On Tuesday, Bloomberg reported that the U.S. Department of Justice (DOJ) had opened a criminal probe into the $372 million in digital assets that were allegedly hacked from FTX-controlled wallets on November 11, the day FTX filed for Chapter 11 bankruptcy. The probe, overseen by the DOJ’s National Cryptocurrency Enforcement Team, could result in a charge of computer fraud with a maximum sentence of 10 years in stripes.
With the temporary exception of a handful of Bahamas-based customers, FTX users have been locked out of their accounts since that November 11 filing. Suspicion is rife that the unauthorized transfer was conducted by FTX insiders with access to the wallets, although FTX general counsel Ryne Miller posted a Telegram message at the time insisting that “FTX has been hacked.”
The DOJ probe is separate from the multiple charges filed against SBF in the Southern District of New York earlier this month, including wire fraud, securities fraud, money laundering, and campaign finance violations. That case took an unusual turn last week when the judge assigned to the case, U.S. District Judge Ronnie Abrams, recused herself due to conflict of interest concerns.
Abrams’ husband is a partner at Davis Polk & Wardwell, which acted in an advisory capacity to FTX in 2021. Abrams stated that her husband’s firm “represented parties that may be adverse to FTX and Defendant Bankman-Fried in other proceedings (or potential proceedings).” While clarifying that her husband “has had no involvement in any of these representations,” Abrams recused herself “to avoid any possible conflict, or the appearance of one.”
This week, the court appointed Judge Lewis Kaplan to handle SBF’s case. Kaplan is not entirely unfamiliar with digital assets, but he also handled many of the 2011 ‘Black Friday’ online poker cases, which share some DNA with the current crypto meltdown. Kaplan is currently overseeing cases that include E. Jean Carroll’s defamation suit against Donald Trump and oversaw Virginia Giuffre’s suit against Prince Andrew until the randy royal settled the case earlier this year.
Investing (with other peoples’ money) is easy
Meanwhile, FTX’s already messy bankruptcy process got even messier after court filings revealed that SBF and FTX co-founder Zixiao ‘Gary’ Wang borrowed $546 million from Alameda Research to fund their acquisition of a 7.6% stake in the Robinhood digital trading business. The acquisition of nearly 56.3 million Robinhood shares—currently worth around $440 million—was made in May via the Antigua-registered Emergent Fidelity Technologies Ltd.
SBF’s affidavit indicates that he controlled 90% of Emergent, with Wang holding the other 10%. The promissory notes that enabled SBF to pillage the $546 million from Alameda—the FTX-affiliated market-maker over which SBF also exerted 90% control—were issued in a two-week period from April to May.
Given the well-documented free-for-all that FTX/Alameda called accounting, in which SBF treated customer deposits as his to do with as he pleased, FTX creditors will have a keen interest in reclaiming the Robinhood shares, but they aren’t the only ones with a claim to make.
BlockFi, the equally bankrupt U.S.-based digital asset lending platform that SBF made a big show of bailing out this summer, maintains that FTX/Alameda owes BlockFi over $1 billion. BlockFi filed a civil complaint last month against Emergent, based on a November 9 ‘pledge agreement’ in which Emergent provided collateral to cover a $671 million loan that Alameda got from BlockFi. The collateral Emergent provided was “certain shares of common stock,” which are believed to be Robinhood shares.
Other court filings indicate that, shortly before his arrest earlier this month, SBF filed papers to regain control over his Emergent and Robinhood shares. That filing came after Yonatan Ben Shimon, an Antigua-based creditor of FTX, convinced an Antiguan court to issue a freezing injunction against Emergent’s assets, including the Robinhood assets.
Last week, FTX’s new court-appointed CEO John J. Ray III, asked the Delaware bankruptcy court to maintain the freeze on the Robinhood assets, in effect to block all three competing claims on the shares while the FTX creditors committee tries to get to the bottom of who owns what.
Honestly, all that’s missing from this tawdry tale is SBF’s parents chiming in with a claim that, since they spawned their fraudulent offspring, they should get a cut of his illegal exploits. Implausible? Probably… but it’s kinda crazy that we can’t entirely rule it out.
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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.
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