Unveiling the FTX Scandal: Unraveling Fraud and Financial Misconduct in the Cryptocurrency World

The FTX Saga Continues


On November 2, 2022, the news website CoinDesk published an article that left many people wondering just how solvent the cryptocurrency trading platform FTX truly was. With questions about other companies founded by FTX CEO Sam Bankman-Fried, many who held FTT, the platform’s cryptocurrency token, began selling their tokens. Within about ten days, the company had lost a significant amount of money, had their assets frozen in the Bahamas, filed bankruptcy, had Bankman-Fried replaced by a new CEO appointed by the court, and reported an alleged massive data breach. 

By the end of 2022, Bankman-Fried had been arrested and many investors in FTX had launched lawsuits against the platform, though most recognized that they would likely never recoup all of their money.

With FTX gone and Bankman-Fried out on bail awaiting trial after being extradited to the United States, most expected the worst of the scandal to be over with. However, that turned out to not be the case when Bankman-Fried’s massive $250 million bail bond was revoked and he was arrested on August 11, 2023, just a few months before his trial was expected to begin in October.

Let’s take a brief look back at the FTX saga and what Bankman-Fried did to end up in jail. Along the way, we’ll discuss how Infortal can protect investors from becoming victims of fraudulent companies like FTX.


A Summary of the FTX Scandal up to August 2023


FTX fell apart over the course of about a week and a half following the CoinDesk article. This article outlined how Alameda Research, a testing firm that Bankman-Fried also ran, had about $5 billion dollars’ worth of FTT tokens. The investment foundation associated with Alameda also had a large amount of money in FTT. This raised a number of questions about these companies’ solvency and what else Bankman-Fried may have failed to disclose.

Four days later, Binance (a company that later faced its own scandal revolving around shady payments) announced that it was pulling out of FTX and would sell all of its FTT tokens which were worth around $530 million. Binance’s CEO stated that they had conducted a risk management analysis on FTX and had decided to liquidate their investment. 

The Binance announcement set off alarms for other investors, and within a few days, requests for withdrawals totaling over $6 billion had been made from FTX investors. Bankman-Fried had no way of making these payouts. After considering several options, he reached out to Binance itself for a bailout. Unfortunately, although the two did come to an initial agreement, Binance later revoked their offer after a due diligence investigation brought to light a variety of additional issues with FTX’s management, including potential fraudulent behavior and the mismanagement of funds.

This type of due diligence assessment is something Infortal often does for our clients. We can help you assess risks in investments, mergers, acquisitions, and even C-suite hiring, enabling you to avoid the pitfalls and reputation damage that working with the wrong business partners may bring. 

Without the bailout, the securities regulations branch of the Bahamas, where FTX’s FTX Digital Markets subsidiary was headquartered, stepped in. They froze all assets in the Bahamas. 

The same day, California launched an investigation into the platform. A few days later, on November 11, Bankman-Fried resigned as FTX’s CEO and was replaced by a court-appointed interim CEO to see the company through the bankruptcy process. FTX filed bankruptcy that day, revealing that around 130 other subsidiaries and assets would be a part of the bankruptcy case.

After claims of being hacked, lawsuits from investors, and additional actions by the Bahamas, Bankman-Fried was arrested on fraud charges. He was then indicted by the U.S. government on a number of charges, including securities fraud, money laundering, violating anti-bribery laws,  and conspiracy. 

The appointed interim CEO stated before a US House committee that FTX had little to no financial records or bookkeeping documents. 

On December 22, 2022, Bankman-Fried was released on bail. His bail was set at $250 million, the highest bail amount in U.S. history. He moved in with his parents in California, but he was ordered to wear a monitoring device and instructed to remain within a specific area in Northern California. He was set to face eight criminal counts in federal court on October 2, 2023. He had pleaded not guilty to all of these counts on January 3, 2023.

Over the past several months, prosecutors have dropped several charges against Bankman-Fried, including the charge of conspiracy related to illegal campaign contributions. The reason for the modified indictment was that the government is required to receive permission from the Bahamas for any charges due to Bankman-Fried being extradited from the island country. Previously, the prosecution had also dropped a charge related to violating anti-bribery laws.


The Saga Continues  - Bankman-Fried’s Arrest in August 2023


As investors worked to recover whatever money they could from the smoldering remains of FTX, Bankman-Fried seemed to keep a low profile while waiting for his trial. 

However, that all changed on August 11, 2023, when federal prosecutors petitioned a judge in New York, where the case was being tried, to revoke bail. They alleged that Bankman-Fried had engaged in witness tampering

Bankman-Fried did request that his arrest be delayed until his appeal of the charges was heard, but the judge in the case denied this request. If his appeal is denied, he will remain in prison until his trial in October. 

The judge stated that his denial was based on the conclusion that there was probable cause for the witness tampering charges. In fact, he stated that the evidence suggested that Bankman-Fried had tried to influence witnesses at least twice while out on bail. Rather than have Bankman-Fried detailed in the Metropolitan Detention Center, federal prosecutors requested that he remain in custody in Putnam, New York. The reasoning for this request was that he would need internet access to prepare for his defense, something that was limited at the detention center.


What Led to these Charges?


Over the summer, federal prosecutors and Bankman-Fried had participated in a number of pre-trial hearings. These hearings mainly focused on Bankman-Fried’s interaction with the press. Prosecutors claimed that some of his press exchanges could be categorized as witness tampering and that some of his actions counted as attempts to evade the conditions of his bail. The judge had already warned Bankman-Fried that he needed to cease these actions.

Prior to his bail being denied, several members of the press had sent letters expressing their belief that Bankman-Fried’s actions should be considered an exercise of free speech. He was also supported by some legal professionals who felt that his First Amendment rights were being violated. Finally, his legal team expressed that Bankman-Fried would be unable to fully prepare for his October trial if he were in jail. Prosecutors expressed their willingness to agree to have Bankman-Fried held at a facility with full internet access, hence their request for detainment in Putnam, New York.


The Evidence Against Bankman-Fried


According to the prosecution, Bankman-Fried had sent more than 100 emails over the summer to various people in the media. He had also made more than 1,000 calls to reporters and other members of the press. Following these actions, Bankman-Fried’s bail conditions were modified to include restrictions on his internet access and smartphone use. 

The final act that led to the request to revoke his bail came when Bankman-Fried released the diary of Caroline Ellison, his ex-girlfriend. Ellison had served as the CEO of Alameda Research and had pled guilty to her own criminal charges in December of 2022. She has also cooperated with federal prosecutors and is expected to testify in Bankman-Fried’s trial.

The judge directly addressed Bankman-Fried’s release of the private diary entries as a tactic aimed at discrediting Ellison as a witness while also hurting her reputation. The prosecutors and the judge saw this as indirect witness intimidation via the press. 

As of August 17, Bankman-Fried is in custody and his trial remains set for October 2, 2023. 


Infortal Can Help You Avoid Investing in Corrupt Businesses


No matter what happens to Bankman-Fried and the others involved in the FTX scandal, numerous people and companies lost money by investing in FTX. Whether it was a small amount or millions of dollars, many investors will never fully recoup the money they had in FTT tokens. 

What can you do to avoid making the same mistake as these investors? Know who you’re working with. Infortal can assist you with deep dive due diligence and risk assessment. This will help you fully understand what risks you’re about to take. We will look into the key executives and the company’s past, including any past criminal actions, questionable business practices, conflicts of interest, interactions in foreign countries and overseas subsidiaries and numerous other issues that will inform your decision making. 

You may also find that the risks are much more severe than you expected them to be and that may affect the value of the transaction. By avoiding these costly mistakes, you may end up saving not just a large amount of money but your reputation and even your company’s very existence. Contact Infortal today to learn more about our deep dive due diligence services.



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