Under the bail arrangement, SBF will be under strict electronic monitoring, including wearing an ankle monitor. The Judge also ordered that he surrender his passport and receive mental health and substance abuse treatment. SBF is known to suffer from depression and the use of antipsychotic drugs to counter it. Meanwhile, his parent’s interest in their home helped secure the $250 million personal recognizance bond required for his release.
Sam Bankman-Fried (SBF) appeared in court just hours after the US authorities had extradited him to the US from the Bahamas late on Wednesday night. He had willingly agreed to be extradited after local Police had arrested him on request from the US authorities. SBF is alleged to have committed “one of the biggest financial frauds in US history” and is facing up to life imprisonment if convicted.
Two of SBF’s Former Associates Plead Guilty To Fraud Charges
FTX’s co-founder Gary Wang and Caroline Elison, former CEO of FTX’s sister company Alameda Research, have both pleaded guilty to fraud-related charges. The Southern District of New York had charged them for their “roles in the frauds that contributed to FTX’s collapse.” Damian Williams, attorney for the Southern District of New York, confirmed that Wang and Elison are now “cooperating” in a video release concerning the ongoing case. Damian further issued a warning to other persons involved in the fraud scheme. “If you participated in misconduct at FTX or Alameda, now is the time to get ahead of it,” he said.
SEC’s Charges against SBF and His Former Associates
In a separate action, the US Securities and Exchange Commission (SEC) also charged SBF with “orchestrating a scheme to defraud equity investors in FTX.” According to the SEC Chair Gary Gensler, SBF built a “house of cards on a foundation of deception” while lying to investors about the financial health of the crypto exchange platform. The SEC has also charged SBF’s former associates Ellison and Wang for their roles in a “multiyear scheme to defraud equity investors in FTX.” The Commission however noted that both Ellison and Wang are cooperating with its ongoing investigations.
Takeaways From SBF’s Case So Far
Besides SBF’s former associates turning on him, here are some key takeaways from the charges leveled against SBF by the Department of Justice (DOJ) and Securities and Exchange Commission (SEC):
Up until now, SBF has continued to deny any wrongdoing, including mismanaging customers’ funds. However, court documents reveal that SBF “improperly diverted” customer assets to sister company Alameda Research. He allegedly did this with the help of co-founder Gary Wang who created a backdoor that allowed SBF to divert these funds to Alameda.
SBF used his Alameda as his “personal piggy bank” which he took money from to invest in real estate, provide VC capital and support political campaigns (he was the second highest donor to Democrats during the election cycle.) Meanwhile, Caroline Ellison, Alameda’s former CEO, was in on all this as she ran Alameda with part of these funds including using it to pay some of the company’s debts.
FTX’s Wang and SBF also granted Ellison’s Alameda trading perks which included unlimited “line of credit” funded by the platform’s customers.
Ellison claims to have acted under SBF’s directive when she caused Alameda to borrow billions of dollars from third party lenders with FTT, FTX’s illiquid token, being used as collateral for most of these loans. According to the court documents, SBF directed Ellison to purchase FTT on various platforms in order to pump the token’s price and increase the value of Alameda’s collateral. This act allowed Alameda to borrow more money from external lenders since they could consider FTT valuable because of its price.
This fraudulent scheme by SBF and his former associates apparently began from FTX’s inception with SBF diverting funds from customers’ funds to Alameda and using those funds to grow his billion-dollar empire.
SBF and FTX’s co-founder Wang owned 100% of Alameda Research, with Sam owning 90% and Wang, 10%. SBF appointed Sam Trabucco and Caroline Ellison as the CEOs of the firm in October 2021 following outcry about SBF’s conflict of interest in managing both a crypto exchange and trading firm. However, SBF remained the “ultimate decision-maker” despite Ellison and Trabucco’s appointment. He directed investment and operational decisions and was in frequent communication with Alameda’s employees.
SBF had always promoted the concept of a 24/7 automatic risk monitoring as an innovative benefit of crypto asset markets. Many even praised FTX’s risk engine. What traders and everyone else didn’t know is this risk engine didn’t apply to the accounts of its most important customer – Alameda.
By 2022, FTX had succeeded in transferring up to $8 billion in FTX customer assets to Alameda-controlled bank accounts. These transfers were considered as a loan made to Alameda. Interestingly, SBF also ensured that Alameda’s liability was moved to an account that made Alameda’s liability interest-free.
Besides the loans to Alameda with Customers’ assets, SBF also executed loans from Alameda, including loans to FTX executives, totaling more than $1.338 billion, including loans he made to himself while acting as the lender in his capacity as CEO of Alameda. There was little or no documentation for these loans to FTX executives, while some were off the record.
Unsurprisingly, FTX customers withdrew approximately $5 billion from the crypto exchange the day Binance announced that it wasn’t following through with its acquisition of FTX. While this was ongoing, SBF sought to raise funds from investors to cover the $8 billion shortfall in FTX’s balance sheet, but he was unsuccessful in his efforts.
Are Crypto Tokens Securities?
One issue which has continually sprung up is whether Cryptocurrencies are tokens, with the SEC vs. Ripple case, which is still ongoing, a leading one in this regard. The court filings against SBF mention FTT, FTX’s token, as a security since it was offered and sold as an “investment contract.” There is the feeling that this issue of whether crypto tokens are securities will continue to arise. If the SEC finally gets the court’s backing that crypto tokens are indeed securities, it could mean a lot for the crypto industry going forward and even retrospectively.
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