is likely to plead not guilty to fraud and other charges at his arraignment next week, according to people familiar with the matter.
The U.S. attorney’s office for the Southern District of New York earlier this month charged Mr. Bankman-Fried with engaging in criminal conduct that contributed to the cryptocurrency exchange’s collapse, alleging that he oversaw one of the biggest financial frauds in American history. Mr. Bankman-Fried is likely to appear in person in New York to enter his plea on Jan. 3, one of the people said.
Before his arrest, Mr. Bankman-Fried blamed the loss of customer funds on sloppy record-keeping and a bank-account issue that allowed Alameda Research, an affiliated trading firm, to cover large losses with money destined for FTX. His not guilty plea was widely expected.
The collapse of FTX has set off the largest crypto-related bankruptcy ever, and court filings are already shedding light on what went wrong and how complicated things could get. Here are three things to know about the company’s bankruptcy process. Photo: Lam Yik/Bloomberg News
Mr. Bankman-Fried stands at odds with his associates—
Caroline Ellison,
the former chief executive of Alameda Research, and
Gary Wang,
FTX’s former chief technology officer—who both pleaded guilty to criminal offenses similar to those Mr. Bankman-Fried was charged with. Both are cooperating with federal investigators.
The collapse of FTX and its sister trading firm Alameda have rattled the nascent world of crypto. Prosecutors allege that Mr. Bankman-Fried took billions of dollars of FTX.com customer money to pay the expenses and debts of his trading firm Alameda Research. Both companies filed for bankruptcy last month. Individual traders who entrusted FTX with their crypto are likely facing lengthy bankruptcy proceedings before they have a chance at seeing any of their funds back.
Mr. Bankman-Fried was released on a $250 million bond last week and has been ordered to stay in his parent’s Palo Alto, Calif., home after his appearance in a New York federal court following his extradition from the Bahamas.
Prosecutors say that from 2019 through November, Mr. Bankman-Fried conspired with unnamed individuals to defraud customers and lenders. He provided false and misleading information to lenders on the financial condition of Alameda, according to the indictment by the U.S. attorney’s office.
Mr. Bankman-Fried is also accused of defrauding the Federal Election Commission starting in 2020 by conspiring with others to make illegal contributions to candidates and political committees in the names of other people.
He and his associates contributed more than $70 million to election campaigns in recent years, The Wall Street Journal previously reported. He personally made $40 million in donations ahead of the 2022 midterm elections.
Mr. Bankman-Fried also faces allegations from the Securities and Exchange Commission and the Commodity Futures Trading Commission.
The SEC alleged in a civil lawsuit that Mr. Bankman-Fried diverted customer funds from the start of FTX to support Alameda and to make venture investments, real-estate purchases and political donations. The CFTC filed a lawsuit linking his allegedly fraudulent conduct at Alameda and FTX to markets that the CFTC regulates.
On Friday afternoon, Mr. Bankman-Fried returned to Twitter for the first time since Dec. 12 to defend himself against rumors that he has been moving funds out of several crypto wallet addresses associated with Alameda.
Cryptocurrency prices have cratered this year amid rising central bank rates and the collapses of a once-prominent hedge fund and crypto lenders, with bitcoin and ether plunging 64% and 67%, respectively, according to CoinDesk data. The total market cap of all digital tokens fell to $795 billion, compared with $2.2 trillion at the start of year, per CoinMarketCap data.
Write to Caitlin Ostroff at caitlin.ostroff@wsj.com and Vicky Ge Huang at vicky.huang@wsj.com
apologized in court this week as she pleaded guilty to fraud and other offenses, telling a judge that she and others conspired to steal billions of dollars from customers of the doomed crypto exchange while misleading investors and lenders.
“I am truly sorry for what I did,” Ms. Ellison, the former chief executive of Mr. Bankman-Fried’s crypto-trading firm, Alameda Research, said in a New York federal court, according to a transcript of the hearing made available Friday. “I knew that it was wrong.”
Ms. Ellison, 28 years old, and former FTX chief technology officer
Gary Wang,
29, pleaded guilty Monday during separate hearings in sealed courtrooms. Both agreed to cooperate with the government’s investigation in exchange for the prospect of lighter sentences.
Ms. Ellison, a former romantic partner of Mr. Bankman-Fried, pleaded guilty to seven criminal counts, including fraud, conspiracy and money laundering. During her hearing, she admitted to conspiring to use billions of dollars from FTX customer accounts to repay loans Alameda had taken out to make risky investments.
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FTX executives had enacted special settings that granted Alameda access to an unlimited line of credit without having to post collateral, pay interest on negative balances or be subject to margin calls, she said.
“I also understood that many FTX customers invested in crypto derivatives and that most FTX customers did not expect that FTX would lend out their digital asset holdings and fiat currency deposits to Alameda in this fashion,” she said.
Ms. Ellison also said she and Mr. Bankman-Fried worked with others to conceal the arrangement from lenders, including by hiding on quarterly balance sheets the extent of Alameda’s borrowing and the billions of dollars in loans that the firm had made to FTX executives and associates. Mr. Bankman-Fried was among the executives who received loans from Alameda, she said.
Under questioning from the judge, Ms. Ellison said she knew what she was doing was illegal.
She said that since FTX’s implosion, she has worked hard to assist in the recovery of customers’ assets and aid the government’s investigation.
At the hearing, U.S. District Judge
Ronnie Abrams
granted the request of federal prosecutors to temporarily seal all documents connected to Ms. Ellison’s plea agreement. At the time, Mr. Bankman-Fried was in a jail in the Bahamas after the Justice Department requested local police arrest him, and he had not yet formally consented to his transfer to U.S. custody.
“We’re still expecting extradition soon, but given that he has not yet entered his consent, we think it could potentially thwart our law enforcement objectives to extradite him if Ms. Ellison’s cooperation were disclosed at this time,” Assistant U.S. Attorney
Danielle Sassoon
told Judge Abrams.
A lawyer for Ms. Ellison declined to comment. Ms. Ellison was ordered released on $250,000 bond at her plea hearing. A spokesman for the U.S. attorney’s office in Manhattan declined to comment.
John J. Ray III, the new chief executive of FTX, testified in front of a House committee Tuesday on the collapse of the crypto exchange. His testimony came less than a day after the company founder, Sam Bankman-Fried, was arrested in the Bahamas. Photo: Al Drago/Bloomberg News
Mr. Wang pleaded guilty in front of the same judge. He told Judge Abrams he knew what he was doing was illegal and wrong. “As part of my employment at FTX, I was directed to and agreed to make certain changes to the platform’s code,” he said, adding that he executed the changes knowing they would give Alameda Research special privileges on the FTX platform.
A lawyer for Mr. Wang declined to comment. He has previously said that Mr. Wang takes his responsibilities as a cooperating witness seriously.
The Justice Department charged Mr. Bankman-Fried earlier this month with eight counts of fraud and conspiracy connected to the implosion of his company. He was released from custody on a $250 million bond on Thursday after making his first court appearance in New York following his extradition from the Bahamas. A federal magistrate judge set strict restrictions on Mr. Bankman-Fried, including ordering him to stay in his parents’ Palo Alto, Calif., home and be under electronic monitoring.
Mr. Bankman-Fried has said he made mistakes that contributed to FTX’s demise, but he has denied engaging in fraud.
Write to Corinne Ramey at corinne.ramey@wsj.com and James Fanelli at james.fanelli@wsj.com
WASHINGTON—The Senate Finance Committee has opened an inquiry into whether auto makers including
Tesla Inc.
and
General Motors Co.
are using parts and materials made with forced labor in China’s Xinjiang region.
In a letter sent Thursday, the committee asked the chief executives of eight car manufacturers to provide detailed information on their supply chains to help determine any links to Xinjiang, where the U.S. government has alleged the use of forced labor involving the Uyghur ethnic minority and others.
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The U.S. bans most imports from the region under the Uyghur Forced Labor Prevention Act. The letter to car companies cited a recent report from the U.K.’s Sheffield Hallam University that found evidence that global auto makers were using metals, batteries, wiring and wheels made in Xinjiang, or sourcing from companies that used Uyghur workers elsewhere in China.
According to that report, some car manufacturers “are unwittingly sourcing metals from the Uyghur region.” It said some of the greatest exposure comes from steel and aluminum parts as metals producers shift work to Xinjiang to take advantage of Chinese government subsidies and other incentives.
The U.S. ban on products linked to Xinjiang has already caused disruptions in the import of solar panels made there.
China has called Washington’s claim baseless. It disputes claims by human-rights groups that it mistreats Uyghurs by confining them in internment camps, with Beijing saying its efforts are aimed at fighting terrorism and providing vocational education.
Besides
Tesla
and GM, the letter signed by Finance Committee Chairman
Ron Wyden
(D., Ore.), was sent to
Ford Motor Co.
,
Mercedes-Benz Group AG
,
Honda Motor Co.
,
Toyota Motor Corp.
,
Volkswagen AG
and
Stellantis
NV, whose brands include Chrysler and Jeep.
GM said its policy prohibits any form of forced or involuntary labor, abusive treatment of employees or corrupt business practices in its supply chain.
“We actively monitor our global supply chain and conduct extensive due diligence, particularly where we identify or are made aware of potential violations of the law, our agreements, or our policies,“ the company said.
A Volkswagen spokesman said the company investigates any alleged violation of its policy, saying “serious violations such as forced labor could result in termination of the contract with the supplier.” A Stellantis spokesperson said the company is reviewing the letter and the claims made in the Sheffield Hallam study.
Other companies didn’t immediately provide comments.
“I recognize automobiles contain numerous parts sourced across the world and are subject to complex supply chains. However, this recognition cannot cause the United States to compromise its fundamental commitment to upholding human rights and U.S. law,” Mr. Wyden wrote.
The information requested includes supply-chain mapping and analysis of raw materials, mining, processing and parts manufacturing to determine links to Xinjiang, including manufacturing conducted in third countries such as Mexico and Canada.
General Motors says its policy prohibits forced or involuntary labor, abusive treatment of employees or corrupt business practices in its supply chain.
Photo:
mandel ngan/Agence France-Presse/Getty Images
The lawmakers are also asking the auto makers if they had ever terminated, or threatened to terminate, relations with suppliers over possible links to Xinjiang, and if so, provide details of the cases.
The committee’s action comes as the Biden administration and bipartisan lawmakers increase their focus on alleged forced-labor practices in China as a key component of their confrontation with Beijing over its economic policy. The United Auto Workers has called on the auto industry to “shift its entire supply chain out of the region.”
The State Department has said more than one million Uyghurs and other minorities are held in as many as 1,200 state-run internment camps in Xinjiang. Chinese authorities “use threats of physical violence” and other methods to force detainees to work in adjacent or off-site factories, according to the department.
The U.S. Customs and Border Protection investigated 2,398 entries with a total value of $466 million during the fiscal year ended September, up from 1,469 entries in the previous year and 314 cases in fiscal 2000.
Analysts expect the CBP’s enforcement activity to further increase this year, with a strong bipartisan push for a tougher stance on the forced-labor issue.
The researchers at Sheffield Hallam University found that more than 96 mining, processing, or manufacturing companies relevant to the auto sector are operating in Xinjiang. The researchers used publicly available sources, including corporate annual reports, websites, government directives, state media and customs records.
& Co. reached a $3.7 billion deal with regulators to resolve allegations that it harmed more than 16 million people with deposit accounts, auto loans and mortgages.
The settlement with the Consumer Financial Protection Bureau includes a $1.7 billion penalty, the agency’s largest-ever fine, and more than $2 billion in consumer restitution, the regulatory agency said Tuesday.
The consumer watchdog agency said the bank illegally assessed fees and interest charges on loans for cars and homes. Some consumers had their vehicles illegally repossessed while others had overdraft fees unlawfully applied, the agency said.
Wells Fargo’s regulatory troubles continue to ripple through the bank more than six years after its fake account scandal burst into public view. Other problems later surfaced across the San Francisco-based bank, including in its lending and deposit-taking businesses.
The CFPB settlement resolves a major penalty hanging over Wells Fargo but leaves it handcuffed by other regulators. The Federal Reserve has had a cap on the bank’s asset growth in place for nearly five years. Politicians continue to target the bank, and investors have filed a series of class-action lawsuits.
“Wells Fargo is a corporate recidivist,” said CFPB Director
Rohit Chopra,
on a call with reporters Tuesday. He said the settlement “should not be read as a sign that Wells Fargo has moved past its longstanding problems.”
The bank had been negotiating with the CFPB for months in an effort to lump as many outstanding issues into the settlement as possible, according to people familiar with the matter.
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Much of the $2 billion remediation included in the settlement has already been doled out to customers. The bank, for example, has paid $1.3 billion to 11 million customers who had auto-loan servicing issues, the CFPB said.
Wells Fargo has been working for years to resolve a series of regulatory matters stemming from a fake-accounts scandal in 2016. Afterward, other problems surfaced across the bank, including in its mortgage and auto-lending businesses.
The CFPB said the bank’s actions span over a decade. Wells Fargo incorrectly applied auto-loan payments because of technology and compliance failures from 2011 through 2022, the agency said. Errors in its home loan modification process went on from 2011 to 2018, the agency said.
The bank sometimes charged overdraft fees even when a customer had enough funds available to make a debit-card transaction or ATM withdrawal, CFPB said. Wells Fargo is required to refund customers about $205 million in fees since the beginning of last year that weren’t yet reversed. CFPB will oversee that process.
Mr. Chopra, an appointee of President Biden, has said he plans to target repeat offenders. “Corporate recidivism has become normalized and calculated as the cost of doing business,” he said in a speech earlier this year. He has also sought to make his agency more adversarial toward financial firms.
The CFPB said Wells Fargo has accelerated efforts to clean up its act since 2020. Tied to the settlement, the agency will terminate one of the consent orders it had placed on the bank in 2016 and clarify that a 2018 consent order will terminate in no more than three years.
Wells Fargo, led by CEO Charlie Scharf, had signaled for months that it expected another large regulatory penalty.
Photo:
Drew Angerer/Getty Images
“This far-reaching agreement is an important milestone in our work to transform the operating practices at Wells Fargo and to put these issues behind us,” Chief Executive
Charlie Scharf
said in a statement.
Mr. Scharf was brought in to clean up the bank in 2019. He has overhauled the top executive ranks, cut its workforce and gave priority to remaking the bank’s back-end systems for managing internal controls and risk.
The bank had signaled for months that it expected another big regulatory penalty, and it took a $2 billion charge in the third quarter tied to resolving long-running legal and regulatory issues. The bank said Tuesday that it expects an operating losses expense of $3.5 billion in the current quarter.
has signaled it plans to challenge the Federal Trade Commission’s lawsuit to block its $75 billion deal for
Activision
ATVI -0.38%
Blizzard Inc., and is expected to argue that it is an underdog in videogame developing.
The personal-computing company has been publicizing its position for months, saying the acquisition wouldn’t threaten competition in the industry because Microsoft trails rivals in videogame consoles and has a limited presence in mobile-game development. The company has also said it expects the industry to get more competitive in the future with the rise of cloud gaming.
Legal experts say Microsoft will likely build its case around those talking points as well as the fact that it is pursuing what is called a vertical merger, meaning it is buying a company in its supply chain as opposed to a direct competitor.
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The deal “is fundamentally good for gamers, good for consumers, good for game developers and good for competition,” said
Brad Smith,
Microsoft’s president and vice chair, at the company’s annual shareholders meeting Tuesday. “We will have to present this case to a judge in a court because this is a case in which I have great confidence.”
Microsoft has until Thursday to respond to the FTC’s suit, which was filed Dec. 8 in the agency’s administrative court.
In its complaint, the FTC alleged the deal is illegal because it would give Microsoft the ability to control how consumers access Activision’s games beyond the Redmond, Wash., company’s own Xbox consoles and subscription services. The company could raise prices or degrade Activision’s content for people who don’t use its hardware to access the developer’s games, or even cut off access to the games entirely, the FTC said.
“If you can control an important source of content like Activision Blizzard, you have a variety of tools to leverage at your disposal,” which could stifle competition, an agency official said earlier this month.
At the shareholder meeting, Mr. Smith challenged the FTC’s concerns that Microsoft’s chief rival, PlayStation maker
Sony Group Corp.
, would be harmed by the deal, saying Sony has too big a lead in the high-performance console space to warrant protection.
Microsoft Gaming CEO Phil Spencer discusses growth in cloud gaming, gaming subscriptions and the planned acquisition of Activision Blizzard.
He further argued that the FTC’s case largely hinges on a worry that Microsoft could one day make games from Activision’s “Call of Duty”—which has been a hit among PlayStation users—exclusive to its Xbox system. Mr. Smith said Sony has about four times as many exclusive games on its consoles today as Microsoft has on its gaming machines.
Sony didn’t respond to a request for comment.
Microsoft said it made a last-minute offer to keep “Call of Duty” games accessible to others through a legally binding consent decree, augmenting an offer that the company had made months earlier to keep it accessible for at least 10 years.
A hearing would take place in the FTC’s administrative court in August, unless a resolution is reached before then. After the case is heard, legal experts say it could take months before a decision is handed down, and the losing side can then appeal it with the full commission. If an appeal is filed, the commission reviews the entire record anew and hears oral arguments, before deciding to uphold or overturn the administrative law judge’s order. At that point, if Microsoft loses, the company can appeal the commission’s decision to a federal appeals court.
“This is no way a slam-dunk case for the FTC,” said
Eric Talley,
a professor at Columbia Law School. “Even if the odds are a little bit long, they’re showing they’re willing to kick the tires to budge legal precedent a little bit more in their favor.”
Microsoft recently made a last-minute move to augment its offer to keep Activision’s ‘Call of Duty’ games accessible to others.
Photo:
Martin Meissner/Associated Press
Some analysts said Microsoft might want to drop the acquisition, which the company values at $68.7 billion after adjusting for Activision’s net cash, to avoid executive distraction and expensive regulatory concessions. Microsoft has said it is committed to addressing regulators’ concerns.
While the litigation is continuing, Microsoft could offer the FTC additional commitments or implement them itself, said
Benjamin Sirota,
an antitrust attorney with the law firm Kobre & Kim LLP in New York. But to be satisfied, the government would have to enforce those commitments, which “takes resources and circumstances often change,” he said. The agency might also consider how “commitments that solve a competition problem now might not work in the future,” he added.
The FTC faces hurdles in its case because of the deal’s vertical-merger status, according to
David Hoppe,
mergers and acquisitions, tech and media attorney with Gamma Law in San Francisco.
“With these cases, it’s hard to prove consumer harm,” he said. “It’s not two competitors combining, in which case the harm to consumers is typically self-evident.”
The FTC has been clear about its intention to expand the scope of harm beyond a merger’s likely impact on consumer prices, Mr. Hoppe said. The agency might be concerned about actions that could indirectly put consumers at risk, he said, such as the misuse of sensitive competitor information by the combined enterprise. That information could give Microsoft a way to keep newcomers in videogame distribution from succeeding, which could result in fewer options for consumers, he said.
“It’s all about the network effect,” Mr. Hoppe said.
Write to Sarah E. Needleman at Sarah.Needleman@wsj.com
oversaw one of the biggest financial frauds in American history, a top federal prosecutor said in charging that the former chief executive stole billions of dollars from the crypto exchange’s customers while misleading investors and lenders.
An indictment by the U.S. attorney’s office for the Southern District of New York, unsealed Tuesday, charges Mr. Bankman-Fried with eight counts of fraud. Prosecutors allege that he took FTX.com customers’ money to pay the expenses and debts of Alameda Research, an affiliated trading firm. Mr. Bankman-Fried is charged as well with conspiring to defraud the U.S. and violate campaign-finance rules by making illegal political contributions.
Damian Williams,
the U.S. attorney for the Southern District of New York, said he authorized the charges against Mr. Bankman-Fried last Wednesday and a grand jury voted on the indictment Friday.
“This investigation is very much ongoing, and it is moving very quickly,” Mr. Williams said at a press conference in Manhattan on Tuesday. “While this is our first public announcement, it will not be our last.”
John J. Ray III, the new chief executive of FTX, testified in front of a House committee Tuesday on the collapse of the crypto exchange. Photo: Nathan Howard/Getty Images
Separately, John J. Ray III, the new chief executive of FTX, said at a congressional hearing Tuesday that FTX incurred losses in excess of $7 billion. Mr. Ray, who oversaw the Enron Corp. bankruptcy early in the 2000s decade, said funds were taken from FTX and Alameda, an affiliated trading firm that incurred trading losses.
Mr. Ray described Enron as having been brought down by sophisticated people whose machinations aimed to keep transactions secret. FTX presents as “old-fashioned embezzlement,” Mr. Ray said. “It’s taking money from customers and using it for your own purpose.”
Also Tuesday, the Securities and Exchange Commission alleged in a civil lawsuit that Mr. Bankman-Fried diverted customer funds from the start of FTX to support Alameda and to make venture investments, real-estate purchases and political donations. The Commodity Futures Trading Commission filed a lawsuit Tuesday linking his allegedly fraudulent conduct at Alameda and FTX to markets that the CFTC regulates.
“
Sam Bankman-Fried
built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto,” SEC Chair
Gary Gensler
said.
The charges are the latest twist in a saga that has rattled the world of cryptocurrencies, a largely unregulated market that boomed during the pandemic but has been hammered this year by rising interest rates and the failure of several significant industry players.
FTX, one of the largest crypto exchanges in the world, filed for bankruptcy last month after the firm ran out of cash and a merger with rival Binance collapsed. The firm’s failure marked a sudden fall from grace for Mr. Bankman-Fried, who portrayed FTX as a safer crypto exchange to use and cast himself as an ally of regulation.
In interviews since the filing, Mr. Bankman-Fried said he bore responsibility for FTX’s collapse but denied he committed any fraud.
Mark Cohen,
a lawyer for Mr. Bankman-Fried, said Tuesday that his client “is reviewing the charges with his legal team and considering all of his legal options.”
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Mr. Bankman-Fried, 30 years old, was arrested Monday in the Bahamas. He appeared in court Tuesday in Nassau. He was denied bail and has been remanded to jail until Feb. 8, according to a person familiar with the matter.
A U.S. court official said that while the case had been assigned to a federal judge in Manhattan, there was no timing yet for Mr. Bankman-Fried’s extradition.
The tales of Mr. Bankman-Fried’s alleged misdeeds resonated with crypto customers around the world, even those who haven’t suffered significant losses as various firms by turns suspended withdrawals and collapsed.
Vasco Tagachi, a 42-year-old Portuguese-Sri Lankan trader based in China, said he felt a sigh of relief after learning of Mr. Bankman-Fried’s arrest. He said he had $57,423 in an FTX account this fall but was able to withdraw almost all of it just before the firm stopped honoring withdrawal requests.
“I had a little bit of tears in my eyes hearing that,” he said.
Prosecutors allege that from 2019 through November 2022, Mr. Bankman-Fried conspired with unnamed individuals to defraud customers and lenders. He provided false and misleading information to lenders on the financial condition of Alameda, according to the indictment.
Sam Bankman-Fried was arrested in the Bahamas on Monday, a day before he was expected to testify on the sudden collapse of FTX before the House Committee on Financial Services. Illustration: Jacob Reynolds
While the 14-page indictment was light on detailed allegations, it says that on Sept. 18, 2022, Mr. Bankman-Fried caused an email to be sent to an FTX investor in New York that contained false information about FTX’s financial condition. In June 2022, the indictment says, Mr. Bankman-Fried and others misappropriated FTX.com customer deposits to satisfy the loan obligations of Alameda.
Mr. Bankman-Fried is also accused of defrauding the Federal Election Commission starting in 2020 by conspiring with others to make illegal contributions to candidates and political committees in the names of other people.
He and his associates contributed more than $70 million to election campaigns in recent years, The Wall Street Journal previously reported. He personally made $40 million in donations ahead of the 2022 midterm elections, most of which went to Democrats and liberal-leaning groups.
Mr. Ray, the FTX CEO, said FTX is investigating whether any loans taken by FTX executives were improperly used for campaign contributions.
Mr. Ray added that tracing fund flows from FTX to executives and third parties was difficult because of the lack of a paper trail for many corporate transactions at FTX.
“We’re dealing with a paperless bankruptcy,” he said. “It makes it very difficult to trace and track assets.”
The CFTC’s complaint contains a detailed discussion of events at Alameda and FTX and argues that the agency, generally less visible to the public than the SEC, also has jurisdiction over the case. While the CFTC regulates U.S. derivatives markets, it can go after fraud that affects some commodity markets.
Besides giving Alameda access to its customer deposits, FTX granted the crypto hedge fund controlled by Mr. Bankman-Fried a series of trading-execution privileges that provided it an edge against other traders on the platform, the CFTC lawsuit alleges.
The CFTC said that while institutional customers had their orders routed through the FTX system, Alameda was able “to bypass certain portions of the system and gain faster access.” It resulted in Alameda’s orders being received by FTX several milliseconds faster than those of other institutional clients.
The lawsuit also alleges that Alameda wasn’t subject to certain automated verification processes, including on whether it had available funds before executing a transaction, giving it further advantage on the speed of its trades.
The edge wasn’t enough to keep Mr. Bankman-Fried from thinking about shutting down Alameda in September, according to the CFTC complaint.
In a document titled “We came, we saw, we researched,” Mr. Bankman-Fried laid out reasons for shutting down Alameda, according to the CFTC lawsuit. Chief among them: Alameda wasn’t making enough money to justify its existence, he wrote.
The CFTC said the statements contradicted what Mr. Bankman-Fried and Alameda were saying publicly at the time.
Tuesday’s congressional hearing was the first public appearance for Mr. Ray on FTX’s bankruptcy. Mr. Bankman-Fried had been scheduled to appear virtually at the same hearing, before he was arrested in the Bahamas at the request of the U.S. government. Bahamian police have said that they would keep him in custody and that they are awaiting an extradition order from U.S. authorities.
“The operation of Alameda really depended, based on the way it was operated, on the use of customer funds,” Mr. Ray said, responding to questions from members of Congress at the hearing. “There were virtually no internal controls…whatsoever.”
He described numerous loans totaling billions of dollars taken out by Mr. Bankman-Fried from Alameda.
“We have no information at this time as to what purpose or use of those funds were,” Mr. Ray added. He said Mr. Bankman-Fried had signed as the issuer and recipient for some of the loans.
Mr. Ray pushed back against recent statements made by Mr. Bankman-Fried that he had little to no involvement in the management of Alameda after passing control of the company to
Caroline Ellison
and
Sam Trabucco,
as well as Mr. Bankman-Fried’s statements that customer funds were passed to Alameda because of an accounting error.
“I don’t find those statements to be credible,” Mr. Ray said.
The Justice Department’s indictment of Mr. Bankman-Fried includes an array of charges with few supporting details, a tactic that could give federal prosecutors flexibility in navigating the rules involving extradition.
The charges against Mr. Bankman-Fried run the gamut from wire fraud to securities fraud conspiracy to conspiring to launder money and conspiring to break campaign-finance laws.
The statutes charged, with the exception of the campaign-finance offense, are enormously broad, said Rebecca Mermelstein, a former federal prosecutor who is now at O’Melveny & Myers LLP.
“By not being superspecific, you protect yourself later against an argument that charges relating to different criminal conduct are being added,” she said.
The arrest of Mr. Bankman-Fried is the latest case to highlight prosecutors’ push to bring white-collar cases to justice faster.
Deputy U.S. Attorney General Lisa Monaco said in a September speech that making prosecutors and companies feel that they were “on the clock” in these cases was a key priority for the department.
FTX founder Sam Bankman-Fried sat down with The Wall Street Journal to discuss what happened to the billions of dollars deposited by the exchange’s customers. Photo: Kenny Wassus/The Wall Street Journal
“We need to do more and move faster,” she said. “In individual prosecutions, speed is of the essence.”
Former federal prosecutors say that high-profile financial cases with lots of victims can increase the pressure on authorities to bring cases more quickly.
“Appearances matter when it comes to criminal justice,” said Mark Chutkow, a former federal prosecutor who is currently head of government investigations and corporate compliance at Dykema Gossett PLLC.
If Mr. Bankman-Fried remains in the Bahamas while the details of his potential extradition to the U.S. are worked out, there is only one prison there: the Bahamas Department of Correctional Services, commonly known as Fox Hill Prison.
Prison inmates reported removing human waste by buckets and developing bed sores from lying on the bare ground, according to a 2021 human-rights report on the Bahamas by the U.S. State Department. Cells were infested with rats, maggots and insects, the report said.
Inmates are supposed to get an hour every day outside for exercise. Because of staff shortages and overcrowding, there are times when inmates will only get 30 minutes a week, said Romona Farquharson, an attorney in the Bahamas.
The prison has different sections that separate those serving terms for violent crimes, for instance, from those who aren’t. Because of overcrowding, there have been instances in which inmates awaiting trial for minor crimes have been sent to the maximum-security facility, said Ms. Farquharson.
“I think they’ve got to be careful not to have him in really rough areas in the prison,” she said.
—Angel Au-Yeung, Ben Foldy and Hannah Miaocontributed to this article.
Write to Corinne Ramey at corinne.ramey@wsj.com, James Fanelli at james.fanelli@wsj.com, Dave Michaels at dave.michaels@wsj.com, Alexander Saeedy at alexander.saeedy@wsj.com and Vicky Ge Huang at vicky.huang@wsj.com
Cloud gaming is an emerging technology that allows people to stream videogames to nearly any internet-connected device, similar to how movies and shows are viewed on
Netflix,
Hulu and other streaming platforms.
The business model being developed alongside cloud gaming is a subscription service, where consumers get to play a catalog of games for a flat monthly or annual fee. With cloud gaming, players can avoid downloading games to their devices, which takes up memory, and they don’t need to invest in hardware such as a console or high-end computer.
The FTC and videogame industry participants anticipate cloud gaming will become a much larger part of the market in years to come. With its lawsuit, the FTC says it is protecting the videogame-distribution market—as it is today and how it is expected to evolve—from being dominated by a few companies.
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Microsoft is an early leader in cloud gaming with its Xbox Game Pass subscription service. The company’s $75 billion deal forActivision would bolster its content library, adding several blockbuster franchises including “Call of Duty,” “World of Warcraft” and “Candy Crush Saga.”
Microsoft, which has pledged to fight the FTC’s suit, has said it is an underdog in the existing console market, with Xbox’s position trailing
Sony Group Corp.’s
PlayStation and
Nintendo Co.
’s Switch. The company doesn’t disclose Xbox sales by volume.
Shoppers are seeing more out-of-stock messages than ever, but inventory tracking websites like HotStock and Zoolert are giving people a better chance of finding the hot-ticket products they’re looking for. Here’s how those websites work. Illustration: Sebastian Vega
The technology giant has also said that it has no meaningful presence in mobile, the biggest corner of the overall videogame industry by revenue.
Apple Inc.
and
Alphabet Inc.’s
Google, makers of the predominant smartphone operating systems, play a critical role in how people access mobile games, and they take a cut of developers’ in-app and subscription sales.
Xbox Game Pass, which Microsoft launched in 2017, offers a library of hundreds of games for subscribers to play starting at $9.99 a month. The basic plan allows subscribers to download individual games on their Xbox or PC to play whenever they want. For $14.99 a month, subscribers can play some of thosegames via the cloud, all part of Microsoft’s ambitions to build a “Netflix of gaming.” The company in January said Game Pass had 25 million subscribers.
Global consumer spending on cloud-gaming services and games streamed via the cloud will reach a combined $2.4 billion by the end of this year, according to an estimate from Newzoo BV. That is a tiny fraction—1.4%—of the $184.4 billion in overall spending on videogame software.
Sony, which has aggressively lobbied governments around the world to oppose the Microsoft-Activision tie-up, and others have attempted to grow their own cloud-gaming subscription services. Microsoft, for now, is the dominant player, accounting for 60% of the overall cloud-gaming business last year, according to an estimate from research firm Omdia.
Microsoft is an early leader in cloud gaming with its Xbox Game Pass subscription service.
Photo:
etienne laurent/Shutterstock
The FTC appears concerned that it “can’t see the unintended consequences even just a few years down the road for an acquisition like this,” said
Paul Swanson,
a Denver-based antitrust lawyer at Holland & Hart LLP. “What they’re saying here is we’re going to err on the side of preserving as many independent competitors as we can.”
Over the past decade, Microsoft has poured billions into its cloud operations primarily for selling software and infrastructure for enterprise customers. It is now building out a separate cloud infrastructure to power its videogaming ambitions, which have been under development since it launched its first Xbox console in 2001.
Cloud gaming hasn’t been an easy business to navigate. The technology is difficult for companies to execute smoothly because games need to support multiple players with minimal delay regardless of where players are located. Earlier this year, Google shut down its game-streaming service, Stadia, after struggling to gain traction with users.
Microsoft remains heavily invested in its Xbox hardware, but cloud gaming gives it an opportunity to reach more gamers. It wants to build its own mobile app store, a move it says would create more competition in mobile videogames, not less. The Redmond, Wash., company has argued that Apple and Google’s app marketplaces have policies that pose technical and financial barriers to its goals.
Representatives for Apple and Google didn’t respond to requests for comment. Apple has said that it doesn’t prevent cloud-gaming apps from appearing in the App Store and that it isn’t trying to block their emergence.
Industry researcher and academic
Joost van Dreunen
said Microsoft’s mobile move would likely benefit the videogame ecosystem by diminishing Apple and Google’s grip.
Microsoft has said it is an underdog in the console market, with Xbox trailing consoles such as Nintendo’s Switch.
Photo:
Guillaume Payen/Zuma Press
“It breaks down the so-called walled-garden strategy that has dominated the game industry for 20 years,” he said.
Since Microsoft announced its deal for Activision, which it values at nearly $69 billion after adjusting for the developers’ net cash, some videogame players have been concerned about what it means for industry competition.
Steve Schweitzer of State College, Pa., is worried that Microsoft will raise the price of Game Pass over time. He said that it is affordable now but that in a few years, if Microsoft becomes more dominant, it could bump up the price and start cutting back on quality. Mr. Schweitzer, 55 years old, said he remembers back in the 1990s when Microsoft was able to use its market power to capture market share in the browser wars. “I’ve seen this game before,” he said.
Before its lawsuit, the FTC had been reviewing the deal for months. Regulators in other jurisdictions, including the European Union and the United Kingdom, are doing the same. The company has gained approval for the deal in smaller markets such as Brazil and Saudi Arabia.
Write to Sarah E. Needleman at sarah.needleman@wsj.com and Aaron Tilley at aaron.tilley@wsj.com
had been working for close to a year to calm regulators’ concerns about its acquisition of videogame developer
Activision Blizzard Inc.,
ATVI 0.54%
but the Federal Trade Commission’s suit to block the deal raised doubts about the company’s pledge not to shut out rivals.
The FTC this week took one of its biggest swings ever against a big technology company and sued to stop the planned $75 billion acquisition, setting the stage for a court challenge over a deal the antitrust agency said would harm competition.
The commission’s complaint said the deal is illegal because it would give Microsoft the ability to control how consumers beyond users of its own Xbox consoles and subscription services access Activision’s games. Microsoft has repeatedly said it wouldn’t engage in such actions. The FTC’s complaint accused Microsoft of reneging on a similar pledge to a European regulator in the past, a criticism the company disputes.
Earlier this week, as the possibility of a lawsuit grew, Microsoft touted the deal’s benefits to gamers through an op-ed article in The Wall Street Journal and announced an agreement to give a competitor access to one of Activision’s most popular games. The FTC filed its lawsuit on Thursday.
“The Proposed Acquisition, if consummated, may lessen competition substantially or tend to create a monopoly,” the FTC said in its complaint against Microsoft.
Executives at the Redmond, Wash., company have said it would take a long time to get all the approvals needed from regulators around the world, and it had given itself close to 18 months for the process. The deal could now miss Microsoft’s mid-2023 deadline, and some analysts said Microsoft might want to drop the acquisition.
Microsoft should “take the hint and give up the deal that, if completed, might end up a Pyrrhic victory of executive distraction and expensive regulatory concessions,” John Freeman, vice president at investment-research firm CFRA Research, wrote in a note to investors.
Competitors had expressed concerns the deal would block them from access to Activision games such as the popular ‘Call of Duty’ franchise.
Photo:
Allison Dinner/Associated Press
At stake is Microsoft’s big ambitions for its videogaming business, which had revenue of $16 billion in the company’s last fiscal year. That total represents less than 10% of Microsoft’s overall revenue. The business is a crucial part of Microsoft’s plans to diversify to attract more noncorporate customers.
The FTC’s move came after the company had avoided the brunt of the anti-tech backlash of recent years.
The suit represents a “somewhat meaningful setback” for Microsoft because of the company’s longtime lobbying efforts, said Stifel Nicolaus analyst Brad Reback. “They’ve worked very hard to stay on the right side of government agencies.”
Microsoft’s representative in Washington—its vice chairman and president,
Brad Smith
—has been building relationships in the capital for decades. He had helped cultivate an image of the software giant as one of the friendly technology leaders, an enviable position in a regulatory environment that has been increasingly hostile toward tech titans.
One of the longest-serving leaders inside Microsoft, Mr. Smith joined the company in 1993 and was a legal adviser through its bitter antitrust disputes with regulators worldwide in the 1990s.
“We have been committed since Day One to addressing competition concerns, including by offering earlier this week proposed concessions to the FTC,” Mr. Smith said after the lawsuit was filed. “While we believed in giving peace a chance, we have complete confidence in our case and welcome the opportunity to present our case in court.”
In its complaint, the FTC accused Microsoft of previously suppressing competition from rivals through its 2021 acquisition of ZeniMax Media Inc., parent of “Doom” developer Bethesda Softworks, despite giving assurances to European antitrust authorities that it would do otherwise. Microsoft said the FTC’s ZeniMax allegation is misinformed.
Brad Smith, Microsoft’s vice chairman and president, has been building relationships in Washington for decades.
Photo:
Zed Jameson/Bloomberg News
Microsoft officials have expressed confidence in closing the Activision deal, which it has valued at $68.7 billion after adjusting for Activision’s net cash. Lawmakers and industry representatives have said it would be hard for any of the biggest U.S. tech companies—including
Apple Inc.,
Amazon.com Inc.,
Google parent
Alphabet Inc.
or
Facebook
owner Meta Platforms Inc.—to win approval for a large acquisition in the current political environment.
In recent years, as government scrutiny and competition between the biggest tech companies have been increasing, Microsoft has tried to appease regulators.
For example, in May, Microsoft announced a set of principles it would abide by when dealing with cloud-service providers in Europe, hoping to assuage concerns its cloud business was hurting European cloud companies. The principles included pledges to work with European cloud providers and support the success of software vendors running on Microsoft’s cloud.
Amid concern the deal could hurt attempts to unionize at Activision or elsewhere in the gaming industry, Microsoft in June said it was open to working with any labor unions that want to organize.
As PlayStation maker
Sony Group Corp.
and others said they were concerned the acquisition could leave competitors locked out of Activision’s popular “Call of Duty” franchise, Microsoft this week said it would make it available for the first time on Nintendo Co.’s Switch gaming consoles for at least 10 years.
Microsoft this week also made its case to the public. “Blocking our acquisition would make the gaming industry less competitive and gamers worse off,” Mr. Smith, wrote in the Monday op-ed article in the Journal. “Think about how much better it is to stream a movie from your couch than drive to Blockbuster. We want to bring the same sort of innovation to the videogame industry.”
It is too soon to tell whether the FTC can succeed in blocking the acquisition. The agency likely will have to go before a federal judge, a process that could take months to unfold, said Eric Talley, a professor at Columbia Law School.
The case could be difficult for the regulator to win because courts have traditionally not seen deals among companies that specialize in different phases of the same industry’s production process—so-called vertical mergers—as competitive dangers, he said.
“It may require the commission to convince a judge to change the law somewhat,” he said. “That makes it a difficult case for the FTC to win, though they presumably knew this going in.”
Write to Sarah E. Needleman at Sarah.Needleman@wsj.com
SAN JOSE, Calif.—Theranos Inc.’s former No. 2 executive, Ramesh “Sunny” Balwani, was sentenced to nearly 13 years in prison for his involvement in an elaborate fraud scheme at the blood-testing company, capping a yearslong saga that became synonymous with the worst of Silicon Valley culture.
Mr. Balwani’s sentencing comes more than four years after the collapse of Theranos, which promised to revolutionize healthcare but peddled faulty technology to patients and investors, along the way delivering inaccurate health results and squandering hundreds of millions of dollars. Mr. Balwani helped lead the deception as Theranos’s president and chief operating officer, and along with his longtime romantic partner, he became the focus of one of the highest-profile white-collar cases in recent years.
Theranos founder and former chief executive
Elizabeth Holmes,
Mr. Balwani’s ex-girlfriend, was sentenced last month to 11¼ years for four counts of criminal fraud tied to her now-defunct blood-testing startup. The result is an unusual white-collar criminal punishment for Mr. Balwani: being sentenced to a longer prison term than his former boss, who was at the center of the fraud at her company.
Photos: The Testimony of Elizabeth Holmes
Mr. Balwani declined to make a statement when invited to before his sentencing. He also didn’t testify during his trial. That differed from Ms. Holmes, who testified on her own behalf and issued a tearful apology to the judge about the harm she had caused.
The Balwani sentence marks the final chapter in a corporate scandal that erupted more than seven years ago following a series of Wall Street Journal articles that called into question Theranos’s claims about its blood-testing technology.
The reporting triggered criminal and civil investigations into the company and led to the 2018 indictments of Ms. Holmes and Mr. Balwani on fraud and conspiracy charges. The scandal entered popular American culture, led to a bestselling book, an award-winning Hulu series and a planned movie, in addition to multiple university case studies on corporate fraud.
The once-highflying Theranos now stands as a cautionary signal to Silicon Valley about the criminal risks of misleading investors and consumers about new technology. The sentencing of the top two Theranos executives delivers a remarkable indictment of corporate leaders lying and obfuscating in pursuit of technological and financial success.
“The evidence shows he knew about the fraud,” U.S. District Judge
Edward Davila
said ahead of reading the sentence. He called the crime at Theranos “a true flight from honest business practices.”
Judge Edward Davila declined to find that Sunny Balwani recklessly put patients at risk of death or serious bodily injury.
Photo:
VICKI BEHRINGER/REUTERS
Government prosecutors had requested a 15-year sentence for Mr. Balwani. A report from a probation officer, who provides an objective recommendation for the judge’s consideration, suggested a nine-year sentence. The probation officer found that Mr. Balwani’s crimes fall into the most serious offense category specified by U.S. sentencing guidelines, which carries the possibility of a life prison term.
“Mr. Balwani came to work day after day and made misrepresentations,” said Assistant U.S. Attorney Jeffrey Schenk. “Investors believed they were investing in a different company.”
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Mr. Balwani, 57 years old, was convicted in July of seven counts of wire fraud and conspiracy against investors in Theranos, and five counts of wire fraud and conspiracy against patients who used Theranos blood tests. His trial showed that Theranos’s blood-testing devices were unreliable and often produced inaccurate results about serious health conditions and that Mr. Balwani and Ms. Holmes lied about the company’s technology, finances and business prospects.
Following his sentencing, Mr. Balwani briefly spoke quietly with members of his family, who had appeared in court to support him.
“We respectfully disagree with the outcome,” said defense attorney Jeffrey Coopersmith. “We are disappointed with the result and we plan to appeal.” Government prosecutors declined to comment.
Sunny Balwani has unresolved civil fraud charges pending against him from the Securities and Exchange Commission.
Photo:
Jason Henry for The Wall Street Journal
Theranos’s victims, Judge Davila said, include venture-capital firms Lucas Venture Group and Peer Venture Partners, and individual investors including
Pat Mendenhall
of U.S. Capital Advisors LLC;
Richard Kovacevich,
the ex-CEO of
Wells Fargo
& Co.; and
Rupert Murdoch.
Mr. Murdoch, who invested $125 million in Theranos, is the executive chairman of
News Corp,
which owns the Journal.
“We all screwed up,” said Mr. Mendenhall, an early Theranos investor who testified against Mr. Balwani. “I will never, ever invest in any company again without audited financials.”
Mr. Murdoch declined to comment Wednesday. After Ms. Holmes’s sentencing, he said he blamed only himself for falling for her fraud. Mr. Kovacevich declined to comment.
Judge Davila declined to find that Mr. Balwani recklessly put patients at risk of death or serious bodily injury, which could have added years to his sentence.
“This is a very close call,” Judge Davila said, acknowledging that Mr. Balwani had “oversight and control over the lab situation.”
Mr. Balwani has been ordered to surrender on March 15, 2023, more than a month earlier than Ms. Holmes was ordered to surrender. Ms. Holmes is pregnant with her second child.
“Let this story be a cautionary tale for entrepreneurs in this district: Those who use lies to cover up the shortfalls of their promised accomplishments risk substantial jail time,” Stephanie Hinds, U.S. attorney for the Northern District of California, said in a statement.
Former Theranos CEO Elizabeth Holmes was sentenced last month.
Photo:
Brian L. Frank for The Wall Street Journal
Mr. Balwani joined Theranos in 2009 as vice chairman of its board and the following year became president and chief operating officer, a position he held until 2016. He ran the company’s lab, despite having no medical credentials.
“This is a complete disregard for other people’s lives,” said Mehrl Ellsworth, a retired Arizona dentist who received four Theranos blood tests in 2015, two of which wrongly suggested he had cancer and two that showed he didn’t. The confusion disrupted his life for about six months, he said, delaying a trip to perform volunteer work in Thailand.
The defense sought to pin the blame on Ms. Holmes, who ran the company for years without Mr. Balwani and often made misleading claims as she sought the media spotlight.
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“Mr. Balwani joined this company because he believed in the mission of Theranos,” attorney Mr. Coopersmith said in court Wednesday. “He is not Ms. Holmes. He did not pursue fame and recognition and glory.”
Theranos was propelled by claims from Mr. Balwani and Ms. Holmes that their technology could cheaply and quickly run more than 200 health tests using a proprietary finger-prick device that required just a few drops of blood. Their trials showed that the company managed to use its proprietary device for just 12 types of patient tests.
“They knew the tests were inaccurate and they put patients in danger,” said Alan Eisenman, a Texas-based investor who sank about $1.2 million into Theranos and whose investment underpins one of the guilty counts against Mr. Balwani. “That is worse than the financial fraud.”
Mr. Balwani also was responsible for the financial models given to investors that greatly inflated revenue projections, prosecutors said, and he managed the company’s partnership with
Walgreens Boots Alliance Inc.,
in which Theranos finger-prick tests were offered at the chain’s drugstores.
Theranos raised $945 million from investors, and most of it evaporated.
Mr. Balwani has unresolved civil fraud charges pending against him from the U.S. Securities and Exchange Commission. Ms. Holmes settled her charges, without admitting or denying wrongdoing, which included a $500,000 fine.
Alex Shultz, whose son Tyler Shultz worked at Theranos, gave a victim impact statement during Theranos founder Elizabeth Holmes’s sentencing last month.
Photo:
VICKI BEHRINGER/REUTERS
During his time at Theranos, Mr. Balwani sought to shut down internal criticism about the company’s technical and laboratory failings and often rebuffed staffers who brought concerns to him, his trial showed. He was particularly harsh in dealing with Theranos whistleblower
Tyler Shultz,
who complained in an internal 2014 email that Theranos had doctored research and ignored failed quality-control checks.
Mr. Balwani belittled Mr. Shultz and then took a swipe at his relationship with
George Shultz,
the late former secretary of state and then a Theranos director.
“The only reason I have taken so much time away from work to address this personally is because you are Mr. Shultz’s grandson,” wrote Mr. Balwani to the young Mr. Shultz in an email.
In an interview Wednesday after Mr. Balwani was sentenced, Mr. Shultz said: “I’m not rejoicing at them going to prison, but I think it is well deserved.”
“It is just such a relief that it is over,” he said.
Write to Heather Somerville at heather.somerville@wsj.com and Christopher Weaver at Christopher.Weaver@wsj.com
is planning to significantly expand its data-encryption practices, a step that is likely to create tensions with law enforcement and governments around the world as the company continues to build new privacy protections for millions of iPhone users.
The expanded end-to-end encryption system, an optional feature called Advanced Data Protection, would keep most data secure that is stored in iCloud, an Apple service used by many of its users to store photos, back up their iPhones or save specific device data such as Notes and Messages. The data would be protected in the event that Apple is hacked, and it also wouldn’t be accessible to law enforcement, even with a warrant.
While Apple has drawn attention in the past for being unable to help agencies such as the Federal Bureau of Investigation access data on its encrypted iPhones, it has been able to provide much of the data stored in iCloud backups upon a valid legal request. Last year, it responded to thousands of such requests in the U.S., according to the company.
With these new security enhancements, Apple would no longer have the technical ability to comply with certain law-enforcement requests such as for iCloud backups—which could include iMessage chat logs and attachments and have been used in many investigations.
Apple has added additional methods to help users recover their end-to-end encrypted data.
Photo:
Apple
The company said the security enhancements, which were announced Wednesday, are designed to protect Apple customers from the most sophisticated attackers.
“As customers have put more and more of their personal information of their lives into their devices, these have become more and more the subject of attacks by advanced actors,” said
Craig Federighi,
Apple’s senior vice president of software engineering, in an interview. Some of these actors are going to great lengths to get their hands on the private information of people they have targeted, he said.
The FBI said it was “deeply concerned with the threat end-to-end and user-only-access encryption pose,” according to a statement provided by an agency spokeswoman. “This hinders our ability to protect the American people from criminal acts ranging from cyberattacks and violence against children to drug trafficking, organized crime and terrorism,” the statement said. The FBI and law enforcement agencies need “lawful access by design,” it said.
A spokesman for the Justice Department declined to comment.
Former Western law-enforcement and intelligence officials said they were surprised by Apple’s decision in part because the company had refrained in the past from rolling out such encryption settings for iCloud. The officials said Apple would sometimes point authorities to the iCloud as a possible means of collecting information that could be useful for criminal investigations.
Ciaran Martin,
former chief of the U.K.’s National Cyber Security Centre, said the announcement by Apple could pose legal complications for the company in multiple democracies that in recent years have adopted or weighed restrictions on technology that can’t be responsive to law-enforcement demands.
“Things will only be clearer when further technical details are given,” Mr. Martin said. “But on the face of it, existing legislation in Australia and looming legislation in the U.K. would seem to give those governments the power to tell Apple in those countries effectively not to do this.”
Last year, Apple proposed software for the iPhone that would identify child sexual-abuse material on the iPhone. Apple now says it has stopped development of the system, following criticism from privacy and security researchers who worried that the software could be misused by governments or hackers to gain access to sensitive information on the phone.
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Mr. Federighi said Apple’s focus related to protecting children has been on areas such as communication and giving parents tools to protect children in iMessage. “Child sexual abuse can be headed off before it occurs,” he said. “That’s where we’re putting our energy going forward.”
Apple released a feature in December 2021 called “Communication Safety” in Messages, which offers tools for parents that warn their children when they have received or attempt to send photos that contain nudity. The option is part of Apple’s “Screen Time” parental-controls software.
The new encryption system, to be tested by early users starting Wednesday, will roll out as an option in the U.S. by year’s end, and then worldwide including China in 2023, Mr. Federighi said.
“This development will prompt questions at home and abroad, including whether the government of China will really accept a loss of data access,” said Sumon Dantiki, a former senior FBI and Justice Department official who worked on cyber investigations and is now a partner at the King & Spalding law firm. U.S. officials have long pointed to China’s increasingly strict demands for access to data on companies that operate within its borders as a national-security concern.
In addition to Advanced Data Protection, Apple is also modifying its Messages app to make it harder for messages to be snooped on, and it will now allow users to log in to their Apple accounts with hardware-based security keys made by other companies such as Yubico.
Privacy groups have long called on Apple to strengthen encryption on its cloud servers. But because the Advanced Protection encryption keys will be controlled by users, the system will restrict Apple’s ability to restore lost data.
Apple has added additional methods to help users recover their end-to-end encrypted data.
Photo:
Uncredited
To set up Advanced Data Protection, users will have to enable at least one data-recovery method. This could be a recovery key—a long list of numbers and characters that users could print out and store in a secure location—or the user could assign a friend or family member as a recovery contact.
Over the past two decades, businesses and consumers have moved much of their data off computer systems that they control and onto the cloud—data centers filled with servers that are operated by large technology companies. That trend has made these cloud systems an attractive target for cyber intruders.
Mr. Federighi said that Apple isn’t aware of any customer data being taken from iCloud by hackers but that the Advanced Protection system will make things harder for them. “All of us in the industry who manage customer data are under constant attack by entities that are attempting to breach our systems,” he said. “We have to stay ahead of future attacks with new protections.”
As Apple has locked down its systems, governments worldwide have become increasingly interested in the data stored on phones and cloud computers. That interest has led to friction between Apple and law-enforcement agencies, along with a growing market for iPhone hacking tools. In 2020, Attorney General
William Barr
pressured Apple for a way to crack the iPhone’s encryption to help with a terror investigation into a shooting that killed three people at a Florida Navy base.
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Advanced Protection will reduce the amount of iCloud information that Apple can provide to law-enforcement agencies, who frequently request iPhone data from Apple as part of their investigations. Apple received requests for information on 7,122 Apple accounts from U.S. authorities in the first six months of 2021, the last period for which the company has provided information.
Apple had already offered end-to-end encryption for some of its services, but the protection will now extend to 23 services, including iPhone backups and Photos. However, three services—Mail, Contacts and Calendar—won’t qualify for Advanced Protection because they use older technology protocols, Mr. Federighi said.
Mr. Federighi said Apple believes it shares the same mission as law enforcement and governments: keeping people safe. If sensitive information were to get in the hands of an attacker, a foreign adversary or some other bad actor, it could be disastrous, he said.
“We’re giving users the option to keep that key only on their devices, which means that even if an attacker were to successfully breach the cloud and access all that data, it would be nonsense to them,” Mr. Federighi said. “They’d lack the key to decrypt it.”
