GP Short Notes

GP Short Notes # 688, 19 December 2022

The Bahamas: Former FTX CEO Sam Bankman-Fried arrested
Madhura Mahesh

What happened?
On 12 December, former FTX CEO Sam Bankman-Fried was arrested by the Bahamian police after US officials filed criminal charges against him. He has been charged by the US government with eight counts which include money laundering, misappropriation of consumer funds, intention to defraud FTX users and violations of campaign rules. Separately he has been accused by the US Securities and Exchange Commission and the Commodity Futures Trading Commission of similar charges.
On 13 December, the Bahamas Magistrate Court denied his request for bail and transferred him to the Fox Hill correctional prison until 08 February.  
US Attorney Damian Williams described his actions as one of America’s biggest financial frauds. The Bahamian Prime Minister said: “The Bahamas and the United States have a shared interest in holding accountable all individuals associated with FTX who may have betrayed the public trust and broken the law.”

What is the background?
First, the fall of FTX. On 11 November, FTX filed for Chapter 11 Bankruptcy in Delaware, US which led to prosecutors in the US and Bahamas opening an investigation into the finances of FTX, Almeda LLC and Bankman-Fried. The US investigations revealed that FTX was misappropriating customer funds to pay off debts and make investments in the name of Almeda LLC. The investigations further revealed that Bankman-Fried had shown investors false and misleading information about Almeda’s financial condition to draw more investors in. 
Second, the US House Committee on Financial Services hearing on the bankruptcy filing. On 13 December, Bankman-Fried along with FTX Chief Executive John J. Ray III were to testify in front of the House Committee on Financial Services on the collapse of FTX, finances of FTX and Almeda. As Bankman-Fried was arrested on 12 December, only Ray testified where he claimed that the FTX’s fall was “one of the worst business failures” he has ever seen. This was reportedly due to the lack of oversight and financial controls, lack of documentation and accountants and poor record keeping. He also accused the Bahamas government of collaborating with FTX to remove over USD 100 million to help Bahamian account holders amid its crash.   
Third, FTX and Bankman-Fried’s donations to Republicans and Democrats’ election campaigns. Bankman-Fried routinely donated to both the Republicans and Democrats’ election campaigns making him one of the largest donors. The Democratic National Committee and the campaign arms of the Senate and House Democrats have pegged the donation amount received from Bankman-Fried since 2020 to be around USD 1.16 million dollars. Investigations have revealed that Bankman-Fried has made illegal donations worth “tens of millions of dollars” to electoral campaigns.

What does it mean?
First, extensive investigations were conducted by the US and Bahaman authorities. The charge sheet against Bankman-Fried filled by the US government, the SEC and CFTC was topical and vague which not only shows the extensive nature of the crimes but tells us that more investigations need to be conducted. The ongoing investigations in the Bahamas regarding the liquidation of FTX’s assets in the country also add to the list of investigations against Bankman-Fried. The dearth of information will ensure that the prosecutors and Bankman-Fried’s lawyers will need months to submit admissible evidence to the courts for the trial to actually begin. As Bankman-Fried is currently detained in the Bahamas, the next step for the US government is to apply for his extradition which will be another laborious ordeal.   
Second, uncertainty over the return of FTX customer funds. Due to the bankruptcy filing, lack of funds, and the extensive investigations and trials pending, the issue of FTX customers getting their funds back appears to be grim. Currently, Ray and FTX are looking to sell off their assets and international wings of the crypto exchange to recover funds to pay back the debts and customers but are not able to collect enough funds to do so.

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