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naraburns  nihil supernum  1yr ago (text post)   31235 thread views

Culture War Roundup for the week of January 9, 2023

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I forgot to share this tidbit from the FTX saga: now Sam Bankman-Fried has his own Substack.

The first (and only so far) article is a pippin, a peach, a doozy. He makes a distinction between FTX US (the arm which permitted Americans to invest and trade) which he claims is solvent (and that seems to be true), and FTX International (the one headquartered in the Bahamas) which.... isn't. So far, this is accurate enough.

But what happened, Sam? we not unreasonably ask. Well, it wasn't his fault, it was all bad luck (global markets crashed at the wrong time) and enemy action (coughBinancecough) and the implication is Alameda went south due to lack of sufficient coverage (your fault, Caroline?) and took FTX down with it.

He includes his example of a balance sheet. I've only very basic accounts knowledge, Sam, but that is not a balance sheet. This is a balance sheet. A list of "we have all this money, trust me", is not a balance sheet.

But never fear! FTX US has assets, and all can be made right very quickly! In fact, he is surprised that hasn't been done yet (implied blame of Mr. Ray and the bankruptcy team?)

I forget which new set of lawyers he is on now - looking it up, it seems to be Mark Cohen, who also represented Ghislaine Maxwell - but surely they must be advising him to shut up, stop giving interviews, and don't publish anything on social media?

He's putting blame on everyone and everything else, and mostly that it was Alameda being exposed to an unprecedented market crash that took it all down, but if he hadn't been strong-armed into Chapter 11, he could have made it all okay.

But some at least of what he is saying is being contradicted by what Caroline Ellison is saying, which is going to make for an interesting day in court when she and Gary Wang testify against Bankman-Fried:

Ellison said she was aware from 2019 through 2022 that Alameda was given access to a borrowing facility at FTX.com that allowed Alameda to maintain negative balances in various currencies.

She said the practical effect of the arrangement was that Alameda had access to an unlimited line of credit without being required to post collateral and without owing interest on negative balances or being subject to margin calls or liquidation protocols.

Ellison said she knew that if Alameda’s FTX accounts had significant negative balances in any currency, it meant that Alameda was borrowing funds that FTX’s customers had deposited into the exchange.

“While I was co-CEO and then CEO, I understood that Alameda had made numerous large illiquid venture investments and had lent money to Mr. Bankman-Fried and other FTX executives,” she said.

Ellison said she understood that Alameda had financed the investments with short-term and open-term loans worth several billion dollars from external lenders in the cryptocurrency industry.

When many of those loans were recalled by lenders in June, she agreed with others to borrow several billion dollars from FTX to repay them.

Wang is also admitting to naughtiness, though he is getting much less coverage than Ellison:

During his plea earlier Monday, Wang said that he made changes to computer code to enable the transactions with Alameda.

“I knew what I was doing was wrong,” he said.

Links to Ellison and Wang's guilty pleas in this article:

Wang pleaded guilty to conspiracy to commit wire fraud, wire fraud, conspiracy to commit commodities fraud and conspiracy to commit securities fraud. Ellison pleaded guilty to two counts of wire fraud, two counts of conspiracy to commit wire fraud, conspiracy to commit commodities fraud, conspiracy to commit securities fraud and conspiracy to commit money laundering.

I'm not surprised they're co-operating as hard as they can, there's several bodies (the SDNY, the SEC, the CFTC and the Bahamian government) all wanting a piece of the action so they're all facing multiple charges on multiple counts, thus Bankman-Fried's denial of fraud won't cut much ice:

Simultaneously, both the Commodity Futures Trading Commission and Securities and Exchange Commission released civil complaints against Wang and Ellison.

The SEC alleged that they were involved “in a multiyear scheme to defraud equity investors in FTX, the crypto trading platform co-founded by Samuel Bankman-Fried and Wang.”

The CFTC’s expanded complaint charges “Ellison with fraud and material misrepresentations in connection with the sale of digital asset commodities in interstate commerce, and charges Wang with fraud in connection with the sale of digital asset commodities in interstate commerce.”

Wang and Ellison accepted the claims made against them, the CFTC statement said. Ellison was singled out in the SEC complaint for engaging in artificial manipulation of FTT, FTX’s self-issued token, as part of a broader effort to boost Alameda Research’s available collateral for lending.

In a statement, the SEC said that Wang and Ellison had also accepted “bifurcated settlements” in connection with the complaints and are cooperating.

...Williams did not offer specific details on charges against Ellison or Wang. The SEC alleges that both Ellison and Wang, in their respective roles at Alameda and FTX, abetted Bankman-Fried in allegedly defrauding FTX customers.

The SEC alleges that Wang created a software backdoor in FTX’s platform which allowed Alameda to divert customer funds for its own trades. Alameda was led by Bankman-Fried until 2021, when Ellison assumed control alongside Sam Trabucco, who departed from Alameda in August 2022.

I wouldn't be surprised if it turned out Wang and Ellison had orchestrated this whole thing, and SBF is simply a patsy. They are both admitting guilt, and that they knew at the time what they were doing was wrong. If SBF has a shred of evidence that they misled him, he'll probably get off, while Wang and Ellison get a slap on the wrist.

I wouldn't be surprised if it turned out Wang and Ellison had orchestrated this whole thing, and SBF is simply a patsy.

Timing works out wrong. He set up Alameda himself first, talked Ellison away from Jane Street, and it looks like Wang and Singh were the other co-founders with him. Sam Trabucco was Alameda CEO first, then co-CEO with Ellison, then furled his sails and left and so she took over as sole CEO. (The Sequoia article continues to toast, butter and put jam on the bread for the background of all this):

About six months after SBF dropped out, Jane Street sent Ellison on a recruiting trip to California, so she decided to call on her old friend. They’d been office buddies at Jane, but they’d also occasionally socialized outside of work, too, being fellow EA acolytes.

[Bankman-Fried tells her the story of what he's been doing, mainly making a fortune off the 'kimchi premium']

As a Japanese citizen, he was able to open an account with the one (obscure, rural) Japanese bank that was willing, for a fee, to process the transactions that SBF—newly incorporated as Alameda Research—wanted to make.

...With a goosed-up capital account, the money started piling up so fast that SBF placed what he refers to as “a market order for employees” to tend to the Rube Goldberg operation that kept the capital spinning. There were constant blowups with banks, which are wary of anything crypto. Crypto was so new that regulators in South Korea and elsewhere were constantly changing their mind about regulations — then making those changes retroactive. It was a swirling mess. Pulled into the vortex was Nishad Singh, a friend of SBF’s brother Gabe, and a fellow EA member. ...After just one conversation with SBF, Singh decided to leave Facebook to take on the more meaningful work of building FTX. Caroline Ellison came, too, quitting Jane Street and moving to California only weeks after SBF described the operation to her over tea.

There's also Ryan Salame, who was making donations to the Republicans as Bankman-Fried and Singh were making donations to the Democrats (and for much the same reasons; butter 'em up to look favourably on FTX when it came to regulations and crypto structuring).

I don't know about Trabucco's reasons for leaving, he got out long before any revelations of something rotten in the state of Denmark so it's hard to know if he knew it was dodgy and left before he could be implicated, but Salame seems to have done some whistle-blowing:

The two new suspects’ guilty pleas provided some clarity as to the mindset of Bankman-Fried’s inner circle, which comprised not only Ellison and Wang, but also former FTX Director of Engineering Nishad Singh, former co-CEO of FTX Digital Markets Ryan Salame, and former co-CEO of Alameda Research Sam Trabucco. Court filings recently revealed that Salame blew the whistle on FTX’s activity to Bahamian regulators.

Regrettably, the Commission was informed today by Mr. Ryan Salame (“Mr. Salame”) who is the Chairman of FTX Digital that clients’ assets which may have been held with FTX Digital were transferred to Alameda Research (“Alameda”). Alameda and FTX Digital are related companies, specifically, Mr. Samuel Bankman-Fried is a founder of both FTX Digital and Alameda.

The Commission understood Mr. Salame as advising that the transfer of clients’ assets in this manner was contrary to the normal corporate governance and operations of FTX Digital. Put simply, that such transfers were not allowed and therefore may constitute misappropriation, theft, fraud or some other crime.

Mr. Salame further advised the Commission that there were only three (3) persons who had the necessary codes (or passwords) to transfer clients’ assets to Alameda in this manner, that is, the founders of FTX Digital who are: (i) Mr. Samuel Bankman-Fried; (ii) Mr. Nishad Singh and (iii) Mr. Zixiao (Gary) Wang.

Plus, the way it was all structured (John Jay's 'four silos' in the bankruptcy filing), Bankman-Fried was majority owner of the entities and was getting a billion dollar personal loan from Alameda (the others got smaller but still substantial loans):

To my knowledge, Mr. Bankman-Fried owns (a) directly, approximately 53% of the equity in Debtor West Realm Shires Inc.; (b) indirectly, approximately 75% of the equity in Debtor FTX Trading Ltd.; (c) directly, approximately 90% of the equity in Debtor Alameda Research LLC; and (d) directly, approximately 67% of the equity in Clifton Bay Investments LLC.

Related Party Loans Receivable of $4.1 billion at Alameda Research (consolidated) consisted primarily of a loan by Euclid Way Ltd. to Paper Bird Inc. (a Debtor) of $2.3 billion and three loans by Alameda Research Ltd.: one to Mr. Bankman-Fried, of $1 billion; one to Mr. Singh, of $543 million; and one to Ryan Salame, of $55 million.

So he isn't a simple patsy who was manipulated by a scheming math weasel as the fall guy.

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