The Second FTX Asset Recovery Report Is Packed With Bombshells

New claims put Sam Bankman-Fried and his friends even closer to the center of a brazen conspiracy.

AccessTimeIconJun 27, 2023 at 3:24 p.m. UTC
Updated Jun 29, 2023 at 3:04 p.m. UTC
AccessTimeIconJun 27, 2023 at 3:24 p.m. UTCUpdated Jun 29, 2023 at 3:04 p.m. UTC
AccessTimeIconJun 27, 2023 at 3:24 p.m. UTCUpdated Jun 29, 2023 at 3:04 p.m. UTC

The second report of John J. Ray III and his FTX restructuring team (the “debtors”) was released on Monday, June 26, and it’s a doozy. The report firms up our sense of specific financial flows, including the use of customer funds for political donations and venture capital investments at defunct crypto exchange FTX and related hedge fund Alameda Research. Among those are many flows to entities controlled by friends and family of Sam Bankman-Fried, reinforcing the picture of a vast and coordinated criminal effort.

More explosively, the report claims that FTX executives were aware as early as August 2022 that the exchange was missing more than $8 billion in customer funds. This recasts many statements made by executives like Caroline Ellison, and especially by FTX CEO and co-founder Sam Bankman-Fried himself, in the following weeks and months.

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Even more damning, the report describes Bankman-Fried getting very hands-on in furtherance of the overall fraud.

Two notes before diving in: First, all of the following are allegations made by the FTX liquidators. The claims may or may not surface or be confirmed in the separate criminal trial against Sam Bankman-Fried, currently scheduled to begin in October. And second, for clarity, I’ll be referring throughout to “customer funds” interchangeably with “commingled funds,” because by their nature, the vast majority of commingled funds would likely have been customer funds.

Into the spaghettiverse

While the details are spicy, the main course of the report is the following big bowl of spaghetti, representing the flows of FTX customer funds. Note how many flows end at “to be determined” – the recovery team’s work, clearly, is not yet done.

A chart included in the second FTX debtors' report, showing where commingled customer funds went.
A chart included in the second FTX debtors' report, showing where commingled customer funds went.

Highlights of this mess include the claim that $20 million of FTX customer funds went to Guarding Against Pandemics (GAP), a quote-unquote “nonprofit” run by Gabe Bankman-Fried, Sam’s brother. Though this funding was already known, the report seems to be the first authoritative claim that funding to GAP came from specific bank accounts full of commingled (that is, customer) funds. This deepens existing questions about the Bankman-Fried family’s knowledge of and participation in the fraud.

Throughout the report, we see SBF’s closest friends and associates eagerly gobbling up the stolen funds. The FTX Foundation, another quote-unquote “nonprofit” entity that was itself funded with customer money, donated $400,000 to an unnamed Effective Altruism organization that made YouTube videos promoting that troubling ideology.

Then there are the (again quote-unquote) “venture investments.” These were seemingly not real investments, but rather financial cutouts primarily created to recycle and obscure stolen FTX user funds. The new report specifically describes the “investment” of $450 million worth of FTX customer funds into an entity called Modulo Capital.

Modulo Capital had been founded by two known Bankman-Fried associates, Duncan Rheingans-Yoo and Xiaoyun “Lilly” Zhang. According to the New York Times, Yoo was only two years out of college, and Zhang (like Caroline Ellison) was a former romantic partner of Bankman-Fried.

Smoking guns

Finally on the money front, we get some new insight into the massive personal loans that went to FTX executives, many meant to fund political donations (themselves wildly illegal). The debtors report makes the important claim that “the evidence identified by the Debtors indicates the transfers were ‘loans’ in name only.”

Way back in November of last year I described these loans as a “smoking bazooka” indicating clear criminal intent – the new report appears to be confirmation of that assessment. And there’s more where that came from – the report is packed with tidbits that suggest goings-on at FTX were overtly and intentionally criminal.

For one, the report claims that “by August 2022, the FTX Senior Executives and [Caroline] Ellison privately estimated that the exchange owed customers over $8 billion in fiat currency that it did not have. They did not disclose the shortfall.” This $8 billion shortfall was hidden in a fake account with a negative $8 billion balance, referred to internally as belonging to “our Korean friend.”

That account was known, but I’m not aware of any similarly authoritative source making specific claims that execs knew about the shortfall as early as August. This would be incredibly bad for Sam Bankman-Fried, who made countless representations to FTX’s rock-solid finances after that, further clarifying his fraudulent machinations.

But the report also makes a claim that would somehow be even worse for SBF if it were demonstrated in his criminal case. It describes a “Payment Agent Agreement” intended to make the flow of FTX customer deposits through Alameda Research bank accounts look intentional, rather than some mix of negligence and fraud.

While the debtors found that the payment agreement document was created in April of 2021, it was backdated to an “effective date” of June 1, 2019. This was seemingly intended to create the impression that FTX customer funds had always flowed through Alameda. In fact, of course, that flow was an exigent strategy to circumvent banking controls, and it seems to have underpinned the larger fraud.

In short, the payment agent agreement document is evidence of a criminal conspiracy.

And according to the debtors report, Sam Bankman-Fried signed the fraudulently backdated document with his own, actual hand: “Notably, while Bankman-Fried regularly executed agreements electronically using DocuSign, which electronically records the date and time of execution, Bankman-Fried signed the Payment Agent Agreement with a wet signature.”

This is just radioactively bad for Bankman-Fried’s criminal defense, for two reasons. First, the one-time use of a physical signature indicates a clear strategy to avoid generating Docusign metadata that might reveal the document was not signed in 2019. That clearly indicates Bankman-Fried was engaging in conspiracy to commit and conceal fraud.

Second, a physical signature means it’s possible someone actually saw Bankman-Fried sign the document, and/or that it can be clearly established that the signature is his. This would eliminate even the farfetched hypothetical defense that Bankman-Fried’s electronic signature was somehow faked and he was actually unaware of the document.

To reiterate, it’s not certain that these and other facts claimed in the debtors report will become part of Bankman-Fried’s criminal trial, but it seems very likely most will.

So while we were already pretty sure Sam Bankman-Fried was cooked, it’s starting to look like he’s downright deep-fried.

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David Z. Morris

David Z. Morris was CoinDesk's Chief Insights Columnist. He holds Bitcoin, Ethereum, and small amounts of other crypto assets.