The collapse of FTX

We have heard it on the news, Samuel Bankman-Fried was charged last year by the Securities and Exchange Commission (SEC) with orchestrating a scheme to defraud equity investors in FTX Trading Ltd. (FTX). Bankman-Fried was the CEO and co-founder of the famous crypto trading platform FTX, headquartered in The Bahamas, one of the world’s largest cryptocurrency exchanges. He was even considered and called by some a modern-day J.P. Morgan. The SEC charged him with violating the anti-fraud provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.  

You may remember, FTX filed for bankruptcy in November last year after facing a liquidity crisis and failing to obtain bailout funds. Following hours of the bankruptcy filing, FTX also experienced a hacking incident in which apparently hundreds of millions worth of tokens were stolen. 

Other crypto companies such as Celsius Network, BlockFi and Voyager Digital have recently filed for bankruptcy as well. Such bankruptcies appear to be directly related to the collapse of FTX, as FTX was one of the largest creditors and served as a “white knight” to some crypto companies.

Representations to Investors

It appears that Bankman-Fried, under his representations to investors, promoted the cryptocurrency exchange as a safe, responsible crypto asset trading platform, and sophisticated enterprise with automated risk measures to protect customer assets.  However, given its collapse, these claims seem to be grandiose pronouncements and not accurate depictions of what FTX and its affiliated entities were.

Remember, representations to investors must be truthful and accurate. You should always present the facts and circumstances of the company transparently, without trying to embellish them and falling into false representations, which can be subject to major legal issues down the road.

Money Laundering and Fraud

It appears that FTX had no bookkeeping and their day-to-day operations may be called by some as  old-fashioned embezzlement. Per the SEC Press Release on December 13, 2022, the complaint alleges, among other things, that Bankman-Fried orchestrated a years-long fraud scheme to conceal from FTX investors: (1) undisclosed diversion of FTX customer’s funds to Alameda Research LLC (Alameda) (Bankman-Fried’s privately-held crypto hedge fund); (2) undisclosed special treatment to Alameda on FTX platform (including an “unlimited line of credit”); and (3) undisclosed risk stemming from FTX’s exposure to Alameda’s significant holdings of overvalued, illiquid assets.

Remember, you should always keep accurate records of your books and finances, regardless of the business you operate.  In addition, DO NOT comingle personal funds with your business accounts.  Maintaining financial books and business records properly, not just bank statements, for the right amount of time is key to the success of your business and complying with applicable laws and regulations. Also, having an outside accountant to monitor and review your financial records is extremely important and prudent. 

Regulatory Action

There are certain gaps in the regulation of crypto-asset activities.  At this point, scholars point out that there have been no changes to regulations to address new forms of currency, such as crypto, and that Congress needs to take action.  Apparently, there is some debate as to whether these new forms of currency should be regulated by the Commodities and Futures Trading Commission or the SEC. Both regulatory agencies have asked Congress to extend their jurisdiction and there are two (2) bipartisan bills pending in Congress: (1) the Digital Commodities Consumer Protection Act of 2022, and (2) the Responsible Financial Innovation Act. 

Bankman-Fried posted bail after being extradited to the U.S. and is living with his parents in California. His bond was the largest bond in history, $250 million dollars.

Please note that this blog must not be considered as financial advice or legal advice and should be read for informational purposes only. If you have any questions or require additional information, please contact our office.

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