committed to a fair outcome, it said the company “will have to weigh any new demands against the concessions we’ve previously made.”

Last Friday, the Court appointed a mediator to negotiate “the amount, form, timing and other terms and conditions of DCG’s contribution to the debtors’ reorganization plan.” The negotiation aims to resolve these issues within 30 days.

Late last month, Gemini claimed that DCG “risks defaulting on its obligations” if it failed to make a scheduled $630 million contribution to the GGC bankruptcy estate this week. On Tuesday, DCG announced that it was “in discussions with capital providers for growth capital and to refinance its outstanding intercompany obligations with Genesis.” DCG added that this capital was needed to “provide further financial flexibility.”

All of the major parties involved in this fiasco are currently in U.S. authorities’ bad books for various transgressions. The U.S. Securities and Exchange Commission (SEC) filed civil charges against GGC and Gemini in January for offering unregistered securities to the public. That same month, Bloomberg reported that both the SEC and DoJ were probing DCG’s financial transfers between its subsidiaries, including GGC.

DGC’s ability to weather this storm is anything but assured. Forbes recently reported on a letter sent to DGC shareholders in which the company celebrated repaying a $350 million loan during Q1, but reported negative EBITDA of $6 million.

DCG is confidently projecting full-year EBITDA of $140 million (excluding GCC), but the real picture is likely far worse, given Charlie Munger’s view that ‘EBITDA’ is a substitute for ‘bullshit.’

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Ethereum, FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.