Sam Bankman-Fried risks pre-trial custody as judge losing patience

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Sam Bankman-Fried (SBF) could find his bail revoked if he doesn’t start abiding by the terms of his release and/or help prosecutors take down an even bigger ‘crypto’ scam than his own.

On July 26, SBF was in Manhattan trying to convince U.S. District Court Judge Lewis Kaplan not to tighten his bail conditions. Last week, the U.S. Attorney for the Southern District of New York wrote Kaplan to express alarm at reports the founder of the bankrupt FTX digital asset exchange had leaked private writings of Caroline Ellison, SBF’s ex-girlfriend and former CEO of the SBF-owned market-maker Alameda Research.

Concerned at SBF’s apparent second attempt to influence a witness preparing to testify against him in court, Assistant U.S. Attorney Danielle Sassoon told Kaplan that the government was seeking to revoke SBF’s bail and detain him until his criminal trial gets underway in October. Sassoon said the government believes “no set of release conditions” appears strict enough to convince SBF that he needs to actually observe them.

SBF is permitted only limited use of digital communication devices while under house arrest at his parents’ home in California. But government-imposed monitoring devices show SBF has contacted various journalists—including biographer Michael Lewis—over 1,000 times since he was extradited from the Bahamas last December.

SBF’s attorneys tried to argue that their client had a right to defend his reputation against the thousands of highly negative articles written about him since FTX’s implosion last November. They also argued that putting SBF behind bars would limit his capacity to participate in his legal defense.

Kaplan ultimately agreed to issue a temporary order governing extrajudicial statements that limit all parties’ public commentary on the case, including “statements about the identity, testimony, or credibility of prospective witnesses.” SBF was also ordered not to delegate the making of such statements to friends, family, or anyone else.

Kaplan gave the parties until August 3 to submit their input into the wording of a more permanent order. As for prosecutors’ request for revoking SBF’s bail, Kaplan said he was taking this request “seriously” and suggested that SBF “better take it seriously too,” as this latest escapade suggested there was “probable cause” to grant the request.

Ellison, along with FTX co-founder Zixiao ‘Gary’ Wang and FTX engineering director Nishad Singh, has pled guilty to her role in the massive fraud that robbed billions of dollars from FTX customers. Despite his co-conspirators flipping on him and the mountain of evidence indicating his decisive role in all major FTX/Alameda decisions, SBF has pled not guilty to the raft of criminal and civil charges against him.

SBF’s determination to maintain his ‘innocence’ in the face of all evidence to the contrary is somewhat more understandable given the recent revelation that he’d made a $10 million ‘loan’ to his father—from FTX customer funds—that is now being used to pay his legal fees.

Campaign finance charge dropped

The DoJ initially slapped SBF with eight criminal charges, including various types of fraud (wire/securities/commodities), money laundering, and campaign finance violations. Bank fraud was later added to the list, as was violating the Foreign Corrupt Practices Act for allegedly bribing Chinese officials to release $1 billion in frozen digital assets.

In June, prosecutors agreed to defer prosecution on five of these charges based on SBF’s insistence that they were added after he’d agreed to be deported from the Bahamas. A separate trial on those five charges is scheduled to streamline the current prosecution next March.

But the DoJ agreed Wednesday not to proceed to trial on the charge of conspiring to commit unlawful campaign contributions. The DoJ told Kaplan that the Bahamian government had informed its U.S. counterpart that it “did not intend to extradite the defendant on the campaign contributions count.” The DoJ was dropping the charge to honor its treaty obligations to the Bahamas.

We’re almost surprised that any member of the Republican party has yet to issue a tweet claiming the fix is in to bury details of SBF’s multi-million-dollar donations to the Democrats in order to protect President Joe Biden. Never mind the multi-million-dollar donations to Republican figures by FTX/Alameda execs; Something something Hunter Biden.

A real Tether truther

Recent developments in a 2019 class action lawsuit against the parent company of the Tether (USDT) stablecoin and its affiliated Bitfinex exchange are raising the tantalizing (if unlikely) prospect of SBF playing a key role.

The plaintiffs, a mix of institutional and retail investors, accused Tether of issuing billions in unbacked—not supported 1:1 with the U.S. dollar—USDT tokens that were used to buy tokens such as BTC on Bitfinex. This “artificially inflated demand for cryptocurrencies and caused prices to spike” during the 2017-18 BTC bubble.

A widely read study released after that bubble burst found USDT was used to pump up BTC’s value on Bitfinex whenever the token showed signs of flagging. The lawsuit claimed that $450 billion was lost when the bubble burst.

During its first 2.5 years of existence, Tether issued less than $55 million USDT. This total grew by over $2.4 billion in the 12 months spanning March 2017 to March 2018. Tether continued to issue all this additional USDT despite its inability to maintain banking relationships anywhere in the world (that is, outside the Bahamas).

An amended complaint in 2020 singled out two wallet addresses that received 72% of all USDT issued by the end of 2018. While some issued USDT went directly into Tether customers’ wallets, these two wallets transferred their contents directly to Bitfinex-controlled accounts on Bitfinex and the Poloniex exchange. In other words, Tether and Bitfinex were issuing new USDT to themselves without the pesky need to take in actual dollars as reserve assets.

Notably, these two wallet addresses received a total of 400 million USDT nine days before the January 24, 2018, publication of the Tether/Bitfinex wash trading report, after which transfers to these addresses halted completely.

In 2021, the class action filings began to mention an ‘Anonymous Trader’ with knowledge of the activities involving these two wallets. One filing claims the Trader’s information is spread across “large Excel files containing significant transaction data, Slack transcripts, Skype and Telegram chat logs, e-mails, support tickets, and banking records.”

The plaintiffs seek to depose this “arbitrage trader” to see what insights he might have into Tether/Bitfinex decision-making. Sadly, the filings have been heavily redacted, leaving us only to guess the Trader’s identity, although we know he is based outside the U.S.

A new filing Wednesday on behalf of the defendants says the Trader has informed them that he has been talking to the plaintiffs “regarding a potential voluntary deposition.” The defendants’ legal team is discussing the parameters of such a deposition “that would satisfy the Anonymous Trader’s privacy and security concerns.”

The defendants asked U.S. District Court Judge Katherine Polk Failla to give the parties until Monday, July 31, to submit a joint letter “setting forth the agreed terms of a deposition and raising with the Court any remaining areas of disagreement.”

Orange is definitely your color

SBF founded Alameda in 2017 and claimed to have made his early fortune by arbitrage trading the so-called ‘Kimchi premium,’ although doubts have been raised about the validity of these claims. Regardless, Alameda quickly became the largest recipient of USDT, with nearly all those billions forwarded to FTX after the exchange launched in 2019.

However, most of the USDT sent SBF’s way came later than the period detailed in the class action, so the likelihood of SBF being Johnny Anonymous seems slim. But the obvious chumminess between SBF and the Tether crew—they shared the same Bahamas banker—makes it extremely likely that SBF has plenty of independent dirt regarding Tether’s propensity for sending unbacked USDT to its most-favored customers.

Since SBF was charged last year, there’s a growing opinion that the only way he doesn’t end up doing a hard time—or at least, less time than he deserves—is by ratting out the other major crypto crooks still standing; Binance and Tether. The sheer volume of damning internal communications contained in the criminal/civil charges against him—as well as the cooperation of his former lieutenants—makes his conviction a certainty.

And yet, SBF continues acting like he’s the real victim here. Thankfully, his belief that the rules don’t apply to him keeps butting up against reality, such as the DoJ calling for him to spend the rest of the pre-trial period in prison. Judge Kaplan also appears weary of SBF’s antics, which won’t help SBF once the trial gets underway.

SBF’s options are few, and the clock is ticking. Speak now or forever hold your peace. Or hold your prison pillow tight as you cry yourself to sleep every night for the next decade, wondering what might have been had you not been so bloody blind to reality.

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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.