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The Monday, June 26 release of the second report by John J. Ray III and his FTX restructuring team (referred to as the "debtors") is truly remarkable. This report provides additional clarity regarding the intricate financial transactions involving customer funds that were allocated towards political contributions and venture capital investments within the now-defunct cryptocurrency exchange FTX and its associated hedge fund, Alameda Research. Notably, numerous transactions were directed towards entities under the influence of close associates and family members of Sam Bankman-Fried. These findings further solidify the notion of an extensive and well-coordinated criminal endeavor.
Furthermore, according to the report, FTX executives had knowledge as far back as August 2022 regarding a staggering shortfall of over $8 billion in customer funds. This revelation completely reframes the previous assertions made by executives such as Caroline Ellison, and particularly by Sam Bankman-Fried, the CEO and co-founder of FTX, in the subsequent weeks and months.
Even more incriminatingly, the report details Bankman-Fried actively engaging in the perpetuation of the overall fraudulent scheme, displaying a high level of direct involvement.
Before we proceed, it is important to note two things: Firstly, all the information presented here are allegations put forth by the FTX liquidators. These claims may or may not come to light or be substantiated during the independent criminal trial involving Sam Bankman-Fried, set to commence in October. Secondly, to ensure clarity, I will consistently use the terms "customer funds" and "commingled funds" interchangeably, as the majority of commingled funds are likely to belong to customers.
Into the spaghettiverse
Although the specifics are intriguing, the focal point of the report lies in the substantial tangle of spaghetti, symbolizing the movement of FTX customer funds. It's worth noting the significant number of flows that culminate in "to be determined," indicating that the recovery team's efforts are still ongoing.
Prominent aspects of this chaotic situation involve allegations that $20 million of FTX customer funds were directed towards Guarding Against Pandemics (GAP), a so-called "nonprofit" organization overseen by Gabe Bankman-Fried, Sam's sibling. While the allocation of funds to GAP was already known, the report appears to be the initial authoritative assertion that the funding originated from specific bank accounts containing commingled funds, including those of customers. This revelation intensifies existing uncertainties regarding the Bankman-Fried family's awareness of and involvement in the fraudulent activities.
In the report, we observe how SBF's closest allies and colleagues eagerly consumed the embezzled funds. The FTX Foundation, labeled as a "nonprofit" organization, which had also been financed with customer funds, contributed $400,000 to an undisclosed Effective Altruism group that produced YouTube videos advocating for that concerning ideology.
Furthermore, we have the so-called "venture investments" that appear to be nothing more than a means to launder and conceal the stolen FTX user funds. The recently disclosed report explicitly outlines the allocation of $450 million worth of FTX customer funds into an entity known as Modulo Capital, which raises doubts about the legitimacy of these investments.
Modulo Capital was established by two individuals closely associated with Bankman-Fried, namely Duncan Rheingans-Yoo and Xiaoyun "Lilly" Zhang. The New York Times reports that Rheingans-Yoo had only graduated from college two years prior, while Zhang, like Caroline Ellison, had previously been in a romantic relationship with Bankman-Fried.
Smoking guns
In terms of financial matters, we have gained fresh understanding regarding the substantial personal loans received by FTX executives, with the intention of financing political donations (which, in themselves, are highly illegal). The debtors' report asserts a crucial point, stating that “the evidence identified by the Debtors indicates the transfers were ‘loans’ in name only.”
In November of last year, I referred to these loans as a "blatant weapon of wrongdoing," signaling unmistakable criminal intentions. The recently released report seems to validate my initial assessment, providing further evidence of the same. Moreover, the report contains numerous revealing details that strongly imply explicit and deliberate criminal activities taking place at FTX.
For one, the report claims that “by August 2022, the FTX Senior Executives and [Caroline] Ellison privately estimated that the FTX.com exchange owed customers over $8 billion in fiat currency that it did not have. They did not disclose the shortfall.” This $8 billion shortfall was hidden in a fake account with a negative $8 billion balance, referred to internally as belonging to “our Korean friend.”
While it was widely recognized that the account had some knowledge, I am unaware of any other reliable source that explicitly asserts that executives were aware of the deficit as early as August. If this were true, it would have severe implications for Sam Bankman-Fried, as he consistently presented FTX's financial stability and actively clarified any suspicions, thereby exacerbating his fraudulent schemes.
However, the report goes on to make an assertion that, if proven in SBF's criminal case, would be even more damning. It details a "Payment Agent Agreement" that was supposedly devised to give the appearance of intentional routing of FTX customer deposits through Alameda Research bank accounts, instead of being a combination of negligence and fraudulent activity.
Although the debtors discovered that the payment agreement document had been generated in April 2021, it was retroactively dated to an "effective date" of June 1, 2019. This deliberate act seemingly aimed to give the impression that FTX customer funds had consistently passed through Alameda. However, it is evident that this flow was a desperate measure to bypass banking regulations, and it appears to have served as the foundation for the broader fraudulent activities.
In essence, the payment agent agreement document serves as concrete proof of a criminal conspiracy.
And according to the debtors report, Sam Bankman-Fried signed the fraudulently backdated document with his own, actual hand: “Notably, while Bankman-Fried regularly executed agreements electronically using DocuSign, which electronically records the date and time of execution, Bankman-Fried signed the Payment Agent Agreement with a wet signature.”
There are two compelling reasons why this poses a grave threat to Bankman-Fried's criminal defense. Firstly, the deliberate employment of a physical signature suggests a calculated effort to circumvent the generation of Docusign metadata, which could potentially expose the fact that the document was not signed in 2019. This unequivocally indicates Bankman-Fried's involvement in a conspiracy to perpetrate and conceal fraud.
Moreover, the presence of a physical signature introduces the possibility that someone may have witnessed Bankman-Fried signing the document, thereby establishing beyond doubt that the signature belongs to him. This eliminates any remote possibility that could be raised as a defense, suggesting that Bankman-Fried's electronic signature was fraudulently replicated and he was unaware of the document's existence.
To emphasize, although it cannot be guaranteed that all the facts stated in the debtors report will be presented during Bankman-Fried's criminal trial, it appears highly probable that the majority of them will be introduced as evidence.
Although we were fairly convinced that Sam Bankman-Fried was in trouble, it appears that he's now in a whole different level of trouble - he's practically crispy deep-fried.
