FTX Family Subpoenas, SBF Witness Tampering, Celsius Deals Revealed, More Crypto-Banking Issues – Amy Castor

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By Amy Castor and David Gerard FTX: It’s a Family Affair

FTXs lawyers have questions. Specifically, they have questions for Sam Bankman-Fried’s brother Gabriel and his parents, Joseph Bankman and Barbara Fried.

Joseph advised FTX. He recruited his first attorneys and joined FTX staff at meetings on Capitol Hill. While visiting FTX’s offices in the Bahamas, he and Barbara stayed in a $16.4 million home named after them. Barbara founded a political action committee called Mind the Gap, which received donations from FTX.

Gabriel started Guarding Against Pandemics, an organization funded by Sam. Gabriel purchased a multimillion-dollar property in Washington D.C., which current FTX team John Jay Ray III says was purchased using funds FTX customers.

Every member of the Sams family was involved in FTX and did not respond to requests for documents. So Team Rays and the Unsecured Creditors Committee (UCC) want to subpoena Joseph, Barbara and Gabriel under the 2004 rule. [Doc 579, PDF; Bloomberg]

We detailed the 2004 rule previously. The Federal Bankruptcy Rule 2004 allows extremely broad discovery and filing. A witness does not always have the right to be represented by counsel or to be cross-examined and has only a limited right to object to questioning. The 2004 exams are sometimes called fishing expeditions because they have to be.

Included in the same 2004 motion, Ray also seeks court permission to subpoena Sam and several other FTX insiders, including FTX co-founders Gary Wang and Nishad Singh, former Alameda CEO Caroline Ellison and former COO of FTX Constance Wang. Just like the SBF family, they weren’t very responsive:

Mr. Wang and Ms. Ellison expressly refused to provide the requested information, and Ms. Fried completely ignored the requests. The debtors have not received any significant commitment or response from Mr. Singh or Mr. Gabriel Bankman-Fried.

Rays’ team is investigating the FTX hack on November 11-12, which saw $300 million in crypto siphoned from the exchange while crypto Twitter watched in horror. They also requested an order under the Sealed Rule 2004 because the information in the application could reveal or lead to evidence that will reveal the identity and activities of the perpetrator(s). Looks like they already have a pretty good idea who was behind the hack. [Doc 581, PDF]

A mostly unredacted list of FTX creditors is now available. It includes investment banks, such as Goldman Sachs and JPMorgan; media companies, such as The New York Times and The Wall Street Journal; commercial airliners, including American, United, Southwest and Spirit; as well as several big tech players, including Netflix, Apple and Meta. The names of individual customers remain hidden. [Doc 574, PDF]

FTX opposes US directors’ request to appoint an independent reviewer. They argue that a reviewer would duplicate work already underway by FTX, UCC, law enforcement and regulators. Indeed, if history is any guide, the cost could approach or exceed $100 million. They point out that it is difficult to imagine a candidate examiner whose qualifications exceed those of Mr. Ray. Which is a good point. The UCC agrees. [Doc 573, PDF; Doc 571, PDF]

What is a little witness tampering between friends?

SBF plays fast and loose with potential witnesses in its criminal trial. He contacted Witness-1, the current FTX US General Counsel (Ryne Miller) to work out a story with him. We doubt Miller wants to have anything to do with such a scheme. But that was enough for the government to ask Judge Lewis Kaplan to change Sams’ bond: [DOJ letter to judge, PDF]

Specifically, the government respectfully asks the Court to impose the following conditions: (1) Defendant shall not contact or communicate with any current or former employees of FTX or Alameda (other than immediate family members) except in the presence of a lawyer, unless the government or the court exempts a person from this rule of non-contact; and (2) Defendant will not use any encrypted or ephemeral calling or messaging applications, including, but not limited to, Signal.

SBF lawyers responded by beating the table. Judge Kaplan told both sides to relax. The government should get its response, with justification for its assertions, by February 2. [letter, PDF; order, PDF]

Dirty Bubble has found another link between FTX and the fraud-ridden binary options industry. In September 2021, FTX bought the ZUBR derivatives exchange for $11 million. The exchange was registered in Gibraltar. By the time Gibraltar revoked the ZUBR license, the exchange had no active clients. The exchange was a collaboration between Belarusian binary options and crypto billionaire Viktor Prokopenya and his former business partner Said Gutseriev, the son of one of Russia’s wealthiest oligarchs. [Dirty Bubble]

Would you be surprised to learn that FTX made political donations to George Santos? [SFGate]

Celsius Network: Let’s make more magic beans!

Celsius rejected Binance US’s offer for Celsius assets, along with four other offers. At the January 23 hearing, Ross Kwasteniet of Kirkland & Ellis, speaking on behalf of Celsius, said the offers were unconvincing.

Instead, Celsius concocted a plan to reorganize itself into a publicly traded company and issue a new asset-sharing token to creditors. Those who follow the Celsius disaster will recognize this as Alex Mashinsky’s very stupid and bad Kelvin plan from September 2022.

The creditors were not informed of the other offers. In fact, creditor and YouTuber Tiffany Fong Celsius got all the deals in a December leak. Bidders included Binance US, Bank To The Future (Simon Dixon), Galaxy Digital, Cumberland DRW, and NovaWulf. Fong has posted the full text of the leaked deals. [Substack; Youtube]

Binance US: Buy only the crypto, take on the liability (at a discount); excludes FTT, CEL and other illiquid junk tokens. Pay $15 million in cash. Bank to the Future: crypto is returned to customers on a pro rata basis. From other Celsius assets to special purpose vehicles, customers get a share of ownership. Cash to be raised by offering rights to creditors. Galaxy Digital: Acquiring illiquid assets and staking ETH. Pay $66.8 million in cash. Cumberland DRW: Buy select tokens and alternative investment portfolio, excluding CEL. The total payment of $1.8 billion includes various discounts. NovaWulf: Transfer substantially all assets and businesses to SEC-compliant, 100% creditor-owned NewCo. Issue revenue share tokens. NovaWulf has to pay $60-120 million, mostly in tokens. It is also a version of the Kelvin plan.

Many ad hoc creditors were disappointed that Binance’s bid was rejected, but that should come as no surprise, given the problems Binance is already having with its Voyager bid.

Frankly, we don’t think the other offerings look so good, either, they’re just fanciful dreams that first assume the crypto market is healthy, which it isn’t.

We believe Celsius should have liquidated in July rather than take several months and hand over millions of dollars to bankruptcy professionals to get to the same place.

Banks

Silvergate is cash-strapped, so its suspended dividend payments on its preferred stock. [Business Wire]

The stock in question (NYSE:SI) is falling down the toilet. It has fallen from $220 in November 2021 to less than $14 in January 2023. Signature Bank (NASDAQ: SBNY) has fallen from $365 to $127 over the past year.

Moonstone Bank claims that recent events that FTX has attempted to use them as a financial laundromat and the changing regulatory environment around crypto firms that regulators are on the warpath on have prompted it to give up the “innovation-driven business model” it has embraced in recent years. [WSJ, paywall]

Federal banking regulators don’t like dodgy crypto banks authorized by regulators in the captured state of Wyoming. The Custodia Bank cannot obtain a Fed account: [Federal Reserve]

The Board has concluded that the firm’s application, as submitted, does not meet the factors required under the law. Custodia is a special purpose depository institution, licensed by the State of Wyoming, which does not have federal deposit insurance. The company has offered to engage in new and untested crypto activities, including issuing a crypto asset on open, public and/or decentralized networks.

Crypto.com’s former gateway for the British Pound and Euro was Transactive Systems of Lithuania. Transactive was discontinued by the Bank of Lithuania, after finding significant violations and shortcomings of the Law on Prevention of Money Laundering and Terrorist Financing. Transactive had apparently reported to a long list of low quality institutions in low quality jurisdictions. Transactive can no longer serve financial institutions, forex or crypto clients. They have also been cut from the UK Faster Payments system. Your EUR and GBP sent to Crypto.com via Transactive are probably blocked now. [Twitter; Offshore CorpTalk; Bank of Lithuania, in Lithuanian]

Before Crypto.com launched Silvergate, it obtained US dollar deposits via a strangely roundabout method: customers sent USD to Silvergate’s Circles account, and Circle minted as much USDC and sent USDC to Crypto. com. This may not have been fully compliant with KYC and AML regulations. [Twitter; crypto.com, archive]

Other happy little accidents

London-based crypto exchange Luno, a subsidiary of DCG, is laying off 35% of its staff. About 330 employees will be made redundant from the company, which has offices in Africa, Asia and Europe. [WSJ, paywall; archive]

DeFi volumes are down. The amount of money (or money) involved has been stable for months and more importantly, you can’t get the ridiculous returns you could get in the bubble. Oh no! Anyway. [Bloomberg]

Happy Penis Day, to those who celebrate

It was five years ago today, January 28, 2018, when Prodeum’s initial coin offering took everyone’s money and disappeared, leaving behind only a new jargon term for exit scam or rugpull. You get a penis! And you get a penis! And you get a penis! Everyone has a penis! [The Next Web, 2018]

Image: Sam Bankman-Sopranino and his family.

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