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CEO of FTX, John Ray III, appointed to oversee the bankruptcy filings appeared before congress
The Southern District of New York submitted an order to arrest Sam Bankman-Fried in the Bahamas
The Bahamian Government a finesse kid
The SEC & CFTC intend to battle about the nature of cryptocurrencies in this filing
The Congressional Hearing on the Collapse of FTX, Part 1 was one of the most interesting hearing I have ever watched, and I have watched a lot of them. I think everyone should watch it so I have hyperlinked it here.
There was so much juicy stuff released in the hearing and I intend to list it all in this article for you in a very fun and easy to understand way. I am not good at being fun or easy to understand, so here goes an attempt at something.
John Ray, CEO of FTX, oversaw Enron, a fraud case that is legendary in proportion to this one. The difference here is that it includes a novel technology known as cryptocurrency which is frowned upon by many establishments because of it presses the notion of Separation of Money & State, which would effectively make most fiat nations powerless. They also reference the pseudonymity of the currencies as if privacy is a bad thing.
"Without privacy, you can't have anything for yourself. Saying you don't care about privacy because you have nothing to hide is like saying you don't care about free speech because you have nothing to say." - Edward Snowden
The Hearing is chaired by Madam Chairwoman Maxine Waters (D - CA 43rd), and by Ranking Member Patrick McHenry (R - NC 10th). Madam Waters had recently tweeted a soft message on SBF & FTX, due to his donations exceeding 50 million USD in the midterms.
https://twitter.com/RepMaxineWaters/status/1598693811252875264?s=20&t=CfX_PPUu7xN0wXuW9z8Y_g
This soft tone was not heard in her opening message where she called him a fraud, likely due to the backlash she received for writing this message. She seemed rather unbiased in the way she began the meeting, which I found peculiar. Ranking Member McHenry, was a great start cryptocurrency believers who included that fraudulence occurs in many fields - railroad and real estate, as he mentions - but it does not take away from the innovation and growth that can happen in that field.
John Ray began his speech to start off with where he listed the issues with the exchanges risk management policies. He listed several things among many that contributed to the fall of FTX, especially the disarray of assets. He also listed four silos of development FTX.US, FTX.com, Alameda Research, & FTX Ventures.
Millions dollars worth of Assets stored in hot wallets with no encryption
A pool of deposits, with no clear distinction between deposits and company assets
Hedge fund borrowing customer deposits
John Ray listed his goals for the bankruptcy filing:
Implementing controls for assets
Asset Recovery (Secured 1,000,000,000 USD in Assets)
Transparency in bankruptcy process
Efficiency & Coordination with various jurisdictions affected
Maximize value for all stakeholders involved
I am not doing all the representatives that spoke, just those who caught my interest
Nydia Velazquez (D - NY 7th): References John Ray’s remark about FTX being a complete failure of corporate controls, which he directed toward the idea of it being a paperless bankruptcy. Most Creditors are outside of the US. He recommended a need for controls in the industry with records, controls & money segregation. (29” - 35”)
Ann Wagner (D - MO 2nd): References that FTX is supposedly worse than Enron. John Ray reports lack of professionalism, noting the use of Quick books, Slack and lack of an independent board. Several Billion dollar hole in FTX. No risk management system. (35” - 40”). Regulated entity known as Ledger X, which is solvent. Regulated by CFTC. Submitted an OP ED that describes an existing SEC Rule that could have prevented misuse of funds.
Tom Emmer (R - MN 6th): There was no group level board of directors. Concentration of power in a small group of people without oversight. There was a legal & compliance department with titles. FTX & IEX announced partnership with 270,000,000 USD investment into IEX. Chair Ginsler met with SBF & a framework for token registration that would expand SEC power with preferential treatment for SBF. Request any internal documents that have Ginsler & SBF. Cryptocurrency solves for the problem of Centralization. Cryptocurrency fraud was uncovered using public cryptocurrency block scanners. (1:55 - 2:00)
John Rose (R - TN 6th): Mismanagement of funds & fraud. Wonders why SBF was arrested. Why SEC waited to file charges? Ginsler hasn’t been before the committee in 14 months. Reassured that unwinding digital assets will not be done in a manner that is deleterious to the market. Request documents for other parties due diligence (Sequoia Capital et cetera). (2:55 - 3:00)
Brad Sherman (D - CA 30th): “For five years I have been trying to ban consumer investments in Crypto.” Actually his first words. Certified Hater. “Crypto is a garden of snakes.” Mentions that cryptocurrency threatens the USD as reserve currency & the government in its ability to provide tax evasion from hidden money. “Inmate 14372 - SBF” Don’t trash SBF and then pass his bill. Added a letter from 19 republicans attacking the SEC for paying attention to the purported risk of cryptocurrencies. Request major bonuses, loans, and Campaign contributions to be reported. (40” - 45”)
Emmanuel Cleaver (D - MO 5th): Mentioned the testimony that SBF was supposed to submit, called it disrespectful. Insulting the Congress of the US. Lack of insurance and gaps in insurance. Rename Cryptocurrency to Creepy Dough Currency (1:00 - 1:05)
William Timmons (R - SC 4th): There is a need for defendant to testify before congress, but SBF was arrested 36 hours prior by the Southern District of New York to preclude his testimony. Grand Jury was returned on the 9th [of Dec. Presumably] and can be delayed for weeks. SBF lacks criminal intent, so he says. Ray will go after the 100 million allowed into the Bahamas. (3:30 - 3:35)
Frank Lucas (R - OK 3rd): Some FTX entities were not included in the bankruptcy filing because they were solvent. They will be sold to recover customer asset value. US bankruptcy proceedings will be cooperative with other jurisdictions. Customers were instructed to deposit directly into Alameda’s account as opposed to FTX. (45” - 50”)
Ted Budd (R - NC 13th): “The story of FTX is a story as old as time. What FTX engaged in is fraud.” Violated terms of service. Transferred 10 billion to hedge fund. Use of software to conceal misuse of funds. Massive leverage positions with other people’s money. FTX result would be the same whether in the US or in the Bahamas. Prosecute SBF to the fullest extent of the law. “We need congress to take the lead and establish clear rules for this industry.” (2:36 - 2:41)
Ayanna Pressley (D - MA 7th): 1,000,000 people have not been made whole. No central banking records, inadequate insurance, no safeguards. Senior management could access any money in any of the silos. We know there were 2.7 million accounts in the US, several billion dollars in losses. No estimate on how much FTX will be able to repay, but will be transparent. (2:31 - 2:36)
Ritchie Torres (D - NY 15th): Impression that FTX had the governance of a college fraternity. SBF listed the relationship between FTX and Alameda was an incident, NY Deal Book Conference. Makes mention of Serum Token. Companies never count their own stock as an asset, and a crypto token should not be counted as an asset it created. FTX is in control of the 500 million dollars of Robinhood stock, not SBF. Mentions SBF Tweet: FTX has all the collateral to cover all client holdings. (2:40 - 2:45)
Alexandria Ocasio-Cortez (D - NY 14th): Nov. 2 Coin Desk; Nov. 8 Binance signs nonbinding agreement & SBF freezes withdrawals from FTX; Nov. 9 Binance couldn’t buy & SBF emailed Bahamanian Attorney General with an offer to unfreeze withdrawals for Bahamas; Nov. 10 FTX was placed in foreign provisional liquidation event in the Bahamas; Nov. 11 Opens withdrawals for withdrawals for the Bahamas & 100 million was withdrawn by 1500 individuals; Nov. 12 Additional FTT tokens (300 million) are sent to the Bahamanian Government; Nov. 16 Bahamas Joint Provisional liquidators came to the US (New York) to get the Bahamas to be recognized as the main foreign proceeding. Submits FTX bankruptcy filings at 1600 ET on Dec. 12 & SBF was arrested around 1800 ET. Bahamas Attorney General stated formal extradition request was needed to send the guy. (3:20 - 3:25)
Jesus Garcia (D - IL 4th): FTX is not an anomaly, but apart of an industry that won’t comply. Cryptocurrencies are in crisis because there is no value. African Americans and Hispanics invest disproportionately more in crypto. Unauthorized FTT tokens worth 300 million USD was the Bahamas. Tons of conflicts of interest. Company is in the hands of a small group of individuals with no internal controls. (3:35 - 3:40)
Jacob Auchincloss (D - MA 4th): Written Testimony leaked through Forbes today. Ray hasn’t engaged with him for an independent examination. SBF could not restart FTX and recover funds. Nov. 6 Liquidity Crisis, Nov. 8 Halted Withdrawals, Nov. 9 Bahamanian email, Nov. 10 100 million to Bahamas Customers, Arrested before testimony in Congress. Ray will make it known all things. Claims Agnostic Cryptocurrency guy. “Crypto needs to put up or shut up.”(3:40 - 3:45)
Ed Perlmutter (D - CO 7th): 2008 is when Madoff filing was made 14 years ago, and they have disbursed just last week. Will take ages to disburse from FTX fallout. Co mingling of assets makes the disbursement painstaking. (A Bankruptcy Attorney, a good listen) (1:08 - 1:13)
Madeline Dean (D - PA 4th): Failure, fraud and pain on US citizens is real. John Ray III accepted his position on the morning of the 11th of November. During the period of bankruptcy filing, assets were accessed from two sources, a third party hack & the Bahamian government (aided with the former management: SBF & Wang). About 300 million USD was minted and transferred to the Bahamian government. Assets could be hidden in a cold wallet unknown to the investigation team. (3:14 - 3:19)
The US Attorney of Southern District of New York, Damian Williams, dropped the bar of the century to me. I will certainly highlight it below to emphasize the importance of it. The coordination of the FBI, SEC and CFTC resulted in the indictment of SBF on the basis of four counts of misconduct.
Defrauded customers of FTX.com (Began in 2019)
Defrauded lenders of Alameda Research
Defrauded investors in FTX
Violation of Campaign Finance laws (Stolen Customer funds were given to politicians)
“To person, entity, or political campaign that has received stolen customer money, we ask that you return that money to the innocent victims. To anyone who participated in wrongdoing at FTX or Alameda Research & who has not yet come forward, I would strongly encourage you to come see us before we come see you.” - Damian Williams
The Securities & Exchange Commission is supposed to enforce the law against market manipulation. As you’ve read above, it is very likely that they have not been doing a great job at that. The morning December 13th, 2022, they filed a lawsuit against SBF concerning his malfeasance at FTX and Alameda.
Fraud in the offer or sale of securities
Fraud in connection with the purchase or sale of securities
While it is a good thing that SBF is being charged by the SEC after a long year of fraudulent and inherently risky groups and organizations escaping the consequences of their actions, there is another battle looming here in these documents which will likely be important to all cryptocurrency investors out there. Is Bitcoin a commodity or a security? The same for Ethereum and many other tokens involved in these filings. Regardless of our knowledge and familiarity with these coins as commodity monies, the United States Government has yet to make a clear statement on this issue.
The Commodity Futures Trading Commission is tasked with regulating the derivatives markets and other high risk assets. They, too, filed a lawsuit against SBF concerning his malfeasance at FTX.
Fraud Against All Defendants
Fraudulent misstatements of material fact and material omissions
The jurisdictional war of Cryptocurrency between the CFTC & SEC will end in this court case because clear definitions will have to be made. I am sure a lawyer would be happy to argue that the digital currencies in conversation are commodities if that reduces the sentence of the defendant.
I don’t know about you, but I am a strong believer in cryptocurrency. I remember when SBF debated the idea of centralization on the Bankless podcast. I thought it was a wild anomaly but it turned out to be much more than that. Three main things emerged from the hearing and I would like to lay them down plainly for you.
SBF may have colluded with the Bahamanian government to receive some slap on the wrist
SBF may have colluded with the SEC chair Gary Ginsler to take over the Cryptocurrency industry by regulating away all competitors
SBF may have colluded with the Department of Justice to ensure that his testimony never touched the floor of Congress.
Another thing appeared before me that I did not think much of while watching. If the Republicans were not taking over the lower chamber January 1st 2023, it is possible that much harsher regulation could have befallen the cryptocurrency industry in the US. Republicans tend to be a lot softer on cryptocurrency than their counterparts. All of the representatives that focused on the fraud rather than the underlying digital assets won my kudos this time around.
CEO of FTX, John Ray III, appointed to oversee the bankruptcy filings appeared before congress
The Southern District of New York submitted an order to arrest Sam Bankman-Fried in the Bahamas
The Bahamian Government a finesse kid
The SEC & CFTC intend to battle about the nature of cryptocurrencies in this filing
The Congressional Hearing on the Collapse of FTX, Part 1 was one of the most interesting hearing I have ever watched, and I have watched a lot of them. I think everyone should watch it so I have hyperlinked it here.
There was so much juicy stuff released in the hearing and I intend to list it all in this article for you in a very fun and easy to understand way. I am not good at being fun or easy to understand, so here goes an attempt at something.
John Ray, CEO of FTX, oversaw Enron, a fraud case that is legendary in proportion to this one. The difference here is that it includes a novel technology known as cryptocurrency which is frowned upon by many establishments because of it presses the notion of Separation of Money & State, which would effectively make most fiat nations powerless. They also reference the pseudonymity of the currencies as if privacy is a bad thing.
"Without privacy, you can't have anything for yourself. Saying you don't care about privacy because you have nothing to hide is like saying you don't care about free speech because you have nothing to say." - Edward Snowden
The Hearing is chaired by Madam Chairwoman Maxine Waters (D - CA 43rd), and by Ranking Member Patrick McHenry (R - NC 10th). Madam Waters had recently tweeted a soft message on SBF & FTX, due to his donations exceeding 50 million USD in the midterms.
https://twitter.com/RepMaxineWaters/status/1598693811252875264?s=20&t=CfX_PPUu7xN0wXuW9z8Y_g
This soft tone was not heard in her opening message where she called him a fraud, likely due to the backlash she received for writing this message. She seemed rather unbiased in the way she began the meeting, which I found peculiar. Ranking Member McHenry, was a great start cryptocurrency believers who included that fraudulence occurs in many fields - railroad and real estate, as he mentions - but it does not take away from the innovation and growth that can happen in that field.
John Ray began his speech to start off with where he listed the issues with the exchanges risk management policies. He listed several things among many that contributed to the fall of FTX, especially the disarray of assets. He also listed four silos of development FTX.US, FTX.com, Alameda Research, & FTX Ventures.
Millions dollars worth of Assets stored in hot wallets with no encryption
A pool of deposits, with no clear distinction between deposits and company assets
Hedge fund borrowing customer deposits
John Ray listed his goals for the bankruptcy filing:
Implementing controls for assets
Asset Recovery (Secured 1,000,000,000 USD in Assets)
Transparency in bankruptcy process
Efficiency & Coordination with various jurisdictions affected
Maximize value for all stakeholders involved
I am not doing all the representatives that spoke, just those who caught my interest
Nydia Velazquez (D - NY 7th): References John Ray’s remark about FTX being a complete failure of corporate controls, which he directed toward the idea of it being a paperless bankruptcy. Most Creditors are outside of the US. He recommended a need for controls in the industry with records, controls & money segregation. (29” - 35”)
Ann Wagner (D - MO 2nd): References that FTX is supposedly worse than Enron. John Ray reports lack of professionalism, noting the use of Quick books, Slack and lack of an independent board. Several Billion dollar hole in FTX. No risk management system. (35” - 40”). Regulated entity known as Ledger X, which is solvent. Regulated by CFTC. Submitted an OP ED that describes an existing SEC Rule that could have prevented misuse of funds.
Tom Emmer (R - MN 6th): There was no group level board of directors. Concentration of power in a small group of people without oversight. There was a legal & compliance department with titles. FTX & IEX announced partnership with 270,000,000 USD investment into IEX. Chair Ginsler met with SBF & a framework for token registration that would expand SEC power with preferential treatment for SBF. Request any internal documents that have Ginsler & SBF. Cryptocurrency solves for the problem of Centralization. Cryptocurrency fraud was uncovered using public cryptocurrency block scanners. (1:55 - 2:00)
John Rose (R - TN 6th): Mismanagement of funds & fraud. Wonders why SBF was arrested. Why SEC waited to file charges? Ginsler hasn’t been before the committee in 14 months. Reassured that unwinding digital assets will not be done in a manner that is deleterious to the market. Request documents for other parties due diligence (Sequoia Capital et cetera). (2:55 - 3:00)
Brad Sherman (D - CA 30th): “For five years I have been trying to ban consumer investments in Crypto.” Actually his first words. Certified Hater. “Crypto is a garden of snakes.” Mentions that cryptocurrency threatens the USD as reserve currency & the government in its ability to provide tax evasion from hidden money. “Inmate 14372 - SBF” Don’t trash SBF and then pass his bill. Added a letter from 19 republicans attacking the SEC for paying attention to the purported risk of cryptocurrencies. Request major bonuses, loans, and Campaign contributions to be reported. (40” - 45”)
Emmanuel Cleaver (D - MO 5th): Mentioned the testimony that SBF was supposed to submit, called it disrespectful. Insulting the Congress of the US. Lack of insurance and gaps in insurance. Rename Cryptocurrency to Creepy Dough Currency (1:00 - 1:05)
William Timmons (R - SC 4th): There is a need for defendant to testify before congress, but SBF was arrested 36 hours prior by the Southern District of New York to preclude his testimony. Grand Jury was returned on the 9th [of Dec. Presumably] and can be delayed for weeks. SBF lacks criminal intent, so he says. Ray will go after the 100 million allowed into the Bahamas. (3:30 - 3:35)
Frank Lucas (R - OK 3rd): Some FTX entities were not included in the bankruptcy filing because they were solvent. They will be sold to recover customer asset value. US bankruptcy proceedings will be cooperative with other jurisdictions. Customers were instructed to deposit directly into Alameda’s account as opposed to FTX. (45” - 50”)
Ted Budd (R - NC 13th): “The story of FTX is a story as old as time. What FTX engaged in is fraud.” Violated terms of service. Transferred 10 billion to hedge fund. Use of software to conceal misuse of funds. Massive leverage positions with other people’s money. FTX result would be the same whether in the US or in the Bahamas. Prosecute SBF to the fullest extent of the law. “We need congress to take the lead and establish clear rules for this industry.” (2:36 - 2:41)
Ayanna Pressley (D - MA 7th): 1,000,000 people have not been made whole. No central banking records, inadequate insurance, no safeguards. Senior management could access any money in any of the silos. We know there were 2.7 million accounts in the US, several billion dollars in losses. No estimate on how much FTX will be able to repay, but will be transparent. (2:31 - 2:36)
Ritchie Torres (D - NY 15th): Impression that FTX had the governance of a college fraternity. SBF listed the relationship between FTX and Alameda was an incident, NY Deal Book Conference. Makes mention of Serum Token. Companies never count their own stock as an asset, and a crypto token should not be counted as an asset it created. FTX is in control of the 500 million dollars of Robinhood stock, not SBF. Mentions SBF Tweet: FTX has all the collateral to cover all client holdings. (2:40 - 2:45)
Alexandria Ocasio-Cortez (D - NY 14th): Nov. 2 Coin Desk; Nov. 8 Binance signs nonbinding agreement & SBF freezes withdrawals from FTX; Nov. 9 Binance couldn’t buy & SBF emailed Bahamanian Attorney General with an offer to unfreeze withdrawals for Bahamas; Nov. 10 FTX was placed in foreign provisional liquidation event in the Bahamas; Nov. 11 Opens withdrawals for withdrawals for the Bahamas & 100 million was withdrawn by 1500 individuals; Nov. 12 Additional FTT tokens (300 million) are sent to the Bahamanian Government; Nov. 16 Bahamas Joint Provisional liquidators came to the US (New York) to get the Bahamas to be recognized as the main foreign proceeding. Submits FTX bankruptcy filings at 1600 ET on Dec. 12 & SBF was arrested around 1800 ET. Bahamas Attorney General stated formal extradition request was needed to send the guy. (3:20 - 3:25)
Jesus Garcia (D - IL 4th): FTX is not an anomaly, but apart of an industry that won’t comply. Cryptocurrencies are in crisis because there is no value. African Americans and Hispanics invest disproportionately more in crypto. Unauthorized FTT tokens worth 300 million USD was the Bahamas. Tons of conflicts of interest. Company is in the hands of a small group of individuals with no internal controls. (3:35 - 3:40)
Jacob Auchincloss (D - MA 4th): Written Testimony leaked through Forbes today. Ray hasn’t engaged with him for an independent examination. SBF could not restart FTX and recover funds. Nov. 6 Liquidity Crisis, Nov. 8 Halted Withdrawals, Nov. 9 Bahamanian email, Nov. 10 100 million to Bahamas Customers, Arrested before testimony in Congress. Ray will make it known all things. Claims Agnostic Cryptocurrency guy. “Crypto needs to put up or shut up.”(3:40 - 3:45)
Ed Perlmutter (D - CO 7th): 2008 is when Madoff filing was made 14 years ago, and they have disbursed just last week. Will take ages to disburse from FTX fallout. Co mingling of assets makes the disbursement painstaking. (A Bankruptcy Attorney, a good listen) (1:08 - 1:13)
Madeline Dean (D - PA 4th): Failure, fraud and pain on US citizens is real. John Ray III accepted his position on the morning of the 11th of November. During the period of bankruptcy filing, assets were accessed from two sources, a third party hack & the Bahamian government (aided with the former management: SBF & Wang). About 300 million USD was minted and transferred to the Bahamian government. Assets could be hidden in a cold wallet unknown to the investigation team. (3:14 - 3:19)
The US Attorney of Southern District of New York, Damian Williams, dropped the bar of the century to me. I will certainly highlight it below to emphasize the importance of it. The coordination of the FBI, SEC and CFTC resulted in the indictment of SBF on the basis of four counts of misconduct.
Defrauded customers of FTX.com (Began in 2019)
Defrauded lenders of Alameda Research
Defrauded investors in FTX
Violation of Campaign Finance laws (Stolen Customer funds were given to politicians)
“To person, entity, or political campaign that has received stolen customer money, we ask that you return that money to the innocent victims. To anyone who participated in wrongdoing at FTX or Alameda Research & who has not yet come forward, I would strongly encourage you to come see us before we come see you.” - Damian Williams
The Securities & Exchange Commission is supposed to enforce the law against market manipulation. As you’ve read above, it is very likely that they have not been doing a great job at that. The morning December 13th, 2022, they filed a lawsuit against SBF concerning his malfeasance at FTX and Alameda.
Fraud in the offer or sale of securities
Fraud in connection with the purchase or sale of securities
While it is a good thing that SBF is being charged by the SEC after a long year of fraudulent and inherently risky groups and organizations escaping the consequences of their actions, there is another battle looming here in these documents which will likely be important to all cryptocurrency investors out there. Is Bitcoin a commodity or a security? The same for Ethereum and many other tokens involved in these filings. Regardless of our knowledge and familiarity with these coins as commodity monies, the United States Government has yet to make a clear statement on this issue.
The Commodity Futures Trading Commission is tasked with regulating the derivatives markets and other high risk assets. They, too, filed a lawsuit against SBF concerning his malfeasance at FTX.
Fraud Against All Defendants
Fraudulent misstatements of material fact and material omissions
The jurisdictional war of Cryptocurrency between the CFTC & SEC will end in this court case because clear definitions will have to be made. I am sure a lawyer would be happy to argue that the digital currencies in conversation are commodities if that reduces the sentence of the defendant.
I don’t know about you, but I am a strong believer in cryptocurrency. I remember when SBF debated the idea of centralization on the Bankless podcast. I thought it was a wild anomaly but it turned out to be much more than that. Three main things emerged from the hearing and I would like to lay them down plainly for you.
SBF may have colluded with the Bahamanian government to receive some slap on the wrist
SBF may have colluded with the SEC chair Gary Ginsler to take over the Cryptocurrency industry by regulating away all competitors
SBF may have colluded with the Department of Justice to ensure that his testimony never touched the floor of Congress.
Another thing appeared before me that I did not think much of while watching. If the Republicans were not taking over the lower chamber January 1st 2023, it is possible that much harsher regulation could have befallen the cryptocurrency industry in the US. Republicans tend to be a lot softer on cryptocurrency than their counterparts. All of the representatives that focused on the fraud rather than the underlying digital assets won my kudos this time around.
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