Issue 14 – FTX friends flip on fellow fraudster

This is a long one, so I'm going to skip the pleasantries and jump right in.

You're getting a lot of court-related news this week because there's been a flurry of court filings. Or maybe I just follow far too many cases. Either way, this week has felt sort of like this, except with CourtListener alerts.

FTX

It didn't take Sam Bankman-Fried very long to change his mind on extradition. After being denied bail in The Bahamas, he decided not to fight extradition to the US (as he originally planned), and was transported to the US last night.¹ He appeared briefly in court today, and was released on a $250 million bond (described by Assistant US Attorney Nick Roos as "the highest ever pre-trial bond"). Bond is secured in part by his parents' Palo Alto house, which is where he will be staying under house arrest and having his location monitored. He has already surrendered his passport. Notably, his bail conditions do not include a restriction from computer use.² Time to wait and see if he decides to tweet through it.

He won't enter a plea until January 3.

U.S. Attorney Damian Williams waited until SBF was in FBI custody and on the plane from The Bahamas before he announced that Alameda Research CEO Caroline Ellison and FTX co-founder Gary Wang had pled guilty to seven and four criminal charges, respectively, and were cooperating with the investigations. [W3IGG]

Ellison pled guilty to seven charges: wire fraud and conspiracy to commit wire fraud on customers, wire fraud and conspiracy to commit wire fraud on lenders, conspiracy to commit commodities fraud, conspiracy to commit securities fraud, and conspiracy to commit money laundering. These are the same charges that SBF is facing, minus the additional charge against SBF pertaining to campaign finance violations. Wang is facing only four charges: wire fraud and conspiracy to commit wire fraud on customers, conspiracy to commit commodities fraud, and conspiracy to commit securities fraud.

The SEC simultaneously came out with civil charges against the duo, and the CFTC amended their complaint against SBF to add both Ellison and Wang as defendants. I did a Twitter thread on the highlights of the SEC complaint, in case you're interested but don't feel like reading all 38 pages of it. It seems to me (not a lawyer, etc.) to go fairly easy on Ellison and Wang, but heavily implicates SBF in further wrongdoing. In particular, it contradicts SBF's many post-collapse claims that he was uninvolved in many of the day-to-day goings on at both FTX and Alameda, and accuses him of directly instructing Ellison and Wang to do various fraudulent actions.

All of this amounts to very, very bad news for SBF.

The bankruptcy

There was a brief emergency hearing in Delaware bankruptcy court on December 14, in which the friction between US- and Bahamas-based regulators became quite apparent. "We do not trust the Bahamian government," FTX attorney James Bromley plainly stated. So far, the American legal team overseeing FTX's bankruptcy has refused to give Bahamian authorities broad access to FTX's computers, based largely on concerns that they may have colluded with FTX's former executives to shift hundreds of millions in assets to Bahamian control in violation of bankruptcy stays. The Americans have also accused Bahamian liquidators of being unresponsive and avoidant. Bahamian liquidators have recently argued that the holding company controlling FTX's substantial Bahamian real estate should be removed from the US bankruptcy case so it can be sold off in The Bahamas. Both groups have argued they should be in charge of the bankruptcy.³ Not a whole lot was accomplished at that hearing, with Judge Dorsey asking them to try to work it out amongst themselves. If that's fruitless, there's a hearing scheduled in January to hash it out.⁴

Meanwhile, court records show that while Sam Bankman-Fried was desperately trying to avoid bankruptcy, FTX co-CEO (with various other titles) Ryan Salame was chatting it up with the Bahamas Securities Commission. On November 9—the same day Binance reeled back in the lifeline they'd dangled in front of FTX—Salame told the BSC that FTX client assets had been improperly transferred to Alameda to cover trading losses. He also implicated FTX founders and executives Sam Bankman-Fried, Nishad Singh, and Gary Wang as the only three people who would have requisite access to transfer these funds.⁵

In an amusing development, Riot Games filed a motion this week in the case, asking to terminate their deal with FTX involving the League of Legends Championship Series, for which FTX was the "official cryptocurrency exchange partner". They have argued that the deal should be terminated not only because FTX is highly unlikely to be able to pay any more than the $6.25 million they've already paid of the $96 million they will ultimately owe Riot for the six-year deal, but because the association with FTX is damaging Riot's reputation:

Prior to, and throughout this media firestorm, Riot's image and reputation to its customer base, remained inextricably linked to FTX through its former CEO, Mr. Bankman-Fried. Media outlets and Twitter commentators splashed images of Mr. Bankman-Fried playing League of Legends—Riot Games' game— at the same time that FTX was crashing. Mr. Bankman-Fried is famous for his affinity for the game. He is well-known among investors to play League of Legends during meetings. He acknowledged on Twitter that he played "a lot more [League of Legends] than you'd expect from someone who routinely trades off sleep vs work." Even Mr. Bankman-Fried's ranking in League of Legends has been the subject of online commentary with public figures Alexandria Ocasio-Cortez and Elon Musk weighing in.

In the courts

Voyager

After the plan for FTX US to acquire the assets of bankrupt Voyager Digital fell through due to the pesky fact that FTX also went bankrupt, Binance US has stepped up as second pick. The deal is still subject to court approval. FTX was offering $1.42 billion for the assets, in a deal which Voyager estimated would allow creditors to receive around $0.72 on the dollar for their assets. Binance is offering $1.002 billion; it's not yet clear what creditor recovery would look like under that plan.

CFTC v. Ooki DAO

Judge Orrick has determined that Ooki DAO [W3IGG] was properly served in the lawsuit from the CFTC. Part of the reason the project was turned into a DAO in the first place, as stated by one of the founders, was because they wanted to "take all the steps possible to make sure that when regulators ask us to comply, that we have nothing we can really do".⁶ This included by making traditional service of process difficult by not having any headquarters or office locations, mailing address, registration, or officers. The CFTC did what they could to serve the DAO—including taking the unusual step of posting notices in the Ooki DAO website's help chat and to the Ooki DAO community forum—but amici curiae have objected, stating that not only was the service insufficient, that the Ooki DAO couldn't be sued at all. This was based in an argument that the DAO was not an entity or group, but rather a technology, and that suing it was like suing "the internet". It was a nice try, but Judge Orrick determined that the CFTC is indeed suing an entity, and deemed that the service was sufficient. Onwards.

Yuga Labs v. Ryder Ripps

Judge Walter ruled that the trademark infringement lawsuit by Yuga Labs (the Bored Apes guys) against Ryder Ripps (the guy who believes the Bored Apes project is racist and who created a copycat project which he says was artistic criticism) shall continue. [W3IGG]. Walter denied Ripps' motion to dismiss, saying that the Rogers test shouldn't apply because his NFTs use the same exact Bored Ape images as the original collection. Walter also dismissed Ripps' anti-SLAPP motion on the basis that the lawsuit centers on trademark infringement and not on Ripps' criticism of the project. Ripps filed an appeal of the anti-SLAPP dismissal to the Ninth Circuit shortly after.

In government

As promised, I published easier-to-read rollups of my livetweets of the House and Senate hearings on FTX.

Senators Warren (D-MA) and Marshall (R-KS) introduced a piece of legislation entitled the Digital Asset Anti-Money Laundering Act, which seeks to require many crypto entities to register as "money service businesses", and thus follow requirements on identifying customers and tracking their transactions. The entities who would need to register include custodial and non-custodial wallet providers, but also a much broader group of "miners, validators, and other network participants that may act to validate, secure, or facilitate digital asset transactions".

Outgoing Senator and friend to the cryptocurrency industry Pat Toomey (R-PA) introduced a stablecoin bill, which he is calling the Stablecoin Transparency of Reserves and Uniform Safe Transactions Act, or the Stablecoin TRUST Act. This is Toomey's second stablecoin bill of the year, after an April version that received minimal support.

The Web3 is Going Just Great recap

There were 12 entries between December 13 and December 21, averaging 1.3 posts per day.

Donald Trump finally gets around to NFT grifting

[link]

Most normal people were not shocked when Donald Trump's "major announcement" turned out to be a grift. His supporters were, however—they'd been busy speculating that his announcement would be that he was running for Speaker of the House, or naming a presidential running mate, or something similarly… well, major.

Instead, they were advertised $99 "trading cards" of Donald Trump in various heroic outfits and poses.

Now, of course he couldn't be satisfied with just the NFT grift alone. The NFTs also appear to use copyrighted photos swiped from various small clothing brands, and crypto analyst OKHotshot has alleged that the project team quietly kept a large number of rare NFTs for themselves.

Scammer posing as a casting director steals fourteen Bored Apes and flips them for $1 million

[link]

In a month-long con, a scammer posing as a casting director at a real television production company convinced the owner of over a dozen Bored Apes that he wanted to cast one of his apes in a TV show. Really.

The scammer ultimately convinced the collector to sign a contract via blockchain transaction. The collector did so, not realizing that he was authorizing a wallet-draining contract that took all his Bored Ape NFTs, transferred them to the scammer's wallet, and then accepted the highest offers outstanding on all of the apes—netting the scammer 852.9 ETH that they transferred to $1,075,000 of the DAI stablecoin.

Paxful comes so close to getting it

[link]

The Paxful peer-to-peer crypto marketplace announced they would be delisting ether, citing "scams that have robbed people of billions".

Keep going! You're almost there!

The removal of ether leaves the platform with just three cryptocurrencies available for swaps: Bitcoin, Tether (USDT), and USDC. Both Tether and USDC are Ethereum-based tokens, leading some to accuse Paxful of hypocrisy for continuing to support their use.

Everything else

• The latest Pokémon knockoff is stopped in court [link]
• FTX executives Caroline Ellison and Gary Wang plead guilty to criminal charges, are cooperating with investigation [link]
• Swan Bitcoin releases a new product to streamline the process of losing your house speculating on Bitcoin [link]
• Core Scientific Bitcoin mining firm files for bankruptcy [link]
• Auros files for bankruptcy [link]
• Waves founder announces a new, "undepeggable" stablecoin as USDN even more dramatically de-pegs [link]
• Raydium exploit results in ~$5 million loss [link]
• Auditing firm cuts ties with crypto clients, deletes Binance's "proof of reserves" report they issued days prior [link]
• Binance withdrawals surge due to concerns over the company's reserves [link]

In the news

It's been a busy one. A few highlights from the longer list:

Worth a read

That's all for now, folks. Until next time,

– Molly White