The Case Against Sam Bankman-Fried — Transcript

Full transcript

1. 0:00Sam Bankman Fried is not having a great week so far, and his worst days may be still ahead
2. 0:06of him.
3. 0:07On Monday he was arrested in the Bahamas at the request of the U.S. government, which
4. 0:13had filed a sealed indictment in the Southern District of New York.
5. 0:18On Tuesday, The SEC charged him with defrauding the venture capitalists and other equity investors
6. 0:25who invested in FTX (with rather limited due diligence) since 2019.
7. 0:32Shortly afterwards, CFTC charges followed alleging that FTX commingled customer funds
8. 0:40and that Bankman-Fried violated the Commodities Exchange Act.
9. 0:44There is some pretty wild stuff to read in the three complaints.
10. 0:49The fact that Sam Bankman Fried was the only person charged (at least so far) has led to
11. 0:54some speculation that his business associates may be co-operating with prosecutors.
12. 1:01SBF’s lawyer says that he is reviewing the charges with his team and considering all
13. 1:07of his options.
14. 1:08There are eight criminal charges in total against Sam which include wire fraud on both
15. 1:14lenders and customers, conspiracy to commit wire fraud on both groups, conspiracy to commit
16. 1:22both commodities and securities fraud as well as conspiracy to commit money laundering.
17. 1:29He faces a maximum 115-year sentence if convicted.
18. 1:34The Department of Justice indictment alleges that Sam also broke campaign finance laws
19. 1:41by making contributions to candidates and committees that exceeded federal limits.
20. 1:47We will cover that point near the end of the video.
21. 1:51Now, While the SEC can only issue civil charges, they are accusing Sam Bankman Fried of orchestrating
22. 1:59a multibillion-dollar fraud that began the day he launched his exchange and continued
23. 2:05at his personal direction until its collapse last month.
24. 2:10The CFTC which can also only issue civil charges wrote in its complaint, that when the enterprise
25. 2:17came crashing down last month "FTX customers and the world at large discovered that FTX,
26. 2:24through its sister-company Alameda Research, had been siphoning off customer funds for
27. 2:30its own use — and over $8 billion in customer deposits are now missing."
28. 2:36Even though the SEC and the CFTC can’t directly send a perpetrator to jail, they can work
29. 2:44with the Justice Department or other law enforcement officials on criminal cases.
30. 2:50The Department of Justice charges are the ones Sam has to worry the most about.
31. 2:55In the SEC lawsuit, it is put forth that Sam promoted his company to potential equity investors
32. 3:03as a safe and reliable participant in the wild west of digital assets and focused on
33. 3:09FTX’s sophisticated risk management.
34. 3:12The SEC complaint alleges that Sam Bankman-Fried hid the fact that his private trading firm
35. 3:19Alameda Research was exempt from these risk controls and benefited from in effect limitless
36. 3:26loans from FTX backed by customer assets.
37. 3:31This is roughly in line with what I suggested had happened in my “SBF explains losses”
38. 3:37video I made last week.
39. 3:40The SEC complaint puts forth that “From the start, Bankman-Fried improperly diverted
40. 3:46customer assets to his privately held crypto hedge fund, Alameda Research, and then used
41. 3:53those customer funds to make undisclosed venture investments, lavish real estate purchases,
42. 4:00and large political donations.”
43. 4:02I feel that I should point out that although Alameda is being referred to as a hedge fund,
44. 4:07it was not actually a hedge fund.
45. 4:09Much like Three Arrows Capital, it had no investors, and was not regulated as a hedge
46. 4:15fund.
47. 4:16Sam Bankman-Fried has in recent weeks insisted that he was unaware of the details of what
48. 4:22Alameda Research was doing.
49. 4:24He has also denied intentional wrongdoing and apologized for what he has characterized
50. 4:30as oversights and errors.
51. 4:33The SEC allege that contrary to what he has been claiming, he actually had full control
52. 4:39and access to information at both FTX and Alameda, and that he “directed investment
53. 4:46and operational decisions” at Alameda.
54. 4:50The SEC claims that Bankman-Fried has taken active steps this year to hide the billions
55. 4:57of dollars of FTX customer balances that were held at Alameda.
56. 5:02“Bankman-Fried placed billions of dollars of FTX customer funds into Alameda.
57. 5:08He then used Alameda as his personal piggy bank,” according to the complaint.
58. 5:14These three different lawsuits are coming at Sam Bankman Fried and FTX from very different
59. 5:20angles.
60. 5:21The old debate over which agency should be regulating FTX does not appear to be a big
61. 5:26deal as Bankman-Fried has found himself accused of securities fraud, commodities fraud with
62. 5:32a bit of general fraud thrown in.
63. 5:35All agencies, no matter what they are regulating seem to be accusing Sam of some variety of
64. 5:41fraud.
65. 5:43Roughly speaking though, The Department of Justice is accusing FTX of criminal wire fraud
66. 5:48and money laundering (which is bad), The CFTC is accusing FTX of commodity futures fraud
67. 5:55(which is also bad), and because FTX raised money from venture capital investors by selling
68. 6:02them stock, which is clearly a security.
69. 6:05And Sam misled these VC investors (while playing video games at the same time), these investors
70. 6:12were defrauded, and the SEC can then charge Sam and his cursed exchange with securities
71. 6:19fraud. – which I should highlight is bad…
72. 6:23It's all bad, the only person really saying anything good about Sam right now is Kevin
73. 6:29O’Leary, and he seems to be under the impression that Sam’s parents are compliance lawyers
74. 6:35when they are in fact Tax Law professors.
75. 6:38But I won’t make fun of Kevin here.
76. 6:41He does his best…
77. 6:43OK so let’s look first at the SEC complaint, then the CFTC complaint and finally the criminal
78. 6:51charges against Sam Bankman Fried to see what he is accused of and what evidence of wrongdoing
79. 6:58the various agencies have put forth.
80. 7:01The SEC complaint starts out with the statement that “From at least May 2019 through November
81. 7:082022, Bankman-Fried engaged in a scheme to defraud equity investors in FTX Trading Ltd,
82. 7:17the crypto asset trading platform of which he was CEO and co-founder, at the same time
83. 7:24that he was also defrauding the platform’s customers.
84. 7:28They go on to explain how he lied to and defrauded FTX customers, but the focus of the SEC case
85. 7:36is that he lied to and misled the equity investors in FTX.
86. 7:41Specifically, that he solicited equity investors by touting FTX’s controls and risk management
87. 7:49and that he misrepresented the risk profile of investing in FTX by not just failing to
88. 7:55disclose FTX’s exposure to Alameda Research and illiquid, FTX-affiliated tokens like FTT,
89. 8:03but by actively hiding those risks.
90. 8:06Sam is accused of violating Section 17(a) of the Securities Act of 1933, section 10(b)
91. 8:14of the Securities Exchange Act of 1934 and Rule 10b-5.
92. 8:20The SEC allege in their complaint that Sam Bankman-Fried was the ultimate decision-maker
93. 8:27at Alameda Research, even after Caroline Ellison and Sam Trabucco became co-CEOs.
94. 8:35The complaint states that Bankman-Fried directed investment, operational decisions, frequently
95. 8:41communicated with Alameda employees, and had full access to Alameda’s records and databases.
96. 8:48So, this is very different to SBF’s recent claims that he has been making in interviews
97. 8:55where he is claiming to have been a hands-off investor, with no day-to-day involvement.
98. 9:01It looks like the SEC are going after him both for the “offer of securities” and
99. 9:06the “sale of securities” as they focus in on the statements he made in November of
100. 9:11this year while attempting to raise additional capital right before the bankruptcy filing.
101. 9:18Amusingly, it would appear that the VC investors did so little due diligence that in the SEC’s
102. 9:25search for false statements being made to investors they had to use statements made
103. 9:30by Sam in public forums and on the FTX website.
104. 9:34The SEC’s argument is that because Sam gave so little information to investors at all,
105. 9:41they must have relied on statements he made in press interviews and things like the Terms
106. 9:46of Service from FTX’s website which assured customers that their assets were secure.
107. 9:54This would have led investors to believe the same thing.
108. 9:57The SEC are working on the assumption that the VC investors who handed over close to
109. 10:03two billion dollars did some research first.
110. 10:06They wouldn’t have just invested because Sam told them that some day you would be able
111. 10:11to buy a banana on the app.
112. 10:15That would be ridiculous…
113. 10:16The SEC claim that FTX specifically used the documents on their website in their pitch
114. 10:22to a US investor who invested $35 million dollars.
115. 10:27They reference news coverage, statements to the house of representatives and statements
116. 10:32to the CFTC as public statements that investors will have used in deciding whether to invest
117. 10:41or not.
118. 10:42As we dig in more, the SEC directly challenge SBF’s claims that he has been making in
119. 10:49recent interviews that he had nothing to do with Alameda and didn’t realize that they
120. 10:54were capitalized with customer funds.
121. 10:57The claim alleges that in 2022 FTX began separating Alamedas money from customer money by moving
122. 11:06the customer money to a different account in the FTX database.
123. 11:11This change caused FTX’s systems to start charging Alameda interest on the 8 billion
124. 11:18dollar liability that they were now showing.
125. 11:20The SEC allege that Sam directed that this liability be moved to an account where Alameda
126. 11:27wouldn’t be charged interest.
127. 11:30This account was associated with an individual who had no apparent connection to Alameda.
128. 11:36As a result, this change had the effect of further concealing Alameda’s liability in
129. 11:43FTX’s internal systems.
130. 11:46The complaint alleges that Bankman-Fried directed software code to be written in or around August
131. 11:532019, and updated in or around May 2020, that allowed Alameda to maintain a negative balance
132. 12:03in its account.
133. 12:05Bankman-Fried is also accused of directing FTX to increase the amount by which Alameda
134. 12:11could maintain a negative balance in its account on multiple occasions.
135. 12:17They allege that in or around May 2020, Bankman-Fried directed that Alameda be exempted from the
136. 12:25“auto-liquidation” feature of FTX’s spot margin trading services.
137. 12:30This put customer money directly at risk, but importantly for this complaint, put the
138. 12:36overall exchange at risk too and was not disclosed to investors, meaning that there was securities
139. 12:44fraud.
140. 12:45The complaint uses SBF’s recent media appearances as evidence against him, as he told interviewers
141. 12:54that he didn’t put any time or effort into risk management at FTX, while he had pitched
142. 13:00to investors that good risk management was the exchange’s competitive advantage.
143. 13:06Next up is the CFTC case and they are pursuing claims based on customer losses.
144. 13:13The Commodity Futures Trading Commission charged Sam Bankman-Fried, FTX and Alameda with fraud
145. 13:21and material misrepresentations.
146. 13:24The complaint alleges that computer code written by FTX provided an “effectively limitless
147. 13:31line of credit that allowed Alameda to withdraw billions of dollars in customer assets from
148. 13:37FTX.”
149. 13:39The CFTC start out by making a case that the activity at FTX falls under CFTC jurisdiction.
150. 13:46So, they provide a bunch of charts and data showing that the collapse of FTX had a significant
151. 13:54affect on digital commodities listed on US exchanges.
152. 13:59The CFTC filing alleges that Alameda Research, Bankman-Fried’s personal hedge fund, enjoyed
153. 14:06access to as much as ”$8 billion in customer funds,” in an account nominally on FTX books
154. 14:14but controlled and in the name of Alameda.
155. 14:17From the very founding of FTX in 2019, the CFTC alleges that Alameda “accessed and
156. 14:25used FTX customer funds for Alameda’s own operations and activities, including to fund
157. 14:33its trading, investment, and borrowing/lending activities.”
158. 14:37The CFTC dismiss Sam’s claims that FTX and Alameda were separate entities and that he
159. 14:44had no control over Alameda.
160. 14:46They say that all of the companies operated as a single, integrated common enterprise
161. 14:53under the sole and ultimate authority of Bankman-Fried as their mutual owner.
162. 14:59They point out that he was a signatory on important corporate agreements, corporate
163. 15:04bank accounts and trading accounts.
164. 15:08They say that Sam maintained direct decision-making authority over all of Alameda’s major trading,
165. 15:15investment, and financial decisions and that this authority was exercised regularly through
166. 15:21Bankman-Fried’s often daily participation in various in person and mobile chat communications
167. 15:29with senior personnel at Alameda.
168. 15:32The complaint states that Alameda and FTX continued to share office space, key personnel,
169. 15:40technology, hardware, intellectual property and other resources.
170. 15:45The complaint alleges that, at Sam Bankman-Fried’s direction, FTX employees created features
171. 15:52in the FTX code that favored Alameda and allowed it to execute transactions even when it did
172. 16:00not have sufficient funds available, including an “allow negative flag” and effectively
173. 16:06limitless line of credit that allowed Alameda to withdraw billions of dollars in customer
174. 16:12assets from FTX.
175. 16:15These features were not disclosed to the public.
176. 16:18The complaint also points out that Alameda was given certain hard coded advantages trading
177. 16:24on FTX, where they could trade significantly faster than anyone else using the platform.
178. 16:31The complaint says that Alameda’s borrowed funds could be withdrawn from FTX.
179. 16:37Meaning that Alameda had an unlimited ability to borrow and withdraw digital assets from
180. 16:43FTX Trading to put towards its off-platform activities.
181. 16:48By early 2022, Alameda had invested several billion dollars in directional, unhedged,
182. 16:56illiquid, and/or long-term investments.
183. 16:59To fund these investment activities, Alameda had relied on billions of dollars of loans
184. 17:05from digital asset lending platforms, traditional bank lines of credit, and its unlimited borrowing
185. 17:12abilities on FTX, including its access to customer funds.
186. 17:19The complaint says that over the summer of 2022, Alameda was subject to a large number
187. 17:25of margin calls and loan recalls from other platforms.
188. 17:29They didn’t have sufficient assets to meet those payments and at the direction of Sam
189. 17:36Bankman-Fried, Alameda greatly increased its usage of FTX customer funds to meet its external
190. 17:43debt obligations.
191. 17:45Alameda was able to rely on its undisclosed ordinary course access to FTX credit and customer
192. 17:52funds to facilitate these large withdrawals, which were several billion dollars in notional
193. 17:59value.
194. 18:00The CFTC says that Sam Bankman Fried was aware of and responsible for this misappropriation
195. 18:08of FTX customer funds.
196. 18:11The $8 billion in Alameda liabilities were disguised on FTX’s systems as a customer
197. 18:18account that Sam Bankman-Fried would refer to as “our Korean friend’s account”
198. 18:23and/or “the weird Korean account.”
199. 18:27Come on Sam, you are supposed to be a woke vegan…
200. 18:30Good Lord!
201. 18:32The complaint alleges that the same type of “allow negative flag” and exemption from
202. 18:38liquidation characteristics were applied to the so-called ”Weird Korean” account as
203. 18:44was applicable to the Alameda main account and other sub-accounts.
204. 18:49Interestingly, in or around September 2022 the CFTC alleges that Sam drafted and shared
205. 18:57a document internally questioning whether Alameda should be permanently shut down.
206. 19:03He gave a few reasons, including the fact that they didn’t hedge which meant that
207. 19:08more money had been lost than Alameda had ever made or ever would make; That capital
208. 19:15is really expensive, and that Alameda wasn’t making enough money to justify its existence.
209. 19:22These internal admissions were the exact opposite of what Sam Bankman-Fried and Alameda were
210. 19:28telling the public about Alameda’s profitability at that time.
211. 19:33The CFTC seeks restitution, disgorgement, civil monetary penalties but cautions victims
212. 19:42that this may not result in the recovery of lost money because there may be insufficient
213. 19:48funds to pay them..
214. 19:50And it doesn’t sound like there is much left.
215. 19:53Last, but by no means least, we have the US Department of Justice case which charges Sam
216. 20:00Bankman-Fried with eight counts including conspiracy to commit wire fraud on customers
217. 20:06and lenders, money laundering and violations of campaign finance laws.
218. 20:13These charges represent the most serious threat to Sam Bankman Fried, but the DOJ complaint
219. 20:19contains far fewer details than the other two complaints.
220. 20:24The criminal charges describe a long-running scheme to misappropriate the deposits of exchange
221. 20:31customers and use them to pay the debts and expenses of Alameda Research and to make investments.
222. 20:39The conspiracy is alleged to have run from 2019 — the year Sam founded FTX — until
223. 20:46its collapse last month.
224. 20:48Damian Williams, US attorney for the Southern District of New York, described the alleged
225. 20:54crimes as “one of the biggest financial frauds in American history” at a news conference.
226. 21:01Williams said he had approved the charges against Bankman-Fried last week.
227. 21:06The criminal case was unsealed on Tuesday morning as lawmakers in Washington conducted
228. 21:13a hearing into the FTX bankruptcy.
229. 21:17Bankman-Fried had been scheduled to testify to the US House financial services committee
230. 21:22before he was arrested at his home by Bahamian police.
231. 21:26John Ray the third…, FTX’s court-appointed new chief executive, told the hearing: “This
232. 21:34isn’t sophisticated whatsoever, this is just plain old embezzlement.”
233. 21:40In spite of their claims of rigorous risk controls, FTX staff recorded transactions
234. 21:45on Slack, and did the accounts on QuickBooks.
235. 21:49There was no board of directors and payments were made to Bankman-Fried’s family, the
236. 21:55new chief executive told lawmakers.
237. 21:58While Bankman-Fried was broadly condemned by politicians, some held back from attacking
238. 22:04the wider crypto industry.
239. 22:07The inconvenient truth is that several of the politicians present had accepted campaign
240. 22:12contributions from Sam and FTX, hoping to stave off onerous regulation.
241. 22:20Bankman-Fried emerged from obscurity a bit over a year ago to become the second-largest
242. 22:26donor to Democratic-leaning groups in the recent midterm elections, doling out $36mn.
243. 22:34And this leads us to the last charge.
244. 22:36Sam Bankman-Fried is alleged to have spent as much as $70 million on 2022 election campaigns,
245. 22:44according to Federal Election Commission records — there are claims that there was much more
246. 22:51in "dark money," a term used to describe legal donations that do not have to be publicly
247. 22:58disclosed.
248. 22:59US Federal law limits donations from an individual to a single candidate to $5,800 — which
249. 23:07is made up of $2,900 for the general election and an equal amount for the primary.
250. 23:15Bankman-Fried and unnamed co-conspirators are accused of making "tens of millions of
251. 23:20dollars in illegal campaign contributions" to election candidates and campaign committees.
252. 23:28The donations, according to Damian Williams, the U.S. attorney for Southern New York, were
253. 23:34"disguised" to look as though they were coming from wealthy donors when, in fact, the contributions
254. 23:41were funded by Alameda Research, using stolen customer money.
255. 23:47The US government required every recipient of Madoff funds – including foundations
256. 23:53and endowments to return the money.
257. 23:56We must wonder if the same will happen with these political donations.
258. 24:01Sam Bankman Fried was denied bail by the court in The Bahamas.
259. 24:06His lawyer said that he was not waiving his right to extradition proceedings.
260. 24:11If he fights removal, the process could take up to a year or more of hearings and appeals,
261. 24:18with a slim chance of success.
262. 24:20The U.S.-Bahamas extradition treaty requires offenses to be considered crimes in both countries.
263. 24:27It is unlikely that a Bahamian court would find that securities fraud and wire fraud
264. 24:34are not illegal in the Bahamas.
265. 24:37Bankman-Fried might argue that he would not receive a fair trial in the United States,
266. 24:43would face unjust punishment there or would suffer inhumane treatment, factors a Bahamian
267. 24:49court would have to consider before releasing him for extradition.
268. 24:54This doesn’t seem like it would be likely to succeed.
269. 24:59The New York Times wrote a piece on Monday that wrapped up quoting one of Sam’s parents
270. 25:05friends as saying “It’s like a Greek tragedy, The story of flying too close to the sun,
271. 25:11and having your wings singed.”
272. 25:14Now, I had to revisit a book of Greek Mythology, as I didn’t remember the part of the story
273. 25:20where Icarus stole eight billion dollars of customer money, and lost it all.
274. 25:25Hopefully Bahamian authorities who have stated that Sam is a” flight risk” will be restricting
275. 25:32his access to wax and feathers to prevent any escape plans he might have.
276. 25:38If you enjoyed this video, you should watch my Charles Ponzi documentary next.
277. 25:42It is the first video that I’ve had that hit a million views here on YouTube.
278. 25:44Have a great day, and see you again soon.
279. 25:45Bye.