Texas probing FTX for offering securities without authorization, fraud

Getting your Trinity Audio player ready...

FTX is under investigation by Texas authorities, who suspect the United States-facing offshoot of the Bahamas-based cryptocurrency exchange of illegally offering unregistered securities to local residents.

Last Friday, Texas State Securities Board (TSSB) director of enforcement Joe Rotunda threw a wrench into FTX’s proposed bailout of failed ‘crypto’ lending platform Voyager Digital. Last month, FTX.US submitted “the highest and best bid” for the remaining assets of Voyager, which filed for Chapter 11 bankruptcy protection following this summer’s collapse of the Three Arrows Capital (3AC) crypto hedge fund.

In a filing with the New York bankruptcy court, Rotunda said FTX’s winning bid should be paused “until the Securities Commissioner has an opportunity to determine whether FTX.US is complying with the law.” Rotunda said his outfit is now investigating FTX Trading, FTX.US, along with “their principals, including [FTX CEO/founder] Sam Bankman-Fried.”

Rotunda’s division previously filed suit against Voyager for “offering yield-bearing depository accounts regulated as securities in Texas” and “making offers containing statements that were materially misleading or otherwise likely to deceive the public.” That case is still pending. Rotunda said Friday that the products that FTX.US is offering Texans “appear similar” to the allegedly illegal Voyager products.

Rotunda says it “appears” that FTX.com is restricting U.S. customers from accessing FTX Trading—known as Blockfolio prior to FTX’s $150 million acquisition in 2020—via a pop-up window that reminds them that these options are off limits. But the FTX.US site contains a page that allows U.S. residents to download the FTX Trading app “even when they reside in the United States.”

On October 14, Rotunda downloaded the app and was able to create an FTX Trading account despite citing his Austin address and linking to his local bank account. Rotunda went on to deposit $50 from his bank account and 0.1 ETH from his digital wallet (he was told that the former deposit would take six days, but the ETH deposit was credited instantly).

The FTX Trading app informed Rotunda that he was “eligible to earn a yield on my deposits” and that the “Earn program is provided by FTX.US” rather than FTX Trading. The app also stated that “FTX Earn rewards are available for U.S. users on a promotional basis.” The app included a link to an article promising users an 8% annual percentage yield (APY) on the first $10,000 deposited to the FTX Trading wallet, while amounts over $10,000 would earn 5% APY.

Despite the site’s ‘Location Restrictions’ page claiming that FTX “does not onboard or provide services” to U.S. residents and despite Rotunda clearly identifying his location while onboarding, “the FTX Trading app now shows that I am earning yield on the ETH.”

As such, Rotunda believes FTX’s yield program “appears to be an investment contract, evidence of indebtedness and note, and as such appears to be regulated as a security in Texas” under state law. Neither FTX Trading nor FTX.US is authorized to offer or sell securities in Texas.

Furthermore, Rotunda claims that FTX Trading and FTX.US “may not be fully disclosing all known material facts to clients prior to opening accounts and earning yield, thereby possibly engaging in fraud and/or making offers containing statements that are materially misleading or otherwise likely to deceive the public.” In addition to corporate liability, “certain principals” at these firms may also be violating Texas securities law.

Rotunda concludes that FTX.US “should not be permitted to purchase” Voyager’s assets until the Securities Commissioner “has an opportunity to determine whether FTX.US is complying with the law and related and/or affiliated companies, including companies commonly controlled by the same management, are complying with the law.”

In response, FTX issued a statement saying it had applied for a license to operate in Texas, and the company believes that “we are operating fully within the bounds of what we can do in the interim.” The statement also claimed/warned that its deal to acquire Voyager’s assets was aimed at ensuring “the best possible outcome” for Voyager’s former customers/victims and expressed hope “that all state regulators are working towards this same goal.”

That FTX might be shirking its regulatory obligations isn’t that surprising, given its pedigree. FTX was founded with significant financial support from Binance, which pioneered the idea of launching a U.S.-specific site to act as a regulatory lightning rod. Just this week, Reuters offered further evidence of Binance publicly praising regulatory oversight while secretly doing everything it could to mask evidence of its ongoing criminality.

Regardless, the question of FTX’s propriety isn’t the only obstacle blocking its Voyager bailout. The committee representing Voyager’s unsecured creditors in the bankruptcy process is crying foul over a clause that would exempt CEO Stephen Ehrlich from claims arising from his ill-advised approval of loans of digital assets worth hundreds of millions to the 3AC fund.

Last week, the U.S. trustee overseeing the bankruptcy process echoed the committee’s concerns over this provision. On Monday, Voyager filed a new proposal with the court that would see Ehrlich pay $1 million to Voyager while the company would have left to pursue claims of up to $20 million based on other Voyager execs’ insurance policies.

That was then, this is no

Meanwhile, Sam Bankman-Fried (SBF) has awkwardly reneged on the pledge he made this spring to contribute up to $1 billion to U.S. political campaigns through 2024. SBF has so far anted up around $40 million—including $1 million to perennial Democrat Beto O’Rourke, making SBF the single biggest contributor to Beto’s current campaign to unseat Texas governor Greg Abbott—but has decided to shut off the spigot. For now, at least.

Last Friday—the same day Rotunda made his allegations regarding FTX’s alleged violations of Texas securities law—SBF told Politico that his billion-dollar-baby-boast was “a dumb quote on my part.” SBF went on to say that his previous “messaging” of a “soft ceiling” of $1 billion in potential donations was “sort of sloppy and inconsistent in some cases.”

The bulk of SBF’s donations were made during primary races to support candidates who paid lip service to SBF’s declared focus on pandemic preparedness. Conveniently, these candidates generally supported the crafting of industry-friendly regulations of digital assets, which cynics believe reflects the real focus of SBF’s political largesse. (It’s said that politics makes strange bedfellows, but it seems there’s only room for one on SBF’s legendary bean-bag.)

SBF’s record in these primary races is hit and miss, and while that may have soured him on the funding process, it’s also possible that the pols themselves have soured on the optics of taking money from ‘crypto’s’ tousle-haired moppet, whose name might turn up next week in an even more embarrassing report of regulatory wrongdoing, or another interview in which he equates ‘crypto’ with Ponzi schemes.

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.