How Sam Bankman-Fried Misused Billions in Customer Fundsby@legalpdf
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How Sam Bankman-Fried Misused Billions in Customer Funds

by Legal PDFMarch 19th, 2024
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Sam Bankman-Fried engaged in fraudulent conduct by misappropriating billions of dollars in customer funds deposited on, directing funds to Alameda, and making false representations to customers about the safety and custody of their assets. This conduct, including significant spending unrelated to FTX operations, ultimately led to the collapse of and subsequent bankruptcy.
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USA v. Samuel Bankman-Fried Court Filing, retrieved on March 15, 2024 is part of HackerNoon’s Legal PDF Series. You can jump to any part in this filing here. This part is 3 of 33.

A. Fraud on FTX Customers

On, customers could buy and sell cryptocurrencies, such as Bitcoin and Ethereum, convert dollars to cryptocurrency and vice versa, and trade in cryptocurrency derivatives including swaps and futures. To trade on FTX, customers had to deposit money on the platform in the form of fiat currency or cryptocurrency. For fiat currency deposits, customers made deposits into bank accounts in the names of FTX, Alameda, and a company called North Dimension, via wire transfers. For cryptocurrency deposits, customers made deposits to FTX via transfers over the relevant cryptocurrency blockchain.

The defendant directly, and through FTX, represented to customers that the exchange was safe and trustworthy, that customers’ money belonged to them and was custodied, and that their funds would not be used by FTX. For example, as seen at trial, in advertisements featuring celebrities FTX represented that “FTX is the safest and easiest way to buy and sell crypto.” (GX900, GX-905). FTX’s terms of service stated that “none of the digital assets in [a customer’s] account are the property of, or shall or may be loaned to, FTX Trading.” (GX-558). In FTX’s “safeguarding of assets & digital token management policy,” which was submitted to regulators in The Bahamas and shared with some customers, FTX stated that the company had “a responsibility to ensure that customer assets are appropriately safeguarded and segregated from its own funds.” (GX-340). That policy further stated that “customer assets (both fiat and virtual assets) are segregated from its own assets,” that “all third-party service providers are aware that customer funds do not represent property of [FTX],” and that “all third-party providers are aware that customer assets are held in trust.” (Id.). Likewise, in Bankman-Fried’s testimony to the United States Congress, he stated that FTX had a robust risk management system and protected customer deposits by “maintaining adequate liquid resources to ensure the platform can return the customer’s assets upon request,” ensuring “customer assets are custodied,” and protecting “against misuse or misallocation of customer assets.” (GX-914A, GX-916T).

The FTX website also represented that customers owned the funds they deposited. Bankman-Fried repeatedly stated that “by logging in to the customers’ account at FTX, the customer can immediately view the types of assets they own held in custody by FTX.” (GX-914A, GX-916T). When customers logged into their accounts on FTX, they saw the assets that FTX indicated they had in their accounts, which they believed they could withdraw. (GX-425, GX-539; Tr. 79-80, 1293). The website also represented that customers could withdraw all the funds that their account showed that they had.

Contrary to those statements and representations, the defendant conspired with Caroline Ellison, Gary Wang, and Nishad Singh to defraud FTX’s customers by fraudulently inducing customers to deposit funds on FTX, by misappropriating those funds by directing them to Alameda, and by making false statements to lull customers into not withdrawing their money. As Ellison testified at trial, the defendant viewed FTX customer funds as “a good source of capital, and he set up [a] system that allowed Alameda to borrow from FTX.” (Tr. 654).

In his sentencing submission, the defendant claims that FTX was a “legitimate, bona fide, valid, innovative business.” (Def. Mem. at 8). But this case is not about whether FTX had legitimate features. Whether or not the exchange could have operated as a “legitimate” business, the fact is that the defendant intentionally used its infrastructure to misappropriate billions of dollars, and that customer deposits were not safely custodied for them from the outset.

The defendant and others working at his direction at FTX and Alameda misappropriated FTX customer funds through two primary means. (Tr. 644). First, at Bankman-Fried’s direction, FTX told customers to deposit funds into bank accounts controlled by Alameda, some of which had been set up in the name of North Dimension. (Tr. 156-57, 654-55; GX-568). Alameda regularly took customer funds from those bank accounts, transferred the funds to other bank accounts under Alameda’s control, and used or spent the funds. (Tr. 656; GX-1050). As a result of the spending of customers’ deposits, FTX and Alameda had a multi-billion-dollar deficit of customer funds. Second, Bankman-Fried and others secretly introduced special features into FTX’s computer code, which permitted Alameda to spend and withdraw unlimited amounts of money from FTX. (Tr. 358-59, 390-91). While the defendant publicly and repeatedly asserted on Twitter, in response to reporters’ inquiries, in statements to his investors, and in other private and public fora, that Alameda did not have privileged access to FTX, (Tr. 279, 402), Bankman-Fried directed Wang to alter FTX’s computer code to allow Alameda to accrue a negative balance on FTX’s exchange, (Tr. 358-59). Those specific code provisions included an “allow negative” feature, which permitted Alameda to accrue a negative balance when making transfers and withdrawals; a $65 billion line of credit; and an exemption from the automatic liquidation feature on FTX. (GX-644). While for a typical client FTX would have automatically liquidated a client’s account once its negative balance exceeded the amount of any posted collateral, net of fees, FTX permitted Alameda to maintain a negative balance, draw on a multi-billion-dollar line of credit, borrow funds from FTX without sufficient collateral, evade auto-liquidation, and withdraw funds from the exchange. Over time, Bankman-Fried directed that Alameda’s credit limit be raised so high that, in practice, Alameda was permitted to draw on FTX accounts funded by customer assets on an unlimited basis—in amounts that exceeded FTX revenue and tapped into customer funds. (Tr. 390).

As a result of Alameda’s ability to “go negative” and its $65 billion line of credit, Bankman-Fried was able to take or “borrow” billions of dollars of customer funds on FTX, accruing a multi-billion-dollar negative balance in Alameda’s account. (GX-1004). When Alameda had a negative balance on FTX and withdrew funds, it was taking customer money. (Tr. 1364-65). By spending customer funds, FTX had a significant deficit in its cryptocurrency wallets and in the bank accounts that were supposed to be holding fiat deposits. (GX-1051). BankmanFried used customer deposits for billions of dollars in spending unrelated to the operation of FTX, including to pay for his own personal expenses, real estate in The Bahamas, speculative venture investments, a wide-ranging political influence operation, and to repay Alameda’s lenders.

At trial, including in its principal summation, the Government highlighted multiple milestones in 2021 and 2022 when the defendant decided to double down on the fraud, rather than put an end to his misconduct. Each time—whether it involved significantly enlarging the misuse of customer funds and the size of Alameda’s debt to FTX customers, or overriding a coconspirator’s concern about their wrongdoing, or both—Bankman-Fried knowingly pushed ahead, directing the misappropriation and spending of customer funds. Each of these points in time were, alone, a basis for the defendant’s conviction. And it is easy to imagine any one of these incidents giving rise to a criminal prosecution and significant sentence. The fact that the defendant repeatedly pushed forward with misusing customer money when confronted with the wrongfulness and the risk of what he was doing evinces willfulness and callousness that must be reflected in his sentence.

One of the first inflection points highlighted at trial came during the conversations that Ellison had with the defendant about repurchasing FTX stock that was owned by Binance, and the defendant’s subsequent direction to use customer funds to go through with the acquisition. As background, when FTX was founded, Bankman-Fried sold FTX stock to Binance, another cryptocurrency exchange. By the middle of 2021, Binance was FTX’s primary competitor and Bankman-Fried wanted to buy back Binance’s FTX stock. Bankman-Fried repeatedly told Ellison that buying back the stock was “really important” to him, largely because Binance was a major competitor and the defendant viewed Binance’s leader as a rival. (Tr. 668). At the time, Binance’s equity in FTX was worth approximately $2 billion, and FTX’s revenue was only half that amount. According to her trial testimony, Ellison told Bankman-Fried, “We don’t really have the money for this, we’ll have to borrow from FTX to do it.” (Tr. 668). Bankman-Fried responded, “That’s okay. I think this is really important, we have to get it done.” (Id.). Bankman-Fried then repurchased the FTX shares owned by Binance using a mix of FTX funds and customer deposits. (GX-1024). The transfer came from Alameda’s main account on FTX, which was able to make the transfer, notwithstanding the fact that it had insufficient funds, because of the allow negative feature that had been enabled on its account. The transfers were directed personally by BankmanFried. (GX-317).

Several months later there was another inflection point. In the fall of 2021, Bankman-Fried asked Ellison to determine what would happen if Alameda spent $3 billion more on venture investments. (Tr. 707-10). Ellison prepared an analysis, which she shared with Bankman-Fried. (GX-36). As background, Alameda did not have outside investors. Instead, its trading operations were funded primarily through open term loans by third party cryptocurrency lenders such as BlockFi, Genesis Capital, BitGo, Ledn, Celsius, Voyager, and others. Those loans were typically structured as follows: Alameda pledged collateral in the form of FTT, FTX’s “native token,” to the third-party lender, and then the lender lent dollars, Bitcoin, or Ethereum to Alameda, which agreed to repay the lent funds with interest on demand. In the fall of 2021, Ellison told BankmanFried that Alameda had more loans than assets, and that without certain FTX-related cryptocurrencies such as FTT, Solana, and Serum, Alameda’s net asset value was negative $2.7 billion. (Tr. 710). Her analysis also showed that in the event of a market downturn and the recall of Alameda’s loans, the only way to repay third-party loans would be to borrow billions of dollars of FTX customer funds. (GX-36). Ellison told Bankman-Fried that she thought that new venture investments were a bad idea and too risky. (Tr. 710-11). Notwithstanding the risks, BankmanFried told her “he wanted to go ahead with billions of dollars of venture investments.” (Tr. 729). From late 2021 through the first quarter of 2022, Bankman-Fried directed billions of dollars in spending, which used FTX customers’ money. Those expenditures included investments of hundreds of millions of dollars each into Genesis Digital Assets (a crypto mining company), K5 (an investment firm, which the defendant used to connect with politicians and celebrities), Dave Inc. (an online bank), Anthropic PBC (an artificial intelligence company), purchase of stock in the company Robinhood, over $100 million in real estate purchases in the Bahamas (including a $30 million penthouse apartment for Bankman-Fried and his friends), and political donations. (GX1045).

A third inflection point came in June 2022, when Bankman-Fried’s spending caught up with him. In May 2022, the cryptocurrency stablecoin Terra and its sister token, Luna, collapsed in value, triggering a collapse of several other cryptocurrency businesses such as the firm Three Arrows and the lenders Celsius and Voyager. The instability in the cryptocurrency market caused Alameda’s lenders to recall nearly all of their loans, and Alameda was required to repay in excess of $6 billion on demand. Ellison raised the issue with Bankman-Fried, who had been copied on some of the repayment demands from lenders, and asked what to do. As several witnesses testified at trial, Bankman-Fried asked Ellison, Wang, and Singh to work on a spreadsheet to calculate Alameda’s balances on FTX and net asset value. (Tr. 425-26). That spreadsheet indicated that Alameda had a negative $11 billion balance on FTX, and was borrowing $13 billion in customer funds. (GX-50). Bankman-Fried reviewed the spreadsheet and then participated in a conversation with Ellison, Wang, and Singh about Alameda’s balances. (Tr. 439-40). After that conversation, Bankman-Fried turned to Ellison and told her to “go ahead and return the borrows” to “lenders who loaned Alameda money and were asking for it back.” (Tr. 440-41). After that, according to Ellison, Bankman-Fried continued to direct her “to use FTX customer funds to repay loans.” (Tr. 765). Alameda proceeded to repay the third-party lenders using FTX customer funds. (GX-1017A to GX-1017K). Of the $6.5 billion that was repaid to Alameda’s lenders, almost 70 percent was customer money. (GX-1018). This scenario was far from unexpected—it was precisely the market downturn scenario that Bankman-Fried had asked Ellison to analyze in the fall of 2021, and a reason that she had advised against additional venture investing. Consistent with their analysis in the fall of 2021, Bankman-Fried and Ellison both understood that the only way to repay lenders in this scenario was by using customer funds—the only difference was that by June 2022, FTX had billions of dollars more in customer deposits available for Alameda to misappropriate, which was used to repay lenders in full.

By September 2022, the defendant had spent so much customer money that it became clear that it could not be repaid. As of September 1, 2022, Alameda was borrowing approximately $13.7 billion in customer money from FTX. (GX-19). On September 7, Bankman-Fried had a conversation with Ellison, Wang, and Singh, in which they discussed Alameda’s substantial negative balance on FTX and its inability to repay those funds. (Tr. 823, 1403). This was another inflection point, and again, the defendant chose to forge ahead with his crimes. After his conversation with his co-conspirators, Bankman-Fried had a private conversation with Singh on the balcony of his penthouse apartment, during which Singh told Bankman-Fried that he was very concerned about Alameda’s substantial negative balance on FTX and its inability to repay the money. Bankman-Fried acknowledged that they were “a little short on deliverable,” meaning short on the money that was owed to FTX customers. (Tr. 1407). At that time, Singh asked BankmanFried to refrain from additional spending that might exacerbate the problem and increase the size of FTX’s deficit. However, notwithstanding the significant deficit, Bankman-Fried continued to spend money that necessarily was coming from customer funds. On September 7, 2022, BankmanFried directed a $45 million payment to Skybridge for an investment. (Tr. 1419; GX-14B). On September 16, 2022, Bankman-Fried caused a $10 million transfer to an account in his name. (GX141A, 1089). On September 22, 2022, Bankman-Fried caused a $4 million transfer to an account in his name. (Id.). On September 26, 2022, Bankman-Fried directed a $250 million transfer to Modulo Capital for an investment. (Tr. 1418). On October 3, 2022, Bankman-Fried caused a $6 million transfer to an account in his name, which was used to make a political donation. (GX141A, 1089).

A final decision point came in November. Following the online publication of a leaked Alameda balance sheet on November 2, 2022, and subsequent Tweets by the founder of Binance, customers began withdrawing funds from FTX. Over the next several days, as FTX customer withdrawals surged and FTX was unable to satisfy the withdrawals, Bankman-Fried sent a series of false and misleading Tweets to induce FTX customers to leave their money on the FTX platform and deter them from seeking to withdraw their money. Specifically, on November 7, 2022, Bankman-Fried tweeted: “A competitor is trying to go after us with false rumors. FTX is fine. Assets are fine.” (GX-866). He added in a second Tweet, in part, “FTX has enough to cover all client holdings. We don’t invest client assets (even in treasuries). We have been processing all withdrawals, and will continue to be.” (Id.). In a third Tweet, Bankman-Fried wrote, “It’s heavily regulated, even when that slows us down. We have GAAP audits, with > $1B excess cash. We have a long history of safeguarding client assets, and that remains true today.” (Id.). As each of the defendant’s co-conspirators testified at trial, as well as other witnesses, those Tweets were false because at the time FTX had a multi-billion dollar hole and had insufficient assets to cover customer withdrawals. (Tr. 1465-66).

At the time Bankman-Fried made those public statements, he knew they were not true— over the preceding months, he and Ellison had spent billions of dollars of FTX customer money to repay Alameda’s lenders and on other expenses and investments. Moreover, in an internal document that he authored on or about November 6, 2022—the day before tweeting—BankmanFried wrote that FTX only had “enough to process ~1/3 of remaining client assets.” (GX-21). Additionally, in a Signal group thread called “small group chat,” Bankman-Fried wrote just hours before tweeting that FTX only $3.9 billion of the total $12 billion, meaning there was an $8.1 billion shortfall. (GX-406). These documents reflected Alameda’s borrowing of customer funds that Bankman-Fried had authorized, and of which he had been aware for months. Bankman-Fried nonetheless posted what he called a “confident tweet thread” (GX-21) to lull FTX’s customers into keeping their funds on FTX. As a result of Bankman-Fried’s false and misleading Twitter thread, FTX customers did not withdraw their money and left it on the exchange. (Tr. 89, 1292). BankmanFried subsequently deleted these Tweets.

As FTX struggled to meet customer demands, Bankman-Fried approved halting customer withdrawals from the exchange. Shortly thereafter, however, Bankman-Fried—who was residing in The Bahamas at the time—reopened withdrawals only for customers in The Bahamas in order to curry favor with the Bahamian government. In an email to Ryan Pinder, Attorney General of The Bahamas on November 10, 2022, Bankman-Fried wrote in part:

We are deeply grateful for what The Bahamas has done for us, and deeply committed to it. We are also deeply sorry about this mess. As part of this: we have segregated funds for all Bahamian customers on FTX. And we would be more than happy to open up withdrawals for all Bahamian customers on FTX, so that they can, tomorrow, fully withdraw all of their assets, making them fully whole. It’s your call whether you want us to do this--but we are more than happy to and would consider it the very least of our duty to the country, and could open it up immediately if you reply saying you want us to. If we don't hear back from you, we are going to go ahead and do it tomorrow.

(GX-248). Opening withdrawals exclusively for Bahamians resulted in millions of dollars being withdrawn from the exchange by Bahamians and FTX insiders located in The Bahamas, while other customers of had no ability to access withdrawals.

On November 11, 2022, FTX, FTX US, Alameda, and other related entities all filed for bankruptcy. As discussed in detail below, after FTX entered bankruptcy, Bankman-Fried told Wang that Bankman-Fried was still CEO of the FTX Bahamian entity because the bankruptcy applied only to FTX and FTX US. Bankman-Fried took Wang to meet with Bahamian regulators. (Tr. 465). Prior to meeting with the regulators, Bankman-Fried told Wang that he was going to offer to transfer FTX’s remaining assets to the regulators to curry favor with officials in The Bahamas. (Tr. 465-66, 471). After Bankman-Fried met with Bahamian regulators outside Wang’s presence, Bankman-Fried and the Bahamian regulators directed Wang to move FTX funds to a Bahamian cold wallet and Wang complied. (Tr. 466). Bankman-Fried told Wang to stall with those representing the U.S. bankruptcy if they tried to engage Wang in securing additional assets, and to tell the lawyer that he was still with Bahamian regulators. (Tr. 467). As Wang moved the assets to the Bahamians, Bankman-Fried also sent messages to those trying to resume securing assets for the U.S. bankruptcy, stating that he and Wang were unavailable because they were still meeting with regulators. (Tr. 467-69; GX-543). Ultimately the FTX assets that Bankman-Fried and Wang were able to access were transferred to the authorities in The Bahamas, not to the bankruptcy estate.

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