What legal consequences should SBF bear for its mistakes?

A heaven, a hell.

It only took SBF two months to go from being the "Central Bank of the Cryptocurrency Circle" worshipped by thousands of people to being the "sinner of the cryptocurrencies" hated by everyone, and from being one of the richest men in the world to having his assets wiped out overnight.

It took only three years for FTX, the world's second largest cryptocurrency exchange he founded, to go from its establishment to a market value of over US$30 billion and then to bankruptcy.

However, what makes SBF even more desperate is that he may have to spend the rest of his life in prison.

SBF was arrested by Bahamian police in a top luxury apartment in the Bahamas and will be extradited to the United States for trial. No bail was granted during this period. A Bahamian judge rejected SBF's bail application, saying he was a "flight risk" and should stay in prison.

Damian Williams, chief prosecutor for the Southern District of New York, formally filed eight criminal charges against SBF, including: conspiracy to commit wire fraud against customers; engaging in customer wire fraud; conspiracy to commit wire fraud against lenders; engaging in lender wire fraud; conspiracy to commit commodities fraud; conspiracy to commit securities fraud; conspiracy to commit money laundering; and conspiracy to defraud the United States and violate campaign finance disclosure laws.

The two major financial regulatory agencies, the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodity Futures Trading Commission (CFTC), simultaneously announced civil lawsuits against SBF, alleging "securities fraud," namely that SBF privately misappropriated customer funds for various expenses of its hedge fund Alameda and private investments.

Misappropriation of client assets, financial fraud, money laundering, political donations... In the words of the US prosecutor, the SBF case is "one of the largest financial fraud cases in US history." According to Nicholas Biase, a spokesman for the US prosecutor, if the accusation of the Department of Justice is proven, SBF may spend decades in prison, with a maximum sentence of 115 years.

The policy of "cutting leeks" is carried out to the end, and no customer, lender or investor is spared.

The indictment released by the Department of Justice shows that SBF and his accomplices began securities fraud at least since the establishment of FTX in 2019 and continued until it filed for bankruptcy.

The Justice Department said SBF and others designed "fraudulent schemes and schemes to obtain money and property through false and fraudulent disguises, representations, and promises" and conducted interstate and international wire transfers of the money and property involved.

Specifically, SBF and his accomplices misappropriated FTX customers' deposits and used them to pay expenses and debts of SBF's cryptocurrency hedge fund Alameda Research, and also made investments.

As for the methods of misappropriating deposits, the SEC's indictment shows that there are mainly two types:

1) Guide FTX users to deposit funds into bank accounts controlled by Alameda;

FTX required customers to transfer funds to a bank account opened in the name of North Dimension Inc., which was actually a subsidiary of Alameda and did not disclose any connection with Alameda.

Alameda then commingled client assets with other assets and used them indiscriminately for trading operations and other ventures of SBF Private.

2) Providing Alameda with an “unlimited” credit line on the FTX platform, funded by its customers.

FTX also transferred user funds to its own fiat account called [email protected], from which Alameda “borrowed.” However, FTX marked these assets as internal accounts, hiding Alameda’s debt in its internal systems.

At the same time, Alameda marked the customer funds obtained from FTX as "liabilities" and did not indicate that the "liabilities" actually came from FTX when providing balance sheets to third-party lenders. Alameda also mixed the liabilities with third-party loans in an attempt to muddle through.

In order to facilitate Alameda to seize customer funds, SBF gave it the green light again and again.

In August 2019, SBF instructed employees to write special code that allowed Alameda to maintain a negative balance on the platform account without being affected, and later increased the negative balance limit of the account several times, effectively providing Alameda with an "unlimited" credit line.

In May 2020, at the behest of SBF, Alameda was completely free from FTX’s auto-liquidation function.

In contrast, no other accounts enjoy similar special treatment.

In addition, according to the indictment released by the CFTC, FTX executives, under the instruction of SBF, reallocated Alameda's approximately $8 billion in liabilities to two customer accounts in the FTX system to conceal Alameda's huge debts. SBF named the two accounts "Korean Friend's Account" and "Strange Korean Account."

The result is that FTX customers have become Alameda's "unlimited" ATMs in disguise.

Through the above means, SBF injected billions of dollars of FTX customer funds into Alameda. When Alameda’s chaotic financial situation was exposed, customers panicked and withdrew their money, only to find that their money had long disappeared.

While deliberately cutting the leeks of the platform's customers, SBF also raised the "slaughter knife" to investors.

According to the SEC's indictment, SBF boasted to investors about FTX's security and risk management capabilities, and raised more than $1.8 billion from investors through multiple rounds of equity financing, of which $1.1 billion came from approximately 90 U.S. investors.

In response, the U.S. Department of Justice stated that FTX sent an email to investors in September 2022, providing significant false financial information. SEC Chairman Gary Gensler wrote that SBF did not disclose the relationship between FTX and Alameda to investors, "built a 'house of cards' on the basis of deception and told investors that this is one of the safest buildings in the cryptocurrency field."

At the New York Times Business Summit, SBF put on an innocent face when asked about the "backdoor relationship" between FTX and Alameda. He said he knew nothing about Alameda's leverage, funding loopholes, and liquidity problems, and said that his mistake was not paying more attention to Alameda.

Alameda——SBF’s private wallet

In May of this year, Alameda's lenders demanded repayment of billions of dollars in loans as cryptocurrencies plummeted. Despite the huge capital injection from FTX, Alameda was still unable to repay. Why?

In addition to investment losses, this is also related to SBF's long-term greed and insatiable bloodsucking.

According to the Department of Justice and the SEC, Alameda became SBF's personal wallet after receiving a steady stream of customer funds from FTX. SBF continued to withdraw funds from Alameda and used billions of dollars to buy luxury homes, fund political activities, make private investments, and more.

Additionally, funds illegally transferred to Alameda were used to provide loans to FTX executives, including SBF himself.

From March 2020 to September 2022, SBF signed loan promissory notes for Alameda totaling more than $1.338 billion. In 2021 and 2022, FTX co-founders Gary Wang and Nishad Singh borrowed $550 million and $220 million from Alameda, respectively.

When Alameda's financial situation triggered a butterfly effect in the cryptocurrency circle and the "house of cards" built by SBF collapsed, he not only did not stop, but intensified his actions, instructing his subordinates to transfer more customer assets to Alameda to fill the "bottomless pit". He also continued to suck Alameda's "blood", used the funds for venture capital, and provided loans to FTX executives.

SBF’s “greedy behavior” was not stopped until FTX, Alameda, and other companies in SBF’s vast network filed for bankruptcy.

Conspiring to launder money for two years

The U.S. Department of Justice also accused SBF and its accomplices of conspiring to engage in money laundering transactions since at least 2020. The Department of Justice stated that when SBF illegally misappropriated customer funds, it concealed and disguised the source of funds, etc., which actually violated the U.S. Anti-Money Laundering Act.

"It's time for the crypto industry to be subject to the same money laundering rules as other industries," U.S. Senator Elizabeth Warren said at a hearing of the Senate Banking Committee. She and Republican Senator Roger Marshall from Kansas earlier introduced new legislation aimed at plugging loopholes in anti-money laundering rules in the crypto industry.

However, the Justice Department did not provide further details on the money laundering allegations, so the available information is very limited.

Huge political donations buy influence on both parties

The Justice Department’s final charge against SBF is that, since at least 2020, SBF and its associates knowingly and willfully defrauded the U.S. government in violation of campaign finance disclosure laws.

The Justice Department said SBF and others violated laws by donating "in the names of others" to candidates for federal office, federal fundraising committees and independent expenditure committees.

SBF previously admitted that he was a "significant donor" to the 2022 midterm elections. He allegedly bet on both the Democratic and Republican parties, with a total amount of nearly $40 million, most of which was spent on the Democratic Party.

Wall Street Journal previously mentioned that in the US midterm elections, SBF was the second largest individual donor to the Democratic Party, with a donation amount of up to 39 million US dollars, second only to Soros.

However, most of the political donations came from FTX customers. Williams said: “All of this dirty money was used to support SBF’s desire to buy bipartisan influence and influence the direction of American public policy.”

A top cryptocurrency trader uses QuickBooks to keep accounts?

SBF was scheduled to testify with new CEO John Ray III at a hearing of the Financial Services Committee, which is investigating the collapse of FTX. Since SBF was arrested the day before, Ray testified to the committee alone.

Ray, a veteran of corporate restructuring who famously oversaw the liquidation of energy giant Enron, said FTX collapsed because of “the absolute concentration of control in the hands of a small group of severely inexperienced and immature individuals.” He repeatedly said FTX was in worse shape than Enron.

He said he had "never seen such a failure of corporate controls and such a complete lack of trust in financial information" and that it would likely take his team months to sort through the case.

He said that FTX's case was "not complicated at all" and that it was an "old-fashioned" case of embezzlement, "just taking money from customers and using it for their own purposes."

Ray also confirmed that FTX did commingle customer funds and allowed Alameda unrestricted access to FTX’s customer accounts.

According to Ray, FTX's accounting is not rigorous, so it is no wonder that FTX has exposed serious financial flaws. The accounting software QuickBooks used by FTX is more suitable for individuals and small businesses. In the United States, 80% of small and medium-sized enterprises use this software. In addition, he also pointed out that FTX employees communicate invoices and reimbursements through the internal chat software Slack.

“There’s nothing to complain about QuickBooks itself. It’s a very good tool, but it’s not suitable for multi-billion dollar companies,” Ray said. At its peak, FTX had a market value of $32 billion.

When asked by the committee whether FTX was still solvent, Ray firmly replied: "No."

According to SBF's prepared testimony, FTX would still be solvent if its old rival Binance had not suddenly given up its investment. Currently, FTX US is still solvent and can settle for all its customers.