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Bankman-Fried, FTX execs received billions in hidden loans, ex-Alameda CEO says

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NEW YORK, Dec 23 (Reuters) – Sam Bankman-Fried and other FTX executives received billions of dollars in secret loans from the crypto mogul’s Alameda Research, the hedge fund’s former chief told a judge when she pleaded guilty to her role in the exchange’s collapse.

Caroline Ellison, former chief executive of Alameda Research, said she agreed with Bankman-Fried to hide from FTX’s investors, lenders and customers that the hedge fund could borrow unlimited sums from the exchange, according a transcript of her Dec. 19 plea hearing that was unsealed on Friday.

“We prepared certain quarterly balance sheets that concealed the extent of Alameda’s borrowing and the billions of dollars in loans that Alameda had made to FTX executives and to related parties,” Ellison told U.S. District Judge Ronnie Abrams in Manhattan federal court, according to the transcript.

Ellison and FTX co-founder Gary Wang both pleaded guilty and are cooperating with prosecutors as part of their plea agreements. Their sworn statements offer a preview of how two of Bankman-Fried’s former associates might testify at trial against him as prosecution witnesses.

In a separate plea hearing, also on Dec. 19, Wang said he was directed to make changes to FTX’s code to give Alameda special privileges on the trading platform, while being aware that others were telling investors and customers that Alameda had no such privileges.

Wang did not specify who gave him those directions.

Nicolas Roos, a prosecutor, said in court on Thursday that Bankman-Fried’s trial would include evidence from “multiple cooperating witnesses.” Roos said Bankman-Fried carried out a “fraud of epic proportions” that led to the loss of billions of dollars of customer and investor funds.

Bankman-Fried has acknowledged risk-management failures at FTX but said he does not believe he has criminal liability. He has not yet entered a plea.

Bankman-Fried founded FTX in 2019 and rode a boom in the values of bitcoin and other digital assets to become a billionaire several times over as well as an influential donor to U.S. political campaigns.

A flurry of customer withdrawals in early November amid concerns about commingling of FTX funds with Alameda prompted FTX to declare bankruptcy on Nov. 11.

Bankman-Fried, 30, was released on Thursday on $250 million bond. His spokesperson declined to comment on Ellison and Wang’s statements.

Lawyers for Wang and Ellison declined to comment.

Ellison told the court that when investors in June 2022 recalled loans they had made to Alameda, she agreed with others to borrow billions of dollars in FTX customer funds to repay them, understanding that customers were not aware of the arrangement.

“I am truly sorry for what I did,” Ellison said, adding that she is helping to recover customer assets.

Wang also said he knew what he was doing was wrong.

The transcript of Ellison’s hearing was initially sealed out of concern that the disclosure of her cooperation could thwart prosecutors’ efforts to extradite Bankman-Fried from the Bahamas, where he lived and where FTX was based, court records showed.

Bankman-Fried was arrested in the capital Nassau on Dec. 12 and arrived in the United States on Wednesday after consenting to extradition.

A magistrate judge ordered him confined to his parents’ California home until trial.

On Friday evening, Abrams recused herself from the case, saying in a court order that the law firm Davis Polk & Wardwell LLP, where her husband is a partner, advised FTX in 2021.

The firm also represented parties that could be adverse to FTX and Bankman-Fried in other proceedings, the judge said, and while her husband had no involvement in these matters, which “were confidential and their substance is unknown to the Court,” she was recusing herself to avoid a possible conflict.

Reporting by Luc Cohen in New York; Writing by Tom Hals in Wilmington, Del.; Editing by Noeleen Walder, Matthew Lewis and Daniel Wallis

Our Standards: The Thomson Reuters Trust Principles.

Luc Cohen

Thomson Reuters

Reports on the New York federal courts. Previously worked as a correspondent in Venezuela and Argentina.

Tom Hals

Thomson Reuters

Award-winning reporter with more than two decades of experience in international news, focusing on high-stakes legal battles over everything from government policy to corporate dealmaking.

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Business

Core Scientific files for bankruptcy as crypto winter bites

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Dec 21 (Reuters) – Core Scientific Inc (CORZ.O), one of the biggest publicly traded cryptocurrency mining companies in the United States, said on Wednesday it filed for Chapter 11 bankruptcy protection, the latest in a string of failures to hit the sector.

Austin, Texas-based Core Scientific attributed its bankruptcy to slumping bitcoin prices, rising energy costs for bitcoin mining and a $7 million unpaid debt from U.S. crypto lender Celsius Network, one of its biggest customers.

Core Scientific said in court filings that it had suffered a net loss of $434.8 million for the three months ending September 30, 2022, and had just $4 million in liquidity at the time of its bankruptcy filing.

The company engaged restructuring advisers in October and has been negotiating with creditors about a potential bankruptcy filing since that time.

More than a trillion dollars in value has been wiped out from the crypto sector this year with rising interest rates exacerbating worries of an economic downturn. The crash has eliminated key industry players such as crypto hedge fund Three Arrows Capital and Celsius.

The biggest blow came after major crypto exchange FTX filed for bankruptcy protection last month. Its swift fall has sparked tough regulatory scrutiny of how crypto firms hold funds and conduct business operations.

After rapid growth in 2020 and 2021, bitcoin – the most popular digital currency by far – is down more than 60% this year, pressuring the crypto mining sector.

Processing bitcoin transactions and “mining” new tokens is done by powerful computers, hooked up to a global network, that compete against others to solve complex mathematical puzzles.

Bitcoins are seen in this illustration picture taken September 27, 2017. REUTERS/Dado Ruvic

But the business has become less profitable as the price of bitcoin has slumped, while energy costs have soared.

Celsius, which filed for Chapter 11 bankruptcy protection in July, owns several bitcoin mining rigs hosted at Core Scientific’s facilities. Celsius’s bankruptcy has prevented Core Scientific from collecting on higher energy bills that the company is racking up at a rate of $900,000 per month, according to court filings.

Core Scientific said it would not liquidate, and intends to pursue a restructuring backed by creditors who hold over 50% of the company’s convertible notes.

Those creditors have agreed to provide up to $56 million in debtor-in-possession financing, and convertible noteholders would ultimately end up with 97% of Core Scientific’s equity shares if the restructuring is approved in court.

The company’s shares have lost roughly 98% of their value so far in 2022, shrinking its market cap to about $78 million.

The stock fell another 50% in trading on Wednesday. Shares of other crypto miners including Riot Blockchain (RIOT.O), Marathon Digital (MARA.O) and Hut 8 Mining Corp have all shed more than 80% this year.

In its bankruptcy petition, Core Scientific said it has $1 billion to $10 billion in assets and liabilities, and between 1,000 and 5,000 creditors.

Core Scientific went public in 2021 through a merger with a blank-check company in a deal that at the time valued the miner at $4.3 billion.

Core Scientific’s first bankruptcy court hearing has been set for Dec. 21 at 0915 CT (1515 GMT).

Reporting by Siddharth Jindal, Maria Ponnezhath, Akriti Sharma and Manya Saini in Bengaluru, and Dietrich Knauth in New York and Hannah Lang in Washington; editing by Uttaresh.V, Maju Samuel, Alexia Garamfalvi and Deepa Babington

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Ghana to default on most external debt as economic crisis worsens

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  • Ghana suspends payments on Eurobonds, commercial loans
  • Announcement a week after IMF staff-level agreement
  • Eurobonds sink up to 3 cents in dollar

ACCRA, Dec 19 (Reuters) – Ghana on Monday suspended payments on most of its external debt, effectively defaulting as the country struggles to plug its cavernous balance of payments deficit.

Its finance ministry said it will not service debts including its Eurobonds, commercial loans and most bilateral loans, calling the decision an “interim emergency measure”, while some bondholders criticised a lack of clarity in the decision.

The government “stands ready to engage in discussions with all of its external creditors to make Ghana’s debt sustainable”, the finance ministry said.

The suspension of debt payments reflects the parlous state of the economy, which had led the government last week to reach a $3-billion staff-level agreement with the International Monetary Fund (IMF).

Ghana had already announced a domestic debt exchange programme and said that an external restructuring was being negotiated with creditors. The IMF has said a comprehensive debt restructuring is a condition of its support.

The country has been struggling to refinance its debt since the start of the year after downgrades by multiple credit ratings agencies on concerns it would not be able to issue new Eurobonds.

That has sent Ghana’s debt further into the distressed territory. Its public debt stood at 467.4 billion Ghanaian cedis ($55 billion as per Refinitiv Eikon data) in September, of which 42% was domestic.

Ghana external debt by holder type, 2022 Q3, $ billion

It had a balance of payments deficit of more than $3.4 billion in September, down from a surplus of $1.6 billion at the same time last year.

While 70% to 100% of the government revenue currently goes toward servicing the debt, the country’s inflation has shot up to as much as 50% in November.

Ghana has been experiencing what some say is its worst economic crisis in a generation. Last month, more than 1,000 protesters marched through the capital Accra, calling for the resignation of the president and denouncing deals with the IMF as fuel and food costs spiralled.

Its gross international reserves stood at around $6.6 billion at the end of September, equating to less than three months of imports cover. That is down from around $9.7 billion at the end of last year.

The government said the suspension will not include the payments towards multilateral debt, new debts taken after Dec. 19 or debts related to certain short-term trade facilities.

‘NOT COMING OUT OF THE BLUE’

Holders of Ghana’s international bonds confirmed in an emailed statement late on Monday the formal launch of a creditor committee aimed at facilitating the “orderly and comprehensive resolution” of the country’s debt challenges.

Any good faith negotiations, the creditor committee said, would need to avoid unilateral actions and require the timely exchange of detailed economic and financial information between international bondholders, the government and the IMF.

The steering committee was made up of Abrdn, Amundi, BlackRock, Greylock and Ninety One, the group said in its statement.

Kathryn Exum, who co-leads Gramercy’s Sovereign Research department, was hopeful about debt restructuring, noting that it should prove easier for creditors than other recent emerging market restructurings.

“It is more straight forward than the likes of Sri Lanka and Zambia, in the respect that there is not a lot of China debt,” Exum said on Friday in comments anticipating the external restructuring.

One bondholder who requested anonymity said the lack of detail in the announcement could be cause for concern for investors.

Ghana’s external bonds, which are trading at a deeply distressed level of 29-41 cents in the dollar, dropped with the 2034 bond losing more than 3 cents, Tradeweb data showed.

Reuters Graphics Reuters Graphics

Nonetheless, some investors said the suspension of external debt payment was expected.

“It is in line with Ghana getting into talks about restructuring with various debt holders, so not coming out of the blue,” Rob Drijkoningen, co-head of emerging market debt at Neuberger Berman, which holds some Ghanaian Eurobonds.

Ghana did pay a Dec. 16 coupon due on a 2049 Eurobond, according to a person familiar with the matter.

It was not immediately clear if the debt service suspension would include a $1 billion 2030 bond that has a $400 million World Bank guarantee .

“We will not be commenting on the specifics of any particular bond or debt owed at this time, but… we are fully engaging all stakeholders,” a finance ministry spokesperson told Reuters.

($1 = 8.5000 Ghanaian cedi)

Reporting by Christian Akorlie and Cooper Inveen; Additional reporting by Rachel Savage, Marc Jones and Jorgelina do Rosario; Writing by Rachel Savage and Cooper Inveen; Editing by Karin Strohecker, Ed Osmond, Arun Koyyur and Aurora Ellis

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Business

Insurers shun FTX-linked crypto firms as contagion risk mounts

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Dec 19 (Reuters) – Insurers are denying or limiting coverage to clients with exposure to bankrupt crypto exchange FTX, leaving digital currency traders and exchanges uninsured for any losses from hacks, theft or lawsuits, several market participants said.

Insurers were already reluctant to underwrite asset and directors and officers (D&O) protection policies for crypto companies because of scant market regulation and the volatile prices of Bitcoin and other cryptocurrencies.

Now, the collapse of FTX last month has amplified concerns.

Specialists in the Lloyd’s of London (SOLYD.UL) and Bermuda insurance markets are requiring more transparency from crypto companies about their exposure to FTX. The insurers are also proposing broad policy exclusions for any claims arising from the company’s collapse.

Kyle Nichols, president of broker Hugh Wood Canada Ltd, said insurers were requiring clients to fill out a questionnaire asking whether they invested in FTX, or had assets on the exchange.

Lloyd’s of London broker Superscript is giving clients that dealt with FTX a mandatory questionnaire to outline the percentage of their exposure, said Ben Davis, lead for digital assets at Superscript.

“Let’s say the client has 40% of their total assets at FTX that they can’t access, that is either going to be a decline or we’re going to put on an exclusion that limits cover for any claims arising out of their funds held on FTX,” he said.

The exclusions denying payout for any claims arising out of the FTX bankruptcy are found in insurance policies that cover the protection of digital assets and for personal liabilities of directors and officers of companies that deal in crypto, five insurance sources told Reuters. A couple of insurers have been pushing for a broad exclusion to policies for anything related to FTX, a broker said.

Exclusions may act as a failsafe for insurers, and will make it even more difficult for companies that are seeking coverage, insurers and brokers said.

Bermuda-based crypto insurer Relm, which previously has provided coverage to entities linked to FTX, takes an even stricter approach.

“If we have to include a crypto exclusion or a regulatory exclusion, we’re just not going to offer the coverage,” said Relm co-founder Joe Ziolkowski.

D&O QUESTION

Now, one of the most pressing questions is whether insurers will cover D&O policies at other companies that had dealings with FTX, given the problems facing exchange’s leadership, Ziolkowski said.

U.S. prosecutors say former FTX Chief Executive Officer Sam Bankman-Fried engaged in a scheme to defraud FTX’s customers by misappropriating their deposits to pay for expenses and debts and to make investments on behalf of his crypto hedge fund, Alameda Research LLC.

A lawyer for Bankman-Fried said on Tuesday his client is considering all of his legal options.

D&O policies, which are used to pay legal costs, do not always pay out in cases of fraud.

Insurance sources would not name their clients or potential clients that could be affected by policy changes, citing confidentiality. Crypto firms with financial exposure to FTX include Binance, a crypto exchange, and Genesis, a crypto lender, neither of which responded to e-mails seeking comment.

While the least risky parts of the crypto market, such as companies that own cold wallets storing assets on platforms not connected to the internet, may get cover for up to $1 billion, a D&O insurance policyholder’s cover may now be limited to tens of millions of dollars for the rest of the market, Ziolkowski said.

The FTX collapse will also likely lead to a rise in insurance rates, especially in the U.S. D&O market, insurers said. The rates are already high because of the perceived risks and lack of historical data on cryptocurrency insurance losses.

A typical crime bond — used to protect against losses resulting from a criminal act — would cost $30,000 to $40,000 per $1 million of coverage for a digital assets trader. That compares with a cost of about $5,000 per $1 million for a traditional securities trader, Hugh Wood Canada’s Nichols said.

Reporting by Noor Zainab Hussain in Bengaluru and Carolyn Cohn in London; Editing by Lananh Nguyen and Anna Driver

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Biden says U.S. is ‘all in’ on Africa’s future

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WASHINGTON, Dec 14 (Reuters) – President Joe Biden announced an agreement aimed at bolstering trade ties between the United States and Africa on Wednesday after years in which the continent took a back seat to other U.S. priorities as China made inroads with investments and trade.

“The United States is ‘all in’ on Africa’s future,” Biden told African leaders attending a three-day summit in Washington.

Biden’s remarks, and the summit, aim to position the United States as a partner to African countries amid its competition with China, which has sought to expand its influence by funding infrastructure projects on the continent and elsewhere. Chinese trade with Africa is about four times that of the United States, and Beijing has become an important creditor by offering loans with less stringent conditions than Western lenders.

Biden said a new U.S. agreement with the African Continental Free Trade Area will give American companies access to 1.3 billion people and a market valued at $3.4 trillion. He listed companies that had made deals at the summit, including General Electric Co (GE.N) and Cisco Systems Inc (CSCO.O).

“When Africa succeeds, the United States succeeds. Quite frankly, the whole world succeeds as well,” the president said.

Delegations from 49 countries and the African Union, including 45 African national leaders, are attending the three-day summit, which began on Tuesday, the first and is the first of its kind since 2014. Washington has offered $55 billion in support for Africa under the Biden administration for food security, climate change, trade partnerships and other issues.

After his remarks, Biden viewed some of the World Cup semifinal match between Morocco and France with Morocco’s prime minister, Aziz Akhannouch, and other leaders attending the summit, the White House said.

This afternoon, Biden will host leaders facing 2023 elections, including from Gabon and Liberia for a discussion on elections and democratic principles. Then Biden and his wife, Jill, will host African leaders and their spouses at a White House dinner with Vice President Kamala Harris and her husband Doug Emhoff.

The summit is part of a renewed push to boost ties with a continent as China gains influence with trade, investment and lending drives. Beijing has held its own high-level meetings with African leaders every three years for more than two decades.

Some U.S. officials have been reluctant to frame the gathering as a battle for influence. Biden didn’t mention China in his remarks, and Washington has toned down its criticism of Beijing’s lending practices and infrastructure projects.

Biden is expected to announce his support for the African Union’s joining the G20 group of the world’s largest economies as a permanent member during Thursday’s summit events.

U.S. Trade Representative Katherine Tai told African counterparts on Tuesday she wants to improve the continent’s U.S. trade preferences program to boost investment.

Reuters Graphics

“We are not looking for a relationship that is transactional, that’s extractive, that is burdensome, or leaves various countries in a more fragile, poor state after a deal is done,” State Department spokesman Ned Price told reporters on Monday.

[1/7] U.S. President Joe Biden delivers keynote remarks at a U.S.-Africa Business forum at the 2022 U.S.-Africa Leaders Summit in Washington, U.S., December 14, 2022. REUTERS/Kevin Lamarque

On Wednesday, White House national security spokesman John Kirby highlighted the importance of U.S. investments in Africa and helping countries there play a more active role in the global economy.

“It’s a two-way discussion that we want to have with Africa about trade, investment and opportunities for economic growth,” he told reporters.

At an opening trade forum on Wednesday, African leaders called for more investment.

“Instead of exporting commodities, the U.S. should find an opportunity in investing,” Kenyan President William Ruto said. “They have the machinery, they have the know-how, so that they can produce for the African continent in Africa.”

Ruto cited projections that Africa’s agribusiness sector will more than triple to $1 trillion by 2030 and said U.S. capital can help solve the continent’s physical infrastructure deficit to unlock this growth.

CHINA-AFRICA TRADE

According to a Eurasia Group analysis, in 2021 China-Africa trade, at $254 billion, greatly outstripped U.S.-Africa trade, which stood at $64.3 billion. Those figures are up from $12 billion and $21 billion, respectively, in 2002.

Beijing’s lending to Africa has led to Western charges that China has mired African countries in debt.

Beijing’s ambassador to Washington rejected the idea ahead of the summit, citing a report that African countries owe three times more debt to Western institutions, while noting that Chinese-built hospitals, highways, airports and stadiums are “everywhere” in Africa.

China remains the region’s largest bilateral investor, but its new loan commitments to Africa have declined in recent years.

Reuters Graphics Reuters Graphics

It’s not all about economic sway – Washington has been alarmed by China’s efforts to establish a military foothold in Africa, including on the Atlantic coast in Equatorial Guinea.

For their part, many African leaders reject the idea that they need to choose between the United States and China.

“The fact that both countries have different levels of relations with African countries makes them equally important for Africa’s development,” Ethiopia’s U.N. ambassador, Taye Atske Selassie Amde, told Reuters. “However, it should be known each African country has the agency to determine their respective relationship and best interest.”

Additional reporting by David Lawder, Steve Holland and Andrea Shalal in Washington and Michelle Nichols in New York; Editing by Don Durfee, Leslie Adler, Heather Timmons and Jonathan Oatis

Our Standards: The Thomson Reuters Trust Principles.

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Business

In sweltering Bahamas courtroom, Bankman-Fried fights incarceration

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NASSAU, Dec 13 (Reuters) – Cordoned-off roads, a sweltering courtroom and numerous delays marked Sam Bankman-Fried’s first in-person public appearance since his crypto company collapsed.

The Bahamas courtroom hearing, conducted over the course of six hours, saw Bankman-Fried, dressed in a suit rather than his typical t-shirt attire, seeking bail to dispute his extradition to the U.S. He was ultimately refused and faces possible extradition to the United States.

It was a stunning fall from grace for the crypto boss, once estimated by Forbes as worth as much as $26.5 billion.

“I’m not waiving,” Bankman-Fried said when asked if he would seek to waive his right to an extradition hearing.

It was a rare comment in a hearing that was largely taken up with lawyers discussing process. In another comment, Bankman-Fried referred to the night of his arrest as “hectic.”

There was high anticipation ahead of the appearance by Bankman-Fried, who has done numerous media interviews since his firm collapsed but not been widely seen in public.

The day started with Bankman-Fried ushered into court away from the main entrance and photographers and reporters who crowded to get a shot.

Bahamas Chief Magistrate JoyAnn Ferguson-Pratt contributed witty asides that often left the courtroom chuckling, once quipping “I wasn’t born yesterday” at the defense counsel’s interpretation of the law.

Ferguson-Pratt’s repeatedly forgetting the defendant’s last name led to laughter.

“Samuel,” she said before trailing off, with the once-billionaire crypto magnate reminding her of his name: “Bankman-Fried.”

People in the courtroom fanned themselves to keep cool in the tropical heat as sun shone through the windows.

The hearing was adjourned twice, once to consult about the court’s jurisdiction to grant bail, and again in the afternoon.

It also included an extensive discussion of Bankman-Fried’s medication, which his lawyer said was for conditions including depression, insomnia and attention deficit disorder.

At the start of the proceedings, Bankman-Fried asked to change an Emsam patch, a medical strip applied to the skin that is used to treat adult depression. He asked to briefly leave the court room to take the medication.

Bankman-Fried acknowledged that he had not taken his medications with him when he was arrested, which he attributed to having had a “hectic night”.

His parents, Joseph Bankman and Barbara Fried, at times seemed frustrated with the arguments made by the prosecution, which described him as a flight risk.

Bankman-Fried’s defense counsel pointed out that Bankman-Fried had spent weeks in The Bahamas after his business collapsed without attempting to leave the country.

At the end of the hearing, his head lowered, he hugged his parents. A van outside the court waited to take him away.

Reporting by Jared Higgs in Nassau and Brian Ellsworth in Miami; editing by Megan Davies, Noeleen Walder and Sam Holmes

Our Standards: The Thomson Reuters Trust Principles.

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FTX founder Sam Bankman-Fried charged with fraud, denied bail

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NASSAU, Bahamas/NEW YORK, Dec 13 (Reuters) – U.S. prosecutors on Tuesday accused Sam Bankman-Fried, the founder of crypto currency exchange FTX, of fraud and violating campaign finance laws and a judge in the Bahamas denied him bail, sending him to a local correctional facility instead.

The former FTX CEO, who was arrested in the Bahamas on Monday, lowered his head and hugged his parents after the magistrate judge refused bail citing a “great” risk of flight.

He was ordered remanded to a correctional facility in the island nation until Feb. 8, where he will initially held in the medical department, according to a local official.

The day’s events capped a stunning fall from grace in recent weeks for the 30-year-old, who amassed a fortune valued over $20 billion as he rode a cryptocurrency boom to build FTX into one of the world’s largest exchanges before it abruptly collapsed this year.

Bankman-Fried has previously apologized to customers and acknowledged oversight failings at FTX, but said he does not personally think he has any criminal liability.

Earlier on Tuesday, U.S. Attorney Damian Williams in New York said Bankman-Fried made illegal campaign contributions to Democrats and Republicans with “stolen customer money,” saying it was part of one of the “biggest financial frauds in American history.”

“While this is our first public announcement, it will not be our last,” he said, adding Bankman-Fried “made tens of millions of dollars in campaign contributions.”

Bankman-Fried faces a maximum sentence of 115 years in prison if convicted on all eight counts, prosecutors said, though any sentence would depend on a range of factors.

Williams declined to say whether prosecutors would bring charges against other FTX executives and whether any FTX insiders were cooperating with the investigation.

In his first in-person public appearance since the cryptocurrency exchange’s collapse, Bankman-Fried appeared in court on Tuesday in the Bahamas, where FTX is based and where he was arrested at his gated community in the capital, Nassau.

He appeared relaxed when he arrived at the heavily guarded Bahamas court and told the court he could fight extradition to the United States.

Bahamian prosecutors had asked that Bankman-Fried be denied bail if he fights extradition.

“Mr. Bankman-Fried is reviewing the charges with his legal team and considering all of his legal options,” his lawyer, Mark S. Cohen, said in an earlier statement.

‘BRAZEN’ SCHEME

[1/12] Sam Bankman-Fried, who founded and led FTX until a liquidity crunch forced the cryptocurrency exchange to declare bankruptcy, is escorted out of the Magistrate Court building, last month he was arrested after being criminally charged by U.S. prosecutors, in Nassau, Bahamas December 13, 2022. REUTERS/Dante Carrer

FTX’s current CEO, John Ray, told congressional lawmakers on Tuesday that FTX lost $8 billion of client money, saying the company showed “absolute concentration of control in the hands of a small group of grossly inexperienced, nonsophisticated individuals.”

In the indictment unsealed on Tuesday morning, U.S. prosecutors said Bankman-Fried had engaged in a scheme to defraud FTX’s customers by misappropriating their deposits to pay for expenses and debts and to make investments on behalf of his crypto hedge fund, Alameda Research LLC.

He also defrauded lenders to Alameda by providing false and misleading information about the hedge fund’s condition, and sought to disguise the money he had earned from committing wire fraud, prosecutors said.

Both the U.S. Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) alleged Bankman-Fried committed fraud in lawsuits filed on Tuesday.

The CFTC sued Bankman-Fried, Alameda and FTX on Tuesday, alleging fraud involving digital commodity assets.

Since at least May 2019, FTX raised more than $1.8 billion from equity investors in a years-long “brazen, multi-year scheme” in which Bankman-Fried concealed FTX was diverting customer funds to Alameda Research, the SEC alleged.

CRYPTO INVESTORS LOST BILLIONS

Bankman-Fried, who founded FTX in 2019, was an unconventional figure who sported wild hair, t-shirts and shorts on panel appearances with statesmen like former U.S. President Bill Clinton. He became one of the largest Democratic donors, contributing $5.2 million to President Joe Biden’s 2020 campaign. Forbes pegged his net worth a year ago at $26.5 billion.

FTX filed for bankruptcy on Nov. 11, leaving an estimated 1 million customers and other investors facing losses in the billions of dollars. The collapse reverberated across the crypto world and sent bitcoin and other digital assets plummeting.

The collapse was one of a series of bankruptcies in the crypto industry this year as digital asset markets tumbled from 2021 peaks. A crypto exchange is a platform on which investors can trade digital tokens such as bitcoin.

As legal challenges mount, the U.S. Congress is also looking at crafting legislation to rein in a loosely-regulated industry.

FTX has shared findings with the SEC and U.S. prosecutors, and is investigating whether Bankman-Fried’s parents were involved in the operation.

The attorney general’s office of the Bahamas said it expected Bankman-Fried to be extradited to the United States.

Bankman-Fried resigned as FTX’s CEO the same day as the bankruptcy filing. FTX’s liquidity crunch came after he secretly used $10 billion in customer funds to support his proprietary trading firm Alameda, Reuters has reported. At least $1 billion in customer funds had vanished.

Additional reporting by Luc Cohen and Jack Queen in New York and Hannah Lang, Chris Prentice and Susan Heavey in Washington
Writing by Nick Zieminski and Deepa Babington
Editing by Noeleen Walder, Megan Davies, Anna Driver and Matthew Lewis

Our Standards: The Thomson Reuters Trust Principles.

Luc Cohen

Thomson Reuters

Reports on the New York federal courts. Previously worked as a correspondent in Venezuela and Argentina.

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Business

Former FTX CEO Bankman-Fried arrested in Bahamas after U.S. files charges

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Dec 12 (Reuters) – (Editor’s note: This story contains language in paragraph 18 that some readers may find offensive)

FTX founder Sam Bankman-Fried was arrested in the Bahamas at the behest of U.S. prosecutors on Monday, the day before he was due to testify before Congress about the abrupt failure last month of one of the world’s largest cryptocurrency exchanges.

The arrest marks a stunning fall from grace for the 30-year-old entrepreneur widely known by his initials SBF, who rode a boom in bitcoin and other digital assets to become a billionaire many times over until FTX’s rapid demise.

The exchange, launched in 2019 and based in the Bahamas, filed for bankruptcy Nov. 11 after it struggled to raise money to stave off collapse as traders rushed to withdraw $6 billion from the platform in just 72 hours. Since then it emerged Bankman-Fried secretly used $10 billion in customer funds to prop up his trading business.

The arrest came as Bankman-Fried prepared to lash out at his former lawyers at Sullivan and Cromwell, new FTX CEO John Ray and rival exchange operator Binance at a Congressional hearing.

In the testimony, a draft copy of which was seen by Reuters, Bankman-Fried planned to say he was pressured by Sullivan and Cromwell lawyers to nominate Ray as CEO following the sudden exodus of customer funds. And when within minutes he changed his mind, following an offer of billions of dollars of fresh funding, he was told it was too late.

Bankman-Fried will now be unable to testify, according to Congresswoman Maxine Waters, who said in a statement she was surprised to hear of his arrest. Ray’s testimony will go ahead.

Bankman-Fried was arrested shortly after 6:00 pm Monday (2300 GMT) at his apartment complex, a luxury gated community called the Albany, and will appear in a magistrate court on Tuesday, Bahamian police said. The Bahamas attorney general’s office said it expects he will be extradited to the United States.

A spokesman for the U.S. Attorney’s office in Manhattan confirmed Bankman-Fried had been arrested in the Bahamas but declined to comment on the charges.

U.S. prosecutors said they had a sealed indictment against Bankman-Fried and charges would be revealed on Tuesday. The New York Times reported he faces fraud and money laundering charges. The U.S. Securities and Exchange Commission separately authorized charges relating to Bankman-Fried’s violations of securities laws, the regulator said on Monday.

Bankman-Fried and his lawyer Mark Cohen did not immediately respond to requests for comment, nor did Sullivan and Cromwell, FTX, Ray and Binance.

Bankman-Fried has said he doesn’t think he has any criminal liability. “I didn’t ever try to commit fraud,” Bankman-Fried said in a Nov. 30 interview at the New York Times’ Dealbook Summit.

CRYPTO INDUSTRY REELING

FTX’s demise sent shockwaves through an already-battered cryptocurrency industry, which has seen a string of meltdowns this year that have taken down other key players including Voyager Digital and Celsius Network.

More trouble might be on the horizon for the industry. Reuters reported Monday that some Justice Department prosecutors believe they have gathered sufficient evidence in their long-running investigation of Binance to charge the world’s largest cryptocurrency exchange and some top executives.

A Binance spokesperson told Reuters for the article: “We don’t have any insight into the inner workings of the U.S. Justice Department, nor would it be appropriate for us to comment if we did.”

Bitcoin was steady at $17,150. It is down more than 60% this year.

MEA CULPA

Since the collapse of FTX, Bankman-Fried has given numerous media interviews apologizing for his mistakes and explaining what happened at the company, something that legal experts said could allow prosecutors to point to inconsistencies to undermine his credibility with a jury.

“The defense is going to be completely boxed in by the prior statements SBF has made and the very incisive questions he has answered in the press and on social media,” said criminal defense attorney and former federal prosecutor Renato Mariotti.

In his written testimony, Bankman-Fried repeated his mea culpa: “I would like to start by formally stating, under oath: I fucked up,” he wrote.

Then, he launched into an explanation of how things went badly at FTX and his hedge fund Alameda Research, while criticizing Sullivan and Cromwell and Ray as well as arch rival Binance for their actions as his firm imploded.

UNDER PRESSURE

Describing his decision to give up his role as CEO of FTX and appoint Ray, Bankman-Fried said he was pressured to do so by Sullivan and Cromwell and the general counsel of FTX’s U.S. unit, who he said was a former lawyer at the law firm.

Bankman-Fried said less than 10 minutes after he had signed a document at 4.30 am on Nov. 10 to make Ray the CEO of FTX, he received “a potential funding offer for billions of dollars.” Bankman-Fried said he told his counsel to rescind the CEO appointment a few minutes later but was told it was already too late to do so.

Bankman-Fried said he had since been cut off from FTX’s systems and Ray had not responded to his emails offering help or other information.

Bankman-Fried, who had become a prominent and unconventional figure known for his wild hair, t-shirts and shorts during crypto’s boom, said the fortunes of FTX and his trading firm Alameda declined rapidly this year as crypto currencies crashed amid rising interest rates.

In late 2021, he said Alameda had net asset value of more than $50 billion and manageable levels of debt. That became unsustainable as digital assets declined.

“Last year, my net worth was valued at $20b,” Bankman-Fried wrote. “Last I saw, I believe my bank account had about $100k in it.”

Reporting by Jasper Ward in Washington, Luc Cohen and Jack Queen in New York, Brian Ellsworth in Miami and Angus Berwick in London; Editing by Megan Davies, Paritosh Bansal and Lincoln Feast

Our Standards: The Thomson Reuters Trust Principles.

Luc Cohen

Thomson Reuters

Reports on the New York federal courts. Previously worked as a correspondent in Venezuela and Argentina.

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Business

Exclusive: Goldman Sachs on hunt for bargain crypto firms after FTX fiasco

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LONDON, Dec 6 (Reuters) – Goldman Sachs (GS.N) plans to spend tens of millions of dollars to buy or invest in crypto companies after the collapse of the FTX exchange hit valuations and dampened investor interest.

FTX’s implosion has heightened the need for more trustworthy, regulated cryptocurrency players, and big banks see an opportunity to pick up business, Mathew McDermott, Goldman’s head of digital assets, told Reuters.

Goldman is doing due diligence on a number of different crypto firms, he added, without giving details.

“We do see some really interesting opportunities, priced much more sensibly,” McDermott said in an interview last month.

FTX filed for Chapter 11 bankruptcy protection in the United States on Nov. 11 after its dramatic collapse, sparking fears of contagion and amplifying calls for more crypto regulation.

“It’s definitely set the market back in terms of sentiment, there’s absolutely no doubt of that,” McDermott said. “FTX was a poster child in many parts of the ecosystem. But to reiterate, the underlying technology continues to perform.”

While the amount Goldman may potentially invest is not large for the Wall Street giant, which earned $21.6 billion last year, its willingness to keep investing amid the sector shakeout shows it senses a long term opportunity.

Its CEO David Solomon told CNBC on Nov. 10, as the FTX drama was unfolding, that while he views cryptocurrencies as “highly speculative”, he sees much potential in the underlying technology as its infrastructure becomes more formalized.

Rivals are more sceptical.

“I don’t think it’s a fad or going away, but I can’t put an intrinsic value on it,” Morgan Stanley (MS.N) CEO James Gorman said at the Reuters NEXT conference on Dec. 1.

HSBC (HSBA.L) CEO Noel Quinn, meanwhile, told a banking conference in London last week he has no plans to expand into crypto trading or investing for retail customers.

Goldman has invested in 11 digital asset companies that provide services such as compliance, cryptocurrency data and blockchain management.

McDermott, who competes in triathlons in his spare time, joined Goldman in 2005 and rose to run its digital assets business after serving as head of cross asset financing.

His team has grown to more than 70 people, including a seven-strong crypto options and derivatives trading desk.

Goldman Sachs has also together with MSCI and Coin Metrics launched data service datonomy, aimed at classifying digital assets based on how they are used.

The firm is also building its own private distributed ledger technology, McDermott said.

‘TRUSTED’ PLAYERS

The global cryptocurrency market peaked at $2.9 trillion in late 2021, according to data site CoinMarketCap, but has shed about $2 trillion this year as central banks tightened credit and a string of high-profile corporate failures hit. It last stood at $865 billion on Dec. 5.

The ripple effects from FTX’s collapse have boosted Goldman’s trading volumes, McDermott said, as investors sought to trade with regulated and well capitalized counterparties.

“What’s increased is the number of financial institutions wanting to trade with us,” he said. “I suspect a number of them traded with FTX, but I can’t say that with cast iron certainty.”

Goldman also sees recruitment opportunities as crypto and tech companies shed staff, McDermott said, although the bank is happy with the size of its team for now.

Others also see the crypto meltdown as a chance to build their businesses.

Britannia Financial Group is building its cryptocurrency-related services, its chief executive Mark Bruce told Reuters.

The London-based company aims to serve customers who are eager to diversify into digital currencies, but who have never done so before, Bruce said. It will also cater to investors who are very familiar with the assets, but have become nervous about storing funds at crypto exchanges since FTX’s collapse.

Britannia is applying for more licenses to provide crypto services, such as doing deals for wealthy individuals, he said

“We have seen more client interest since the demise of FTX,” he said. “Customers have lost trust in some of the younger businesses in the sector that purely do crypto, and are looking for more trusted counterparties.”

Reporting by Iain Withers and Lawrence White, Editing by Lananh Nguyen and Alexander Smith

Our Standards: The Thomson Reuters Trust Principles.

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Business

FX swap debt a $80 trillion ‘blind spot’ global regulator says

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LONDON, Dec 5 (Reuters) – Pension funds and other ‘non-bank’ financial firms have more than $80 trillion of hidden, off-balance sheet dollar debt in FX swaps, the Bank for International Settlements (BIS) said.

The BIS, dubbed the central bank to the world’s central banks, also said in its latest quarterly report that 2022’s market upheaval had largely been navigated without major issues.

Having repeatedly urged central banks to act forcefully to dampen inflation, it struck a more measured tone and picked over crypto market troubles and September’s UK bond market turmoil.

Its main warning concerned what it described as the FX swap debt “blind spot” that risked leaving policymakers in a “fog”.

FX swap markets, where for example a Dutch pension fund or Japanese insurer borrows dollars and lends euro or yen before later repaying them, have a history of problems.

They saw funding squeezes during both the global financial crisis and again in March 2020 when the COVID-19 pandemic wrought havoc that required central banks such as the U.S. Federal Reserve to intervene with dollar swap lines.

The $80 trillion-plus “hidden” debt estimate exceeds the stocks of dollar Treasury bills, repo and commercial paper combined, the BIS said. It has grown from just over $55 trillion a decade ago, while the churn of FX swap deals was almost $5 trillion a day in April, two thirds of daily global FX turnover.

For both non-U.S. banks and non-U.S. ‘non-banks’ such as pension funds, dollar obligations from FX swaps are now double their on-balance sheet dollar debt, it estimated.

“The missing dollar debt from FX swaps/forwards and currency swaps is huge,” the Switzerland-based institution said, adding the lack of direct information about the scale and location of the problems was the key issue.

Off and on-balance sheet dollar debt

CLOSER

The report also assessed broader recent market developments.

BIS officials have been loudly calling for forceful interest rate hikes from central banks as inflation has taken hold, but this time it struck a more measured tone.

Asked whether the end of the tightening cycle may be looming next year, the head of the BIS’ Monetary and Economic Department Claudio Borio said it would depend on how circumstances evolve, noting also the complexities of high debt levels and uncertainty about how sensitive borrowers now are to rising rates.

The crisis that erupted in UK gilt markets in September also underscored that central banks could be forced to step in and intervene – in the UK’s case by buying bonds even at a time when it was raising interest rates to curb inflation.

“The simple answer is one is closer than one was at the beginning, but we don’t know how far central banks will have to go,” Borio said about interest rates.

“The enemy is an old enemy and is known,” he added, referring to inflation. “But it’s a long time since we have been fighting this battle”.

Market volatility

DINO-MITE

The report also focused on findings from the recent BIS global FX market survey, which estimated that $2.2 trillion worth of currency trades are at risk of failing to settle on any given day due to issues between counterparties, potentially undermining financial stability.

The amount at risk represents about one third of total deliverable FX turnover and is up from $1.9 trillion from three years earlier when the last FX survey was carried out.

FX trading also continues to shift away from multilateral trading platforms towards “less visible” venues hindering policymakers “from appropriately monitoring FX markets,” it said.

The bank’s Head of Research and Economic Adviser Hyun Song Shin, meanwhile, described recent crypto market problems such as the collapse of the FTX exchange and stable coins TerraUSD and Luna as having similar characteristics to banking crashes.

He described many of the crypto coins sold as “DINO – decentralised in name only” and that most of their related activities took place through traditional intermediaries.

“This is people taking in deposits essentially in unregulated banks,” Shin said, adding it was largely about the unravelling of large leverage and maturity mismatches, just like during the financial crash more than a decade ago.

Reporting by Marc Jones; Editing by Toby Chopra and Alexander Smith

Our Standards: The Thomson Reuters Trust Principles.

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