Dan Friedberg’s criminal role laid bare in FTX CEO’s report

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Former FTX lawyer Daniel Friedberg played a key role in the illegal commingling of customer and corporate funds that led to the collapse of the once mighty digital asset exchange.

On Monday, John J. Ray III, the court-appointed CEO of what’s left of FTX and its affiliated market-maker Alameda Research, filed its second interim report on the monkey business that went on behind the scenes at FTX founder Sam Bankman-Fried’s disgraced ‘crypto’ empire.

Ray’s first report, issued in April, laid out the damning history of “hubris, incompetence, and greed” that led to FTX, Alameda, and over 100 affiliated entities filing for bankruptcy protection last November. The report detailed the utter lack of adherence to standard corporate controls and the blatant disregard for protecting FTX customers’ cash from SBF’s desire to keep throwing dice in his crypto casino.

While SBF is already facing a raft of federal civil and criminal charges, Ray’s second report pours more fuel on the fire of outrage regarding FTX senior management’s willingness to break laws to line their pockets.

Much of the report’s details aren’t necessarily new, such as the fact that FTX insiders knew as early as August 2022 that there was an $8.9 billion hole in their balance sheet due to Alameda making awful bets with FTX customer cash.

Not so coincidentally, August 2022 also saw Alameda’s former co-CEO Sam Trabucco—who for some reason has yet to face his own charges—abruptly decide to sail off into the sunset on his new boat, the financing for which remains a subject of some suspicion.

The report contains a truly WTF graph of the sprawling web of entities utilized by FTX/Alameda to move money around. Ray notes that the “extensive commingling and misuse of funds” under the previous management has made it “extremely challenging to trace substantial assets of the Debtors to any particular source of funding, or to differentiate between the FTX Group’s operating funds and deposits made by its customers.”

Ray quotes a former Alameda employee’s statement that the FTX Group “made no meaningful distinction between customer funds and Alameda Funds.” Alameda was a going concern for over a year before the FTX exchange launched in April 2019, and FTX initially relied on Alameda’s bank accounts for customer deposits and withdrawals.

Attorney-1, Friedberg-0

The difficulties in obtaining secure banking relationships by FTX—and later Alameda—led to a greater role for a “senior FTX Group attorney,” identified in the report only as ‘Attorney-1.’ This low-flying legal eagle is credited with activities known to be associated with Friedberg, who formerly served as counsel for not only FTX but also for SBF in a personal capacity.

Friedberg has yet to be charged in this case, possibly because of his ongoing cooperation with the feds. But Ray’s report indicates there is ample reason to charge Friedberg, who appears to have learned no lessons from his notorious history of helping to cover up an insider cheating scandal at a now-defunct online poker company that stole millions from its players.

Ray’s report details SBF’s cynical claims about welcoming regulation of his companies, only to relocate FTX’s operations whenever a jurisdiction made moves towards increasing digital asset oversight. When FTX Group companies moved from Hong Kong to the Bahamas in mid-2021, Attorney-1 “offered a former Bahamian government official, acting as an attorney, a $1 million ‘bonus’ to procure a necessary business license … within ten weeks.” Said license was obtained “less than six weeks later.”

Friedberg was also at the heart of FTX’s bank fraud efforts. Ray’s report cites FTX’s incorporation in 2020 of “a new wholly owned entity called North Dimension Inc,” which was set up for the sole purpose of allowing FTX to obtain bank accounts. Attorney-1 “falsely represented to a bank that North Dimension was a crypto trading firm with substantial operations, when in fact North Dimension was a shell company with no operations.”

In January, NBC News reported on what appeared to be a fake electronics retailer bearing the North Dimension brand, with a ‘contact’ page that cited the same California address as FTX’s U.S.-based exchange FTX.US. North Dimension was incorporated in Delaware in August 2020 by the law firm of Fenwick & West, where Friedberg formerly served as chair of the firm’s payments practice division.

But within months of North Dimension securing U.S. bank accounts in April 2021, many banks began questioning and/or rejecting wire payments to/from North Dimension. Notwithstanding these growing suspicions, these accounts had seen more than $3 billion transit through them by the end of 2021.

Methinks he doth protest too much

We’d be remiss if we didn’t point out that the Wall Street Journal reported Wednesday on the likelihood that Attorney-1 is Friedberg. However, an anonymous source said to be “close to Friedberg” claimed that Danny boy “didn’t know about the misuse of FTX customer funds.”

And yet Ray’s report insists that Attorney-1 “actively facilitated and covered up the FTX Group’s commingling of customer and corporate funds. Attorney-1 caused and allowed false information to be conveyed to customers, banks, auditors, investors, and other third parties.” And unlike Friedberg’s anonymous character references, Ray brought receipts.

For instance, Attorney-1 “instructed an FTX Group employee to copy and paste into the application for North Dimension’s bank accounts the information that Alameda had previously submitted on its own applications to open its bank accounts.”

When a bank asked some due diligence questions, the FTX camp “falsely described North Dimension as a proprietary and OTC trading firm with 2,000 counterparties and average monthly trading volume of $10 million.” Attorney-1 also understood that FTX was lying through its teeth when it told the bank that North Dimension wasn’t a money services business.

Furthermore, Attorney-1 was identified as North Dimension’s general counsel and chief compliance officer. Attorney-1 also directed a law firm to create a bogus corporate register of members and managers “in order to give North Dimension, a purely shell company, a false air of legitimacy.”

A junior FTX attorney who’d only been with the company three months quickly discovered the North Dimension subterfuge and “confronted Attorney-1 about the serious operational and control deficiencies he had identified.” Attorney-1 “provided no substantive response” when they met the same day, although Attorney-1 did inform the junior attorney that he was being immediately terminated.

Friedberg’s buddy told the WSJ that the junior attorney wasn’t let go for whistleblowing but “due to other employment concerns.” The Friedberg pal further claimed that Friedberg “didn’t know that North Dimension was used for FTX customer funds.” (If you’re starting to wonder who ties Friedberg’s shoes in the morning, you’re not alone.)

Is there a doctor(ed) payment agreement in the house?

When FTX hired an external auditor in 2021 in preparation for the exchange’s expected initial public offering (IPO), Attorney-1 “conceived of, drafted and backdated—by nearly two years—a sham intercompany agreement” intended to “legitimize certain improper transfers and arrangements” between FTX Group companies.

Attorney-1 directed an outside law firm to craft the document to try to explain why Alameda held “FTX cash … for the benefit of” FTX customers. The produced document claimed that Alameda provided “cash management” services for FTX.

But Attorney-1 mocked up his own version of this document he called “Intercompany Treasury Management and Subordination Agreement,” later renaming it a “Payment Agent Agreement.” The document, which claimed that Alameda provided mere “payment services” to FTX, was then backdated by nearly two years to coincide with FTX’s mid-2019 launch.

Tellingly, SBF signed this document using a “wet signature” (aka freehand) rather than his usual habit of signing with DocuSign, which includes an electronic date stamp. And in keeping with this gang that couldn’t fraud straight, the document’s signature page features a footer bearing the original ‘Intercompany…Agreement’ title.

The purpose of all this subterfuge appears to have been to convince the auditor “that fiat currency of FTX.com customers did not need to be recorded in FTX Trading Ltd.’s audited financials.” At any rate, while the IPO never went ahead, FTX later used the auditor’s thumbs-up to help raise $400 million in a Series C financing round that closed in January 2022.

Once again, we’ll leave the last word to Friedberg’s WSJ confidante—who were not completely convinced isn’t Friedberg in one of those fake-glasses-and-mustache disguises—who ‘disputed’ the Ray report’s characterization of this intercompany agreement without offering further specifics.

The not-yet-a-prisoner’s dilemma

It’s unknown to what extent Friedberg, who resigned the same week that FTX filed for bankruptcy, is cooperating with the feds in their prosecution of SBF. But Friedberg must be opening his kimono as wide as it will go, as Ray’s report appears to offer clear evidence of bank fraud, conspiracy, Foreign Corrupt Practices Act violations, and countless other potential charges.

Moreover, he’s hardly the only former FTX/Alameda alum to be dishing the dirt on SBF. Caroline Ellison, Gary Wang, Nishad Singh, and (possibly) Ryan Salame have already lined up window seats on the Department of Justice’s (DOJ) Cooperating Witness Express, so Friedberg may be pressed to give the feds something they don’t already have.

Friedberg’s central role in FTX/Alameda’s financial dealings could give him insights into the real story behind the Tether (USDT) stablecoin’s convoluted financial history. By 2021, Alameda was the top recipient of USDT, receiving nearly $37 billion of the allegedly U.S.-dollar-backed tokens (86% of that in 2021 alone). It’s anyone’s guess how much actual money Alameda sent Tether to purchase these stablecoins.

Friedberg likely knows the truth behind Tether’s fictions, in part because of his ties to SBF but also because of his chummy history with Stuart Hoegner, Tether’s general counsel. Both Hoegner and Friedberg worked together at Excapsa, the parent company of Ultimate Bet, the online poker company for which Friedberg worked so hard to cover up massive fraud.

Friedberg clearly learned all the wrong lessons from this experience, despite his cover-up efforts being made public a few years after the fact via a clandestine audio recording. CoinGeek sounded the alarm over Friedberg’s laughable role as FTX’s ‘compliance’ chief way back in August 2021.

Following Ultimate Bet’s demise, Friedberg and Hoegner both morphed into ‘crypto’ advisers, appearing together on a number of conference panels, including one in 2013 in which Friedberg bragged that he “works closely with Stuart on a lot of [digital asset] issues.”

This enduring alliance likely gave Friedberg no shortage of insider knowledge of the real reason behind Tether’s abject refusal to allow a third-party audit of the reserves allegedly backing its $83 billion in issued USDT. The question is: will Friedberg seize this opportunity before SBF does so himself?

Just not SBF’s day

In what was seen as a glimpse into how SBF plans to defend himself in court, his criminal defense team recently filed a motion to force the government to produce documents related to Friedberg’s legal alma mater, Fenwick & West (F&W). SBF sought similar documents from the FTX Debtors, aka the Ray-led team overseeing the exchange’s messy bankruptcy proceedings.

On Tuesday, U.S. District Court Judge Lewis Kaplan denied this motion, agreeing with the DOJ’s arguments that neither F&W nor the FTX Debtors are part of the “prosecution team” and thus, the government “has no obligation to produce materials that are not within its possession, custody, or control.” Kaplan further rubbished SBF’s motion as “a fishing expedition” that didn’t meet legal standards for production.

Kaplan also rejected motions SBF’s team filed in May to dismiss 10 of the 13 charges filed against him (so far). The DOJ had agreed to split five of the charges into a separate trial that will get underway sometime next year but was determined to prosecute SBF on the remaining eight charges in a trial currently scheduled to begin on October 2.

We’ll spare you the minutiae, as Kaplan’s summary of his rejection of SBF’s motions was short and to the point. The arguments made by SBF’s team “are either moot or without merit.” The same might be said for any remaining justifications the FTX/Alameda rats might have not to rat on their former boss.

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