Sam Bankman-Fried has succeeded in deferring prosecution on five of his criminal charges, while Crypto.com appears to be engaging in the same kind of antics that got SBF in so much trouble.
This week, the Financial Times reported that the Singapore-based Crypto.com digital asset exchange operates proprietary trading teams that trade against their rank-and-file customers. The FT cited “five people with direct knowledge of the matter,” at least one of whom said exchange execs provided external trading houses with “absolutely dramatic sworn statements that Crypto.com was in no way involved in trading.”
This proprietary trading team allegedly operates both on Crypto.com as well as rival exchanges and has the ‘sole goal’ of making money. A Crypto.com spokesperson told the FT that the exchange “does not rely on proprietary trading as a source of revenue” and that the trading team’s goal is more about ensuring the exchange “is risk neutral by hedging these positions on a number of venues,” including Crypto.com.
The FT sources also said Crypto.com employs internal market-making teams but instructs employees to “say there is no internal market-maker type operation.” Crypto.com denied telling its staff to lie and told the FT that its internal market-maker “is treated exactly the same as third-party market-makers.” Crypto.com insisted that “this is not a controversial practice.”
Not for ‘crypto’ exchange operators, perhaps, but as U.S. regulators have repeatedly observed, no other financial sector would tolerate a single platform commingling so many aspects of trading. And with the feds having taken the gloves off when it comes to reining in crypto excesses at home or abroad, Crypto.com could be next in the firing line.
In March, the U.S. Commodity Futures Trading Commission (CFTC) exposed the existence of around 300 “house accounts” on the Binance exchange, all of which were/are “directly or indirectly owned” by founder Changpeng ‘CZ’ Zhao. Binance customers were never informed of these accounts, nor the fact that CZ was using insider knowledge to actively trade against his customers for fun and profit.
The Securities and Exchange Commission (SEC) accused Binance of using these accounts to engage in fraudulent wash trading to stoke consumer interest in a new token listing. At some points, wash trading through CZ’s accounts constituted anywhere from 70% to 99% of all trades in specific tokens.
This phenomenon appears endemic across the exchange sector. U.S.-based companies such as Coinbase (NASDAQ: COIN) and Gemini have been accused of rub-a-dub-dubbing their trading volume on certain assets occasionally. And, of course, FTX and its affiliated market maker Alameda Research were routinely engaged in predatory trades targeting their unsuspecting rank-and-file customers.
Trials and tribulations
Speaking of FTX, last week saw Judge Lewis Kaplan of the U.S. District Court for the Southern District of New York grant a federal prosecutors’ request to sever five of the 13 counts brought against SBF for the crimes that led to the collapse of his digital asset empire.
The government requested the charges be severed and scheduled for a separate trial after a Bahamas court ruled that the feds had added new charges against SBF after the mop-haired miscreant had agreed to be extradited to the U.S. last December from the Bahamas, FTX/Alameda’s former base of operations.
SBF’s attorneys initially sought to have the additional charges dismissed outright, but the feds offered to sever these charges from the original eight cited in the extradition deal. SBF is currently out on bail at his parents’ home in California with strict limitations on his access to technology after being caught trying to influence a former associate who might be called as a witness against him.
SBF’s trial on the original eight charges—wire fraud, securities fraud, money laundering conspiracy, etc.—is scheduled to get underway in Manhattan on October 2. Assuming the feds fully intend to prosecute SBF on the other five charges—which include bribing Chinese government officials to unfreeze Alameda accounts on China-based crypto exchanges—a separate trial will commence on March 11, 2024.
And this Berg, you cannot change
A couple of weeks ago, SBF’s attorneys offered a preview of how they might present their client’s defense. SBF’s lawyers asked the court to force the Department of Justice (DoJ) to produce documents related to the law firm of Fenwick & West LLP—former outside counsel for FTX, Alameda and SBF—that the defense team suspects may be “potentially exculpatory.”
Several F&W attorneys, “including Dan Friedberg and Can Sun,” eventually went to work in “senior in-house counsel positions at FTX” but “continued to liaise regularly with their former colleagues” at F&W. With F&W being so “deeply involved” in FTX’s affairs, SBF’s attorneys claim F&W “provided legal advice on many of the issues that are at the core” of the case against him.
Friedberg, as readers of this site will recall, aided the cover-up of a multi-million-dollar insider cheating scandal at an online poker site nearly 20 years ago. Tellingly, Stuart Hoegner, general counsel for the controversial Tether stablecoin, worked at the same online poker company. Both men eventually reinvented themselves as ‘crypto’ attorneys a decade ago and the grifting began anew.
F&W’s name was on the incorporation papers of North Dimension, a Delaware company set up as a pass-through entity to allow U.S. customers to deposit funds to FTX when (most) U.S. banks were unwilling to handle crypto transactions. Publicly, North Dimension posed as an online electronics reseller, complete with a barebones non-functional website.
The feds have accused SBF of providing false information to U.S. banks to open accounts in North Dimension’s name through which FTX.com could receive deposits. SBF’s attorneys claim that F&W “provided real-time legal advice to FTX about both the opening of the North Dimension bank account and whether or not FTX needed to register as a money services business.”
SBF’s attorneys further claim that F&W’s “advice was that FTX.com, the international exchange, did not need to register as a money services business but that FTX.US, the U.S.-based exchange that serviced U.S. customers, did need to register.”
F&W is also alleged to have reviewed internal agreements in which Alameda loaned huge sums of money to SBF and other senior FTX staff. Finally, SBF’s attorneys claim it was F&W who advised him to use Signal and other encrypted messaging apps when conversing with senior staff.
SBF’s attorneys asked the court to compel both F&W and the government to produce the requested documents by June 20. But attorneys representing the FTX Debtors—the court-appointed entity currently struggling to make sense of SBF’s tangled finances—filed a motion opposing SBF’s request, based on their belief that producing these documents would violate the FTX Debtors’ attorney-client privilege. On June 12, Kaplan said he was still mulling the matter.
Friedberg is believed to be cooperating with the feds in their SBF prosecution (one of many former SBF associates who’ve seen the wisdom in throwing him under the bus). Given his neck-deep involvement in the sketchy activity described above, it’s probably the only reason Friedberg’s not in jail at the moment.
Lawyer up, up and away
Speaking of the FTX Debtors, the various firms handling the FTX/Alameda corpse dissection continue to file significant bills with the U.S. Bankruptcy Court tasked with this onerous proceeding.
One of the main beneficiaries is Sullivan & Cromwell LLP, which is seeking $37.5 million for its legal services from February 1 through April 30, nearly one-third of the total $121.8 million billed to the Debtors for legal and advisory costs during the period.
S&C formerly represented both FTX and FTX.US and—according to SBF—put “extreme pressure” on him to file for bankruptcy last November. In January, SBF lost a legal bid to bar S&C from further involvement in FTX’s affairs.
Another big dipper into the post-mortem pool is restructuring consultancy Alvarez and Marsel, who billed $35.9 million in fees plus $1.1 million in expenses. At this rate, there might not be much meat left on FTX’s bones to compensate the roughly nine million customers who had assets on the exchange when it gave up the ghost.
The customer is always [redacted]
And while we’re on the subject of customers, among the more interesting FTX bankruptcy filings was last week’s order to redact the names, addresses, and email addresses of FTX’s customers from any filings with the court or documents made publicly available. This stands in contrast to FTX’s lengthy list of corporate creditors—not including the IRS—which was made public in January.
While unredacted copies of the customer list will be provided to several figures involved in the bankruptcy process—as well as to requests from the DoJ, SEC, and the state of Texas—the apparent intent is to preserve the sanctity of the list to enhance its value in a potential sale of FTX’s operations.
Prospects of an ‘FTX 2.0’ have been growing since last month, when FTX’s court-appointed CEO John J. Ray III billed the court for time spent discussing a possible reboot of the exchange with various creditors and debtors.
Clearly, the FTX brand has acquired a rather toxic aroma over the past year or so, but with legal challenges apparently just beginning for Coinbase, Binance.US, and other domestic rivals, FTX may actually be ahead of the curve here. If/when a reboot happens, SBF can allow himself a quiet fist pump, then quickly get back to stamping names on license plates for 35¢ an hour.
Follow CoinGeek’s Crypto Crime Cartel series, which delves into the stream of groups—from BitMEX to Binance, Bitcoin.com, Blockstream, ShapeShift, Coinbase, Ripple,
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.
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