The Deceptive Tactics of Bankman-Fried: How FTX Investors Lost Billionsby@legalpdf
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The Deceptive Tactics of Bankman-Fried: How FTX Investors Lost Billions

by Legal PDFMarch 19th, 2024
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Bankman-Fried engaged in fraudulent practices, including misrepresentation of customer funds, providing special treatment to Alameda, fabricating revenue through fake transactions, and using investor money for personal expenses, leading to a massive fraud case involving over a billion dollars.
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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 4 of 33.

B. Fraud on FTX Investors

Bankman-Fried also defrauded his investors. This alone was a more than one billion-dollar fraud: investors had to write down over a billion dollars in investments to zero.

By way of background, FTX had equity investors that purchased shares of FTX stock at increasing valuations over time. (GX-26). In the course of making those investments, FTX’s equity investors conducted due diligence. Bankman-Fried represented to FTX investors that FTX acted as a custodian of its customers’ deposits, and they understood this to mean that customer funds were segregated and not used by FTX or Alameda for other purposes. (Tr. 273-74, 2015). Indeed, several FTX investors conducted due diligence on whether Alameda received any special treatment and were told by Bankman-Fried and others acting at his direction that Alameda received no special treatment on FTX. (Tr. 278-81, 2013-14). Those representations were false for multiple reasons, including that Bankman-Fried directed Alameda be afforded preferential treatment in FTX’s computer code, he directed it to engage in extensive borrowing from FTX, and he directed that Alameda be exempt from FTX’s auto-liquidation engine, which Bankman-Fried had highlighted to investors as a key part of the FTX business model that reduced risks to the business. (Tr. 280, 2011-12). Had FTX’s equity investors known about the use of customer funds or Alameda’s special treatment, they would not have invested. (Tr. 274, 280-82, 2014-15).

Bankman-Fried engaged in additional deceptive courses of conduct intended to mislead investors. For instance, in 2021, after an FTX user engaged in a form of market manipulation, causing a large loss on the platform, Bankman-Fried secretly shifted the loss to Alameda so that it would not appear on FTX’s books (the so-called “MobileCoin” incident, after one of the cryptocurrencies the user was believed to manipulate). (Tr. 1455-56). Bankman-Fried also made public statements about FTX having an “insurance fund” to cover losses associated with customer accounts that were liquidated. (Tr. 409; GX-751). But at Bankman-Fried’s direction, FTX’s website was coded to publicly display a fake value for the insurance fund, which overstated the actual money that FTX had available in the insurance fund. (Tr. 412). To conceal the fact that FTX lacked sufficient money in its insurance fund to cover all liquidation losses, Bankman-Fried directed that some of those losses be transferred to Alameda. (Tr. 412).

In order to make FTX’s 2021 revenues appear larger than they were—specifically, so that they would appear to be a billion dollars—Bankman-Fried directed Singh at the end of 2021 to add fake additional revenue to FTX’s books from “staking,” which is a form of lending, of the cryptocurrency Serum. (Tr. 1445-48). At Bankman-Fried’s direction, Singh entered multiple Serum staking transactions and then backdated them in FTX’s database. (Tr. 1450-51). BankmanFried also signed a Serum staking agreement, backdated to January 2021, which was provided to FTX’s auditors. (Tr. 1453-54; GX-323). These actions had the effect of making it appear, falsely, that FTX had revenue of more than $1 billion for FY 2021.

Finally, Bankman-Fried also used FTX investor money to finance Alameda’s operations and cover expenses. Indeed, after receiving money from investors, Bankman-Fried directed that some of those funds be transferred over to Alameda. (GX-1050). Those funds were spent on real estate, including a house for Bankman-Fried’s parents, among other things. (GX-1023).

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This court case retrieved on March 15, 2024, from storage.courtlistener is part of the public domain. The court-created documents are works of the federal government, and under copyright law, are automatically placed in the public domain and may be shared without legal restriction.