a newsletter by Molly White
Sign in Subscribe

The charges against Sam Bankman-Fried and the first FTX Congressional hearing

An overview of the charges filed against SBF from three agencies today, and a recap of the Congressional hearing that featured four hours of testimony from FTX's new CEO.

The charges against Sam Bankman-Fried and the first FTX Congressional hearing

A barrage of criminal charges were levied against Sam Bankman-Fried, founder and former CEO of failed cryptocurrency exchange FTX. Bankman-Fried, who was scheduled to testify in front of the House Committee on Financial Services today, wasn't able to make it—an unfortunate side effect of him being detained by Bahamian authorities yesterday afternoon. Nevertheless, the hearing proceeded without him, and the new CEO tasked with unwinding the whole mess at FTX, John J. Ray III, testified for nearly four hours.

The charges

Last night, Bahamian police arrested Sam Bankman-Fried after receiving notice from the U.S. government that charges had been filed against him, and that he was likely to be extradited.

Those charges had been filed by the U.S. Attorney's Office of the Southern District of New York, a frequent flier on W3IGG for its comparatively active role in prosecuting cryptocurrency scams and frauds. The SDNY indictment was unsealed today, and includes a list of eight charges: wire fraud and conspiracy to commit wire fraud on customers, wire fraud and conspiracy to commit wire fraud on lenders, conspiracy to commit commodities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering, and conspiracy to defraud the United States and violate campaign finance laws.

Altogether, the SDNY paints a picture in which Sam Bankman-Fried knowingly schemed to misappropriate customer funds from FTX for personal use and use at Alameda, and lied to lenders about the financial state of his businesses. The SDNY also charged that SBF had violated campaign finance law by exceeding contribution limits and donating to candidates and committees in other peoples' names.

Shortly after the SDNY unsealed their indictment, the Securities and Exchange Commission and the Commodity Futures Trading Commission each filed their own charges.

The SEC, unsurprisingly, charged SBF with securities fraud for allegedly defrauding investors in FTX. The SEC alleges that he spent years concealing from investors that FTX customer funds were being directed to Alameda; that Alameda received special treatment in its operations on the FTX exchange (namely, exemption from some risk management limitations, and a "virtually unlimited" line of credit); and that there was undisclosed risk as a result of FTX's exposure to Alameda's highly illiquid assets, including their substantial holdings of FTT. The SEC also alleges that SBF commingled customer funds at Alameda "to make undisclosed venture investments, lavish real estate purchases, and large political donations."

The CFTC complaint names SBF, FTX, and Alameda, and charges them with fraud, as well as fraudulent misstatements of material fact and material omissions. The lengthy complaint goes into more detail than the SEC complaint, but covers many of the same allegations: that SBF portrayed FTX as reliable and secure, while in reality he was hiding misappropriation of customer funds and enormous risk due to Alameda's status on the FTX platform.

In a press conference held this afternoon (video, my Twitter thread), both the SDNY and the SEC each very clearly signaled that they expect to file more charges in the near future.

Meanwhile, SBF showed up for a court hearing in The Bahamas, where his counsel asked the judge to consider granting him bail. The lawyers' argument seemed to come down to "if he was going to run, he would have by now." However, if SBF's statement to me yesterday is to be believed (and that's a big if with any statement from SBF), he also hadn't put much thought into the idea that he might be at risk of arrest.

His parents attended the hearing. Per CoinDesk, "They appeared to oscillate between dejection and defiance, at times holding their heads in their hands and clasping their hands. Bankman-Fried's mother audibly laughed several times when her son was referred to as a "fugitive" and his father occasionally put his fingers in his ears as if to drown out the sound of the proceedings."


The House FSC hearing

SBF's arrest certainly threw a wrench in the House hearing scheduled for this morning, as SBF had finally agreed to testify and was expected to appear virtually for questioning.

Some Congresspeople directly addressed this, questioning why the SDNY would not wait to arrest SBF until after he had testified under oath for hours in front of Congress—seemingly a prosecutor's dream. "I wonder why a prosecutor wouldn't want to potentially add 'lying to Congress' to accompany the list of charges against Mr. Bankman-Fried," mused Representative Rose (R-TN). Representative Ocasio-Cortez (D-NY) suggested that she believed SBF's arrest might have been a direct response to Ray's testimony being published last night. Representative Timmons (R-SC) wondered aloud why "thirty-six hours before he was scheduled to testify before this Committee for hours on end, did the SDNY send a provisional arrest warrant to the Bahamian government to facilitate his arrest, to preclude his testimony which would have been incredibly helpful in the prosecution of Sam Bankman-Fried?"

Asked a similar question in a later press conference, US Attorney Damian Williams said that he had filed the charges last Wednesday (December 7) and that SBF had been indicted last Friday (December 9), and that the "timing was dictated by law enforcement" and unrelated to the Congressional testimony.

The hearing went on without SBF, although his statement was made available (and later leaked online). The Congresspeople were not exactly enthused by how he had planned to open:

I would like to start by formally stating, under oath:
I fucked up.

"Absolutely insulting, " said Representative Cleaver (D-MO).

John Jay Ray III sits with his arms folded on the table in front of him, speaking into a microphone at the House FSC hearing.
John J. Ray III

Without SBF in attendance, John J. Ray III fielded all the questions. They were of varying quality—some Congresspeople seemed well-briefed and well-informed, whereas others simply made Ray repeat things he'd already said in his statement. Representative Perlmutter (D-CO) spent a minute or so of his allotted time trying to figure out if dogecoin was pronounced "doe-gee-coin" or "doggy-coin" before someone helped him out with the correct pronunciation of "dohj-coin".

Some things were repeatedly established: there was effectively no separation between the various companies under SBF's control, and despite SBF's recent claims that he's had practically nothing to do with Alameda in the past few years, Ray said that FTX, Alameda, and the other entities were operated "as one company". "There was a public distinction between the two," he said, but that was about the extent of it, and assets were completely commingled.

The minimal and poor-quality record-keeping also came up repeatedly. "They used QuickBooks," said Ray at one point. "A multi-billion dollar company using QuickBooks." This prompted a startled, "QuickBooks?!" from Representative Wagner (R-MO), to whom he was speaking at the time. "QuickBooks. Nothing against QuickBooks, it's a very nice tool, just not for a multi-billion dollar company," said Ray. The audits were also briefly mentioned. When asked to elaborate on why he didn't believe FTX's past audits were reliable, Ray stated simply, "Well, we've lost $8 billion, so by definition, I don't trust a single piece of paper in this organization."

What happened to the money?

As to be expected, questions along the lines of "where the hell did all the money go?" were pretty frequent. The answer, as best they can tell today, seems to be: a mix of massive trading losses at Alameda, and personal loans made to SBF and other high-ups that were then used for investments, real estate, etc. Ray went on to say that the investments seem to have been made without any pro forma or valuation. "I'm really not quite sure how some of the purchase price numbers were derived, so it gives you a worry obviously that the purchases were overvalued."

How much might customers get back?

Some tried to put their fingers on how much of their money FTX customers might wind up seeing in the end, though Ray repeated that it's too early for him to estimate. Representative Adams (D-NC) bluntly asked Ray, "Do you genuinely believe that these customers are ever going to get their money back?" Ray replied that, "It's a massive loss. It's very speculative right now what the recovery will be, and it's too early to tell what ultimate recovery will be to each particular customer." "It doesn't like you really think they're going to get their money back," said Adams.

FTX US vs. FTX.com

There were questions about the separation between FTX.com and FTX US. Since the bankruptcy, SBF has been adamant that FTX US perfectly solvent and could re-enable withdrawals anytime to allow US customers to cash out 100%. I have been skeptical of this from the getgo:

Ray confirmed this skepticism was justified in his statement, where he said that "FTX US was not operated independently of FTX.com". He elaborated in a conversation with Representative Huizenga (R-MI), to say that although they have not yet seen evidence of direct transfer of funds from FTX US to Alameda, he and his team are very concerned about the commingling of funds between FTX US and FTX.com. Representative Loudermilk (R-GA) summarized some of his observations to posit to Ray: "there's not evidence right now that his statement would be true that FTX US is completely solvent." Ray confirmed, "Clearly not." The best news he had for FTX US users was that it was likely to be less bad, but still bad: "There is a general truth that users of the FTX US exchange will suffer less purely because of the siphoning off of cash and assets from FTX​.com to Alameda."

WTF is going on with the Bahamian liquidators?

Some asked about the frankly shady business that seems to be happening with Bahamian regulators, who may be acting in concert with SBF, and Ray was frank:

Ray: Unlike Chapter 11, there's no transparency in the process in The Bahamas. We repeatedly asked [the Bahamian provisional liquidators] for clarity on what they've been doing and we've been shut down on that.

Rep. Steil (R-WI): They did not reply or it was unsatisfactory?

Ray: They put out statements that it was in the interest of Bahamian creditors, although our view is that it violated the automatic stay in bankruptcy.

Steil: "Do you believe that at that time Mr. Bankman-Fried was attempting to undermine Chapter 11 by expanding the scope, by moving assets to accounts under the control of Bahamian authorities?"

Ray: "It appears so."

Steil: "So it appears that he may be working to undermine the scope of US federal bankruptcy law."

Ray: "That's what it appears, yes."

Ray later said that "The pushback that we've gotten [from Bahamian liquidators] is sort of extraordinary in the context of bankruptcy. It raises questions, it seems irregular to me, there's lots of questions on our part, and obviously we're investigating." When asked by Representative Ocasio-Cortez if SBF's decision to briefly re-enable withdrawals for Bahamian customers might have been in exchange for the ability to retain control over FTX, Ray said, "We intend to investigate that very thing."

Did SBF really have no clue what was happening at Alameda?

SBF's repeated claims of ignorance on various goings-on at FTX and Alameda also came up a lot. Representative Gonzalez (R-OH) asked if it was possible, as SBF has claimed, that SBF might not have known about the backdoor in FTX's trading systems to allow the movement of assets without raising red flags. "No," said Ray.

Some Congressmembers, of course, used the opportunity to grandstand rather than to question Ray, and there was posturing on both sides of the aisle as well as on both sides of the crypto issue.

From the crypto bulls there was Representative McHenry (R-NC, ranking member of the FSC and recipient of funds from a PAC to whom FTX donated), who came right out of the gate to argue that "We have to separate out the bad actions of an individual from the good created by an industry and an innovation." Representative Hill (R-AR) made the same argument made at least twice in the hearing: "we didn't throw out railroads" because of fraud in the 1800s. Representative Emmer (R-MN, member of "the blockchain eight", and recipient of donations from FTX) came out swinging at SEC Chair Gary Gensler, talked up his own record on working on "the future of crypto", and tried to portray the collapse as a failure of centralization rather than one of crypto. Representative Gottheimer (D-NJ, member of "the blockchain eight", and recipient of donations from FTX) also spent a long time talking up his history on crypto legislation and bashed Gensler and the SEC. Representative Budd (R-NC, member of "the blockchain eight", and recipient of funds from a PAC to whom FTX donated) did the same, speaking about wanting to "protect innovation and... see it flourish", and blaming the SEC for regulation by enforcement and pushing crypto companies offshore.

Others had changed their tune a bit. Representative Auchincloss (D-MA, member of "the blockchain eight", and recipient of donations from FTX) started a statement by saying he has "long said that I am neither a crypto bull or a bear." This, of course, isn't quite right—the Crypto Action Network gives him an "A" rating on their list of crypto-friendly Congresspeople, an honor he shares with McHenry, Hill, Emmer, Gottheimer, and Budd, among others. However, he went on to say:

My patience with the crypto bulls is wearing thin. It's been fourteen years and the American public has heard lots of promises but has seen lots of Ponzi schemes. It's time to put up or shut up. It's worth noting that ARKK, the innovation investor, several years ago identified five general-purpose technologies of the future: DNA sequencing, artificial intelligence, robotics, energy storage, and blockchain. And yet those first four "disruptive technologies" have already delivered gamechanging innovation that affects my constituents in daily life. Blockchain has thus far delivered whitepapers and podcasts about Bitcoin and DAOs and NFTs, defi, and more, and it's all interesting—it's exciting even—but none of it has achieved product-market fit at scale. It's time for the blockchain investors and entrepreneurs to build things that matter, or to lose more credibility.

Finally, there were the critics. Perhaps the most outspoken critic in Congress to date (and the only to earn an "F" rating from the Crypto Action Network) has been Representative Sherman (D-CA), who said today, "My fear is that we'll view Sam Bankman-Fried as just one big snake in a crypto garden of Eden. The fact is, crypto is a garden of snakes."

Representative García (D-IL, recipient of a donation from Sam Bankman-Fried, which he later pledged to donate to charity) echoed Sherman: "FTX isn't an anomaly. It isn't just a case of one corrupt guy stealing money, it's about an entire industry that refuses to comply with existing regulation that thinks it's above the law." Garcia continued, "These companies are making money using one thing: hype. And when the hype runs out, and ordinary investors—especially latecomers who are disproportionately low-income, Black, and Latino—lose."

Representative Vargas (D-CA) repeatedly lobbed criticisms at Republican members of the House for urging the SEC to be less aggressive or for arguing that the SEC should not be a primary crypto regulator, and said he didn't get the point of cryptocurrency "unless you're a terrorist or someone who wants to hide money."

Representative Tlaib (D-MI) said, "The idea that cryptocurrency can be a solution for financial inclusion is not only laughable, it's dangerous. These get-rich-quick kind of ads and targeting of my residents? It's predatory."

The full Twitter thread begins here, and Mastodon thread begins here. The thread breaks partway through, and is generally difficult to navigate, so I'm going to try to publish a better roll-up as soon as I can.

Stay tuned for my coverage of the Senate Banking Committee hearing tomorrow. Testimonies are available to read ahead of time at that link.

Loved this post? Consider signing up for a pay-what-you-want subscription or leaving a tip to support Molly White's work, which is entirely funded by readers like you.