Another day, another flood of damning developments in the ongoing FTX debacle, with fears of contagion showing no sign of abating.
Last week’s bankruptcy court declaration by CEO John J. Ray III, newly appointed CEO of the crippled digital asset exchange, revealed that the firm employed a slapdash approach to accounting, leaving everyone in the dark as to what assets FTX actually held at the time of last Friday’s Chapter 11 filing in Delaware.
This calculation has been further complicated by Thursday’s announcement by the Securities Commission of the Bahamas (SCB) that on November 12, the SCB “took the action of directing the transfer of all digital assets of FTX Digital Markets Ltd. (FTX DM) to a digital wallet controlled by the Commission, for safekeeping.” FTX’s former CEO/founder Sam Bankman-Fried reportedly organized the transfers at the Bahamian government’s direction.
The announcement sheds more light on the previous weekend’s mysterious transfer of “hundreds of millions of dollars” in assets from digital wallets known to belong to FTX to wallets unknown. Speculation had ranged from insider theft to a third-party hack, with no one seemingly able to offer a definitive explanation. Well, now we know. Why we had to wait a week is the question, but nothing in this tawdry tale makes much sense, so whatever.
The SCB added that “it is not [our] understanding” that FTX DM is a party to the Delaware Chapter 11 proceedings. Left out of the 130-odd companies cited in last week’s Chapter 11 filing—by accident or on purpose—FTX DM filed for Chapter 15 protection on November 15 in the Southern District of New York (SDNY), not Delaware. The Chapter 15 process recognizes foreign bankruptcies, which could foreshadow a nasty jurisdictional squabble over who’s in charge of what here.
Shortly before the SCB’s admission, what’s left of FTX filed an emergency motion in Delaware bankruptcy court on Thursday, arguing for the Chapter 15 case to be transferred to Delaware and seeking a stay on any proceedings in the SDNY. The filing argues that the SDNY was chosen “specifically to keep FTX DM away from the Debtors’ Chapter 11 Cases.”
The filing cites text messages SBF recently exchanged with a Vox reporter in which SBF expressed regret for having filed for bankruptcy and revealed his delusional plans to rescue FTX if he could just “win a jurisdictional battle vs Delaware.” The filing accuses SBF of “supporting efforts” of the Bahamas-appointed joint provisional liquidators “to expand the scope of the FTX DM proceeding in the Bahamas [and] undermine these Chapter 11 Cases.”
The Vox article was only the latest example of SBF’s apparent inability to stop flapping his gums (and/or thumbs), which may have contributed to a change in his legal representation. Bloomberg reported Friday that Martin Flumembaum, who toils at the high-priced firm of Paul, Weiss, Rifkind, Wharton & Garrison, kicked SBF to the curb due to unspecified ‘conflicts’ (read: I can’t believe you don’t shut up). SBF’s new lawyer is one David Mills, who works with SBF’s dad at Stanford University.
This is far from the first legal turf war involving Bahamas-based firms and Delaware’s bankruptcy courts. Consider the Baha Mar integrated resort casino, a $4 billion mega-project that lay semi-completed for a couple years while lawyers argued over its fate. Its original developer Sarkis Izmirlian failed to meet development benchmarks in a timely fashion, which caused the Chinese state-run bankers who’d lent him the bulk of his capital to start foreclosure proceedings.
Izmirlian filed for Chapter 11 protection in Delaware, arguing that he was only in this predicament because a Chinese state-run construction company had deliberately slow-rolled their work. Whether or not Izmirlian’s suspicions were correct, he lost his jurisdictional fight. Bahamian courts appointed a local liquidator, and the project was ultimately sold to yet another Chinese company and finally opened to the public in 2017.
Just how big was FTX’s amphetamine budget?
As for the non-digital assets that FTX creditors may be hungrily eyeing, the Wall Street Journal reported Friday that SBF personally claimed $300 million of the $420 million that FTX raised from VCs in an October 2021 funding round. This would be in addition to the $1 billion loan SBF received from the SBF-owned market-maker Alameda Research that was reported on FTX’s Delaware bankruptcy filing.
Nobody seems to know what SBF did with all this cash—FTX’s 2021 financial statements claimed the $300 million was being held on an “operational expediency” basis for a “related party”—but one thing is clear; SBF didn’t use it to boost pandemic protection efforts, as his ‘effective altruism’ schtick would have led us to believe.
Friday also brought an exclusive report from Reuters on the machinations behind SBF’s plot to brand FTX as the ‘most regulated’ digital asset exchange. The plot involved FTX spending up to $2 billion on “acquisitions for regulatory purposes” in order to become “as licensed as reasonably possible.”
For instance, FTX took a 10% stake in stock trading platform IEX Group because doing so could get SBF into the room with members of the U.S. Securities and Exchange Commission (SEC), including chairman Gary Gensler. In March, SBF attended a meeting with Gensler and IEX CEO Brad Katsuyama to inform the SEC of the FTX deal and to discuss the possibility of IEX expanding into digital asset trading with FTX-supplied infrastructure. Even had the traditionally crypto-skeptical Gensler been inclined to grant this request, FTX imploded before anything could happen.
In 2021, FTX acquired futures exchange LedgerX LLC in order to gain access to those companies’ licenses with the U.S. Commodity Futures Trading Commission (CFTC). SBF had lobbied furiously for the CFTC to be given primary responsibility for overseeing digital assets, based in part on the CFTC’s enforcement budget being a fraction of the SEC’s more robust unit.
SBF attempted to amend one of the LedgerX licenses to permit derivatives trading at FTX’s U.S.-licensed offshoot FTX US. This application to revise the CFTC license was withdrawn following FTX’s collapse.
SBF did reportedly use LedgerX’s licenses to pry more money out of venture capital funds, telling credulous investors that the licenses provided “regulatory moats” that would bar rival exchanges and burnished FTX’s supposed status as the “cleanest brand in crypto.”
The importance of wearing clean underwear every day
Speaking of brand awareness, the Financial Industry Regulatory Authority (FINRA), the U.S. self-regulatory body for brokerages, announced this week that it hopes to rein in its members’ more excessive promotional claims re digital assets.
FINRA members have been asked to submit “all retail communications that were distributed or made available by the firm or its affiliate(s) on its behalf that refer to, relate to, or concern a Crypto Asset or a service involving the transaction or holding of a Crypto Asset.” This request applies to all such pitches distributed by “written communications, video, social media, mobile applications, and websites.”
Silvergate? More like Leadgate
Meanwhile, suspicion appears to be growing that Silvergate Bank, the go-to U.S. financial institution for all things crypto, isn’t telling all it knows regarding its exposure to FTX/Alameda and all the firms caught in that web. Silvergate’s shares fell nearly 11% on Friday to $24.90 and continued falling in after-hours trading. That’s less than half the value they were just one month ago and 85% below their value during the digital asset market’s peak one year ago.
Following FTX’s Chapter 11 filing one week ago, Silvergate shares rose 10% after the company assured investors that its FTX ties were limited to deposits—no loans, no other investments. This Thursday, CEO Alan Lane tried again to calm the waters, saying “whether deposits are up or down, we have the liquidity and the capital ratios to support the volatility.”
But critics have seized on evidence that the blurred lines between FTX and Alameda meant that individuals who thought they were sending money to one company were often dealing with the other. The degree to which Silvergate’s risk and compliance department—which was strictly a family affair—was aware of this discrepancy could play a major role in how far down this rabbit hole banking regulators are interested in going.
Deal me out
As detailed elsewhere on this site, the FTX implosion has more than a threadbare connection to the online poker community. Noted poker pro Tom Dwan, who built a reputation for playing extremely high-stakes matches, befriended SBF and other FTX insiders and even made a lengthy tandem appearance with SBF on FTX’s YouTube channel last year.
Dwan recently tweeted that he knew “at some point in I think 2021” that SBF “had used his FTT token raise to plug a hole in Alameda’s balance sheet.” Dwan added that he “basically knew [FTX] were insolvent when ftt was still at 22” and “got a bunch of flack in groups n public for suggesting ppl be careful, and withdraw at least some.”
Sam had used his ftt token raise to plug a hole in alameda’s balance sheet.
I found this out at some point in I think 2021.
From a few places. Some were nice people who weren’t involved.
I know about a lot of corruption in the world, and sometimes it’s not my business to out
— Tom Dwan (@TomDwan) November 14, 2022
A few days before that revelation, Dwan tweeted his outrage that no one in “the whole ftx group that played poker” thought to tell him that FTX’s regulatory compliance chief Daniel S. Friedberg had previously worked at Ultimate Bet and Absolute Poker, where he oversaw the coverup of an insider cheating scandal that stole tens of millions of dollars from the sites’ players. (CoinGeek reported on Friedberg’s troubled history back in August 2021 but the digital asset community apparently chose to believe that leopards can indeed change their spots.)
"As a brief aside, this article was inspired by writer Jacob Silverman (@SilvermanJacob), who tweeted Tuesday expressing his desire for someone to shed more light on the Daniel S. Friedberg/Stuart Hoegner nexus"
Thanks for writing it!https://t.co/Pw3li5BdZy
— Jacob Silverman (@SilvermanJacob) November 20, 2022
Some men, you just can’t reach
Finally, Friday offered SBF a possible glimpse into his decidedly grim future, as Elizabeth Holmes, former boss of the fraudulent Theranos blood-testing business, was sentenced to 11 years in prison. Holmes was convicted in January on multiple counts of wire fraud and conspiracy to commit wire fraud after it was revealed that her revolutionary blood-testing gizmo didn’t do what it claimed.
Among the big-name investors who swallowed Holmes’ bafflegab and paid an enormous financial price was none other than famed BTC advocate Tim Draper, who must be dealing with a proper bag of mixed emotions. And yet Draper still found time this week to double down on his previous prediction that the BTC token will be worth US$250,000 by “early next year.”
Draper’s unwillingness to admit his mistakes is par for the course. Long after Holmes was exposed as a fraud, Draper continued to insist that he would “back her as chief science officer” of a new business. Echoes of this denial were heard this week when investor Kevin ‘Mr. Wonderful’ O’Leary’ publicly declared that he’d back SBF in a new venture based on O’Leary’s belief that SBF was “one of the most brilliant traders in the crypto universe.”
Take a bow, P.T. Barnum. Take a bow.
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