U.S. Judge Recuses Herself From Sam Bankman-Fried Fraud Case

U.S. District Judge Ronnie Abrams recused herself from the Sam Bankman-Fried fraud case due to a potential conflict of interest. Her husband is a partner at a law firm named Davis Polk and Waddell, which advised FTX in 2021. The law firm also represented parties who may have a dispute with Sam Bankman-Fried and his companies. District Judge Lewis Kaplan will replace Ronnie Abrams.

Sam Bankman-Fried is currently confined to his parents’ home in Palo Alto, California, after posting a controversial $250 million bail that was heavily criticized. Pershing Square CEO Bill Ackman had this to say about it, for instance:

A New York court set the bond during Sam Bankman-Fried’s first appearance in a United States courtroom following his extradition from the Bahamas. His parents reportedly put a home worth $1.8 million up as collateral.

The terms of Bankman-Fried’s bail also includes wearing an ankle monitor and not opening any new lines of credit over $1,000. His next court appearance is scheduled for January 3, 2023. He is expected to enter a plea for charges of wire fraud, conspiracy to commit money laundering, and campaign finance violations at the January 3 hearing. He has denied any wrongdoing related to the leadup of FTX’s collapse in an interview published in New York Times.

Former Alameda Research CEO Caroline Ellison and FTX co-founder Gary Wang have already entered guilty pleas for their roles in the collapse of Sam Bankman-Fried’s former crypto empire. Previously, crypto insiders speculated that Caroline Ellison was cooperating with investigators, including a rumored sighting of Ellison at a Manhattan coffee shop.

Getting the Full Picture May Take Months

Earlier this year, it seemed as though FTX was on a blitz of acquiring or bailing out troubled crypto companies in the wake of the Terra stablecoin’s collapse in May. It placed the winning bid to acquire Voyager Digital’s assets, set up a revolving line of credit for the BlockFi exchange, and acquired a clearinghouse through FTX US. Sam Bankman-Fried mention a $1 billion bailout fund.

That blitz came to a screeching halt when Binance CEO Chagpeng Zhao announced that Binance was going to sell its holdings of FTX’s native FTT token. It had gotten the tokens when it previously sold its share of FTX. FTT predictably declined sharply in price.

Sam Bankman-Fried started scrambling for a bailout of his own – including briefly hoping that Binance would acquire FTX, though that fell through once Changpeng Zhao had a chance to scrutinize its finances more closely. Bankman-Fried had no choice but to pursue bankruptcy and resign as CEO. For his part, Zhao denied any culpability in the collapse, saying that he could say similar things about a financially healthy company and it would survive.

FTX had to back out of acquiring the Voyager Digital assets, which were later sold to Binance. It also had to suspend BlockFi’s revolving line of credit. It petitioned to sell off some of its more recent acquisitions like Liquid, which it had renamed to FTX Japan.

Bankruptcy expert John Ray III took over to guide FTX through bankruptcy. Ray was previously best known for overseeing the Enron bankruptcy in 2001. The bankruptcy proceedings may take months and face complications due to poor management and shoddy bookkeeping.

An Incomplete List of The Facts So Far:

• $8 billion may be missing. Sam Bankman-Fried claims that he “misaccounted” the $8 billion in a bid to explain the shortfall. FTX’s bankruptcy advisors turned up a liquidity gap of the same amount.
• FTX bought luxury properties in the Bahamas for senior staff members and their families. The properties include a $40 million penthouse for Sam Bankman-Fried.
• Alameda Research used FTX for its market making and held a lot of FTT. Alameda Research had billions of dollars in FTT and FTT derivatives on its books before FTX collapsed. There’s also evidence that Tether used Alameda Research as a market maker that received $36.7 billion in USDT and routed $31.7 billion in USDT through FTX. Interestingly, one of Alameda Research’s last moves as an asset trading firm was apparently to short Tether, causing a scary moment when Tether briefly depegged. Soon after that, Sam Bankman-Fried announced that Alameda Research was going to wind down trading.

• FTX might have used illegal tactics to prop up Alameda Research. That includes secretly sending FTX customers’ holdings to Alameda Research so it could trade with the money.
• Sam Bankman-Fried admitted that the name of “Alameda Research” was a thinly disguised ruse. Not much research was being conducted at Alameda Research. Sam Bankman-Fried apparently thought it would be a way to fool banks and investors who were already leery of digital assets.
• Celebrity promoters of FTX are facing lawsuits. Investors filed a class-action lawsuit alleging that famous individuals like Tom Brady, Kevin O’Leary, professional basketball player Stephen Curry, and supermodel Gisele Bündchen misled them into trusting FTX with its money.
• Miami is running the other way, including stripping FTX branding from basketball team Miami Heat’s home arena after a sponsorship deal fell through.
• FTX’s finances are a tangled-up mess. John Ray III said that FTX’s financial records were the biggest mess he had ever seen. He admitted during testimony before a Congressional committee that it would likely take months to get the full picture of what happened to FTX, most of which would probably be spent on a “treasure hunt” for cash and cryptocurrencies.
• FTX has more than one million creditors. A lot of these are probably traders who got their funds frozen when FTX stopped withdrawals. Japan was quick to get on top of things, freezing $135 million in FTX Japan assets so that its users could be compensated. Two of the biggest creditors are owed more than $200 million. At FTX’s request, a court censored a considerable amount of the identifying information of these creditors, though some major media outlets requested that these records be unsealed.