Fraud or mismanagement? FTX founder under massive fire – This is how the bankrupt founder could avoid punishment

taketonews

• The FTX debacle is being dealt with
• Doubts about SBF’s mismanagement portrayal
• Possibly no penalty for FTX founders

“Never in my professional career have I experienced such a failure of corporate control and such a lack of reliable financial information as in this case,” said John J. Ray in a letter to the US bankruptcy court in Delaware. John J. Ray is the new boss of the crypto exchange FTX and is to lead and accompany the restructuring efforts of the company under Chapter 11 as the successor to FTX founder Sam Bankman-Fried (SBF). Ray is considered an expert in his field and has previously overseen the insolvency of the energy company Enron, among other things. His assessment of FTX’s corporate health therefore carries some weight and does not reflect well on the company’s past management.

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SBF claims to have known nothing

Bankman-Fried has made a number of public appearances regarding the allegations and events surrounding FTX. At the New York DealBook Summit, he acquitted himself of fraud allegations. “I made a lot of mistakes but never tried to commit fraud,” said the 30-year-old in an interview.

It was the risk management that failed, there was no person at the crypto exchange “who monitored the risk of our positions”. In addition, given the numerous branches, one would have lost track of individual companies. However, SBF does not feel completely free of responsibility in the context of the interview: He could have worked more thoroughly “if I had been a little more focused on the matter”, he would have recognized the existing risks.

In the meantime it has become known that FTX – contrary to the assurances of the former CEO – speculated with customer funds. Against this background, the trading company Alameda, which was also founded by Bankman-Fried and whose well-known financial structure is considered to be the causal trigger for the FTX bankruptcy, has been caught in the crossfire of criticism. Apparently, customer money in the billions has disappeared there. As reported by the Wall Street Journal, in the early days of FTX, it was common for customers to deposit their money with Alameda since FTX did not yet have its own bank accounts. SBF put the total of customer funds deposited in Alameda accounts at five billion US dollars.

What then happened to the funds, he could not say. The transactions went to Alameda and he can only speculate as to what happened next. US dollars cannot be traced back to the end due to the lack of a unique identifier, and in the end you get “a collection of various assets”.

He said he was unable to see the scale of Alameda’s trading on the exchange due to FTX’s faulty internal system. In addition, his work at FTX and other projects involved him in such a way that he was unable to monitor Alameda’s business.

In an interview with Bloomberg, SBF then once again referred to disappearing customer funds – in the meantime there was even talk of eight billion US dollars. “Booking error,” was the ex-FTX boss’s brief answer. Some FTX customers temporarily transferred their money to Alameda instead of FTX – also because banks were more willing to work with Alameda than with FTX. The internal accounting system then counted the money twice and attributed it to both companies.

Fraud allegations against SBF

Bankman-Fried’s comments and interviews suggest mismanagement, not deliberate fraud. However, some observers see things differently. In particular, SBF’s statement that it was an “accounting error” is viewed critically.

Alameda’s former boss, Caroline Ellison, reportedly admitted to Alameda employees after the FTX collapse that both Bankman-Fried and other senior management were aware that customer funds were being purposefully diverted to Alameda. This was intended to cover the losses caused by the consequences of the Terra/LUNA crash in June.

Alameda and FTX blame each other for the debacle, but for other observers the culprit for the implosion of FTX and Alameda is clear: Sam Bankman-Fried. Brian Armstrong, CEO of Coinbase, does not want to accept his accounting error argument.

Not even the most naive should believe Sam’s words that it was an accounting error. “I don’t care how messy your bookkeeping is (or how rich you are). You’ll definitely know it when you find an extra $8 billion to spend,” Armstrong said in a Twitter post that included plenty received approval.

“It’s pure and simple stolen client money that was used in his hedge fund,” Armstrong added in the comments to the tweet.

More doubts about SBF reasoning

David Z. Morris, columnist at Coindesk, the portal that started the avalanche around FTX with his report on the relationship between Alameda and FTX and the capitalization of the FTX trading arm, has collected a number of other arguments that support talk about a targeted fraud by Sam Bankman-Fried. Not only were the two supposedly independent companies more closely connected than expected, there was also a romantic relationship between SBF and the Alameda boss Ellison, which probably made the events possible.

In addition, on-chain data would have revealed that FTX would have diverted funds to Alameda in a large scale as early as late 2021 – well before the Terra/LUNA crash. “His companies lost enormous amounts of money before the 2022 crypto bear market even started. They may have been stealing funds well before the Terra and Three Arrows Capital explosions that mortally wounded so many other leveraged crypto players,” the columnist said.

According to data from the crypto analysis company Argus, there is another point in favor of targeted fraud at FTX/Alameda. Accordingly, Alameda Research had insider access to information concerning plans for the upcoming listing of certain tokens on FTX. Sam Bankman-Fried’s trading firm was then able to purchase these tokens prior to listing and later sell them when the price rose as a result of the listing.

Can SBF avoid criminal conviction?

The question of whether the events at FTX and Alameda are fraud or mismanagement will now probably have to be decided by the courts. The ex-FTX boss will probably stay away from an upcoming court date on December 13, to which US Congresswoman Maxine Waters has summoned Sam Bankman-Fried. Speaking at the invitation, the MP said: “…we appreciate that you have shown candor in your discussions about what is happening at FTX. Your willingness to speak to the public will benefit the company’s customers, investors and others. Therefore, we would welcome your participation in our hearing on the 13th.”

Sam Bankman-Fried responded on Twitter that he hadn’t been able to process the events and wasn’t sure if that would be done by December 13. But as soon as he was done with that, he would testify before the committee and explain himself.

Ultimately, however, the outcome of a court case against the FTX founder is completely open. SBF should also benefit from the fact that FTX is registered in the Bahamas and is not subject to US jurisdiction. Randall Eliason, a legal expert, told Fortune that Sam Bankman-Fried could avoid a sentence altogether and avoid a criminal conviction. It is specifically about whether you can accuse SBF of intent. “It’s not criminal to mismanage your business and lose a bunch of other people’s money. It happens all the time. For a criminal case to happen, there has to be deception,” he said.

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