SBF Arrested: the Charges and Aftermath of FTX’s Collapse

As FTX crashed and took Bitcoin with it, it was easy to  lose track of these complex events. We’ll take up the story from the moment of the collapse and tell you about the FTX bankruptcy, the $500M FTX hack, the strange involvement of the Bahamas, SBF’s arrest and extradition, what he is accused of -- and what comes next.

FTX and Sam Bankman-Fried’s downfall: the timeline

• On November 2, CoinDesk reported that the balance sheet of Sam Bankman-Fried’s giant trading firm, Alameda Research, held billions of dollars’ worth of FTT, the token issued by FTX. Ties between the two firms were thus much closer than previously thought.
• On November 6, Binance CEO Changpeng Zhao, aka CZ, tweeted that his exchange would be liquidating its $2.1B worth of FTT due to ‘recent revelations’. Alameda CEO Caroline Ellison offered to buy Binance’s whole stash at $22 per FTT, but CZ didn’t respond.

• In reaction to CZ’s tweets, a bank run started on FTX, and the price of FTT crashed below $3.

• Binance almost agreed to buy out FTX, but scrapped the deal after discovering how huge the hole in its balance sheet was. The Financial Times published FTX’ balance sheet, with $9 billion in liabilities and only $900M in liquid assets.
• Bitcoin fell under $16,000, while Bankman-Fried stopped being a billionaire overnight.
• It was revealed that FTX had given billions in customer money to Alameda to trade with without the customers’ knowledge. When FTX suddenly needed money to process  a wave of withdrawals, it didn’t have it.
• SBF tried to raise $9.4 billion to save the company, but on November 11, FTX still filed for bankruptcy, together with Alameda Research and 130 more affiliated companies.
• SBF stepped down as CEO and was replaced by Jay J. Ray III, a famous bankruptcy attorney who led the bankruptcy of Enron in 2001, recovering over $800 million for its creditors. He is paid a staggering $1,300 an hour. Ray said that he had never witnessed “such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.”

The FTX bankruptcy saga

What is Chapter 11 bankruptcy?

A Chapter 11 bankruptcy is a form of bankruptcy in which the debtor’s assets, debts, and affairs are reorganized in such a way that it can continue working as it seeks to compensate the creditors. In this way, the company can still generate income with which to pay its creditors.  It is normally used by companies, and the debtor initially has 4 months to propose a reorganization plan, which their creditors can accept or refuse.

The plan should show how the debtor plans to earn revenue or cut expenses to generate assets for repayments. The first in line are secured creditors - those whose claims are secured by some sort of collateral (an asset belonging to the company). Next come unsecured creditors, who don’t hold any collateral. For them, repayments can take a very long time - or never arrive at all. In the case of FTX, regular exchange customers fall into the unsecured category.

FTX files for bankruptcy

On November 11, Sam Bankman-Fried tweeted that he had filed for a Chapter 11 bankruptcy in Delaware for FTX, FTX US, and Alameda. He went on to say that he was “really sorry.”  

In total, FTX could have as many as 1 million creditors across its 100+ affiliated businesses. The single biggest unsecured creditor is owed $226 million, according to court documents, and total debt to the 50 largest unsecured creditors is $3.1 billion. These are all customers, though they are not named.

Other crypto companies that recently filed for a Chapter 11 bankruptcy include 3AC, Terra Labs, Celsius, and Voyager Digital. The most recent is BlockFi, which named its exposure to FTX as the reason for its collapse.

FTX Digital Markets files for Chapter 15 bankruptcy in the Bahamas

Sam Bankman-Fried had close ties with the Bahamas. First of all, he moved there from Hong Kong in 2021, reportedly spending up to $120 million on real estate properties for himself and around 100 FTX employees. SBF lived in a private resort community called Albany, among whose founders were Tiger Woods and Justin Timberlake. SBF occupied a $30 million penthouse together with 9 friends who ran the FTX/Alameda empire together.

During the pandemic, SBF donated Covid testing kits and masks worth $1.4 million to the Bahamas and even appeared in public next to the prime minister.

FTX also has a subsidiary registered in the Bahamas called FTX Digital Markets. On November 11, the local regulator, the Bahamas Securities Commission, suspended FDM’s license and ordered its own liquidation proceedings against FDM.

The bankruptcy request was filed on November 15 in the Southern District of New York (SDNY), and the format was Chapter 15, used for bankruptcies of foreign-registered firms (as FDM is based in the Bahamas). By that time, the Chapter 11 bankruptcy, filed by the US team, had been filed and pending for several days – remember this fact, as it’s important.

The liquidation team appointed by the Bahamas regulator requested that the SDNY court be given access to FTX records in order to protect FDM’s clients and creditors in the Bahamas.

This led to a dispute between the US leadership of FTX and the Bahamas liquidation team. The latter sustains that the Chapter 11 proceedings in Delaware should deal with all the assets and all the creditors of FTX and its affiliates, in any country. The lawyers write that having two different courts deal with the case ‘simply makes no sense’.

The US team has requested that the Chapter 15 case be transferred to Delaware (where the main liquidation is being processed) - especially after it was found that the Bahamian authorities seized several hundred million dollars in FTX assets!

A hack, or a plot by the Bahamian regulator?

What else can possibly happen after the second-largest exchange goes bankrupt and freezes withdrawals? That’s right: a massive hack.

On November 12, the day after FTX filed for bankruptcy, users started flagging strange movements of money out of wallets associated with the exchange. In the official Telegram support channel, an admin wrote that FTX had been hacked and that users should delete the FTX app from their phones immediately.

FTX general counsel Ryne Miller tweeted that the team was “investigating abnormalities with wallet movements” and that all remaining assets had been transferred to cold wallets.

According to blockchain analytics firm Elliptic, the stolen funds amounted to $477 million, out of which $220M was converted to ETH on DEXs.

The FTX lawyers in the US, however, suspected that the ‘hack’ involved… the Securities Commission of the Bahamas! The same day, they filed an angry emergency court motion claiming that “unidentified actors” operating out of the Bahamas had been trying to access FTX computer systems and assets for days, as SBF doesn’t have authorization to access the system anymore.

The document also claimed - upon “credible evidence” - that Sam Bankman-Fried was working together with the Bahamian liquidators to move FTX’ assets into wallets controlled by the Bahamas authorities.

November 24 brought a new unexpected twist: the Securities Commission of the Bahamas tweeted a statement saying that it had indeed ordered the transfer of all the assets from FTX’s Bahamas subsidiary, FTX Digital Markets Ltd.,to”‘a digital wallet controlled by the Commission for safekeeping.”

As you remember, the Bahamas Securities Commission had started its own liquidation proceedings against FTX Digital Markets. In the statement, the regulator says, “It is not the understanding of the Commission that FDM is a party to the US Chapter 11 bankruptcy proceedings.” Therefore, it had “the authority to apply for a judicial order to protect the clients of FDM.”

The Commission didn’t specify which funds it ordered to be moved, but many news outlets were quick to assume that it was those $477 million that were considered stolen. This would mean that it wasn’t a hack hack, but  an asset seizure by the Bahamas!

As always, Crypto Twitter had a field day with the news.

However, note another sentence in the Commission’s statement:

“The statements made by the purported officers of FTX (...) that they have suffered significant thefts, that their systems were compromised, and that they continue to face new hacking attempts - reinforce the wisdom of the Commission’s prompt action to secure these digital assets.”

Finally, the Commission lashed out at the US liquidators:

“It is unfortunate that (...) the new CEO of FTX Trading Ltd. misrepresented this timely action through the intemperate and inaccurate allegations (...) It is also concerning that [the US team] chose to rely on (...) unreliable sources of information.”

Basically, the Commission didn’t say ‘Yes, it was us and not hackers’ - but rather, ‘We moved the money because FTX got hacked, and how dare they accuse us.’.

Elliptic also edited its article on the hack, saying it’s unlikely that the $477 million transfer was the work of the Bahamian authorities. It’s more plausible that the Commission meant another transfer of $280 million in ETH, made on November 13.

Also, ZachXBT, a well-known on-chain investigator, stressed that the user who took the $477 million exhibited typical hacker behavior: dumping tokens, bridging them via the Ren bridge, etc.

SBF goes on an apology tour

In just a few days, SBF went from a much-admired figure to the most hated man in crypto. Apparently he felt the need to explain himself and say sorry, because Bankman-Fried suddenly embarked on a series of interviews. We’ll go through the two most interesting ones..

The first notable interview was with Vox (posted on Novembers 16), conducted over Twitter DMs. The reporter, in her own words, came away “appalled by much of what he said” as SBF didn’t seem to experience much guilt.

Sam said he didn’t want to do “sketchy stuff” and - speaking of Alameda’s trading with customers’ money borrowed from FTX - that he “thought Alameda had enough collateral to reasonably cover it’. The key issue was ‘messy accounting’ and not realizing ‘the full size of it’, and he could do it all over again, he’d focus on better accounting and offboarding Alameda from FTX sooner.

SBF believes that his single biggest misstep was filing for a Chapter 11 bankruptcy - if he hadn’t, he would be able to make customers whole and reopen withdrawals. He also spoke negatively of the regulators, stating that they ‘make everything worse’ and ‘don’t protect customers at all’.

Three weeks later, SBF did a video interview with the BBC (published on December 10), whom he invited to his Bahamas home. He admitted his responsibility for the disaster (“That’s on me, one way or another.”) but denied knowing that Alameda was trading with FTX users’ money. He said, “I didn’t knowingly commit fraud.”

As for his personal situation, SBF told the BBC that he had less than $100,000 left (out of billions) left in his bank account and that he did “ruminate” at night over the possibility of getting arrested.

Did the Bahamas government ask SBF to mint a new coin?

We can’t know if SBF really helped the Commission move $280 million in crypto. But on December 12, Bloomberg reported that the Bahamas authorities had asked Sam Bankman-Fried to mint hundreds of millions of USD worth of a new crypto token. These new coins were to be transferred to a wallet controlled by the government.

It wasn’t said what the name of the token was supposed to be, or why the Bahamas Securities Commission would even undertake such a scheme. However, let’s remember that SBF said he “would give anything” to start a new enterprise and be able to repay FTX’ users. Could minting this new token be such an enterprise? Now that he’s been arrested, there is no way to know.

The bizarre Crypto Twitter hunt for SBF

When the authorities refuse to act, the Crypto Twitter (CT) community takes matters into its own hands – or at least it tries. That’s how several crypto traders and influencers teamed up to locate SBF.

The first was the infamous YouTuber BitBoy Crypto, whose real name is Ben Armstrong. On November 26, he tweeted that he was in the Bahamas,  apparently to talk to SBF.

BitBoy claimed to have found SBF’s Toyota Corolla (which he  famously drove instead of a luxury sports car). There was a bottle of pills in the front seat, which the crypto trader @BigCheds identified as the stimulant Adderall. BitBoy also filmed himself knocking on SBF’s door.

Meanwhile, a group of well-respected traders – Gainzy, Ice Bagz, and Keyboard Monkey – also flew to the Bahamas, though Gainzy in particular denied that he was there to hunt for SBF. The group seemed to have spent its time gambling, anddining,and even had a meal with BitBoy (whom they had always derided).

This whole episode led to nothing, but it shows how powerful CT can be. Indeed, all the latest developments in the FTX story appeared on Twitter first: from CZ’s tweets that started the bank run on FTX to SBF’s disturbing interview. As one user put it, ‘Who needs Netflix when we have CT?’

BlockFi bankruptcy

Meanwhile, the fallout from the FTX crash continued. The next in line was crypto lending firm BlockFi, which used to have over 200,000 users and a $3 billion valuation. BlockFi suffered after the 3AC collapse, and FTX provided it with a $400 million credit line. FTX was even going to buy BlockFi for $15 million, but couldn’t get the necessary license to provide crypto lending services in the US.

On November 10, the lender froze all withdrawals and got its license revoked the day after. On November28, BlockFi filed for Chapter 11 bankruptcy, revealing that it had a massive exposure to FTX and Alameda, including loans that now wouldn’t be repaid.

There are also concerns about the future of another crypto lending and brokerage firm, Genesis. It has $175 million in assets blocked on FTX and recently suspended withdrawals, though it claims that there is no need to file for a bankruptcy yet. In short, the contagion from FTX may not be over.

The arrest and the charges

For more than a month after the collapse of FTX, the crypto community wondered why SBF still walked free. He wasn’t exactly in hiding, after all, if even BitBoy managed to get into his luxury apartment complex. Some even suggested that politicians who had received large donations from Bankman-Friend would prevent him from getting arrested.

Indeed, as reported by Time Magazine, SBF was the second-largest donor for the Democrats after George Soros, contributing $40 million to the 2022 midterm election campaign alone - and $70 million in the past year and a half. Bankman-Fried also donated over $5 million to Joe Biden’s presidential campaign in 2020.

According to former federal prosecutor Mitchell Epner, the real reason could have been that the US authorities waited for SBF to dig himself deeper into a hole with all interviews. Any of the statements he made can now be used against him in court.

A related potential reason is that the extradition treaty between the US and the Bahamas states that the accused needs to have committed an offense that is punishable by more than 1 year in prison in both countries - and that new charges can’t be added after the extradition. So the US authorities had to make sure that the charges against SBF were serious enough at the moment of the arrest.

The testimony that never happened

A third theory, also suggested by Mitchell Epner, is that the US authorities didn’t want SBF to testify before Congress. The online testimony was scheduled for December 13 and was to feature both Bankman-Friend and the newly-appointed CEO Jay J. Ray III. The Congress hearing was supposed to establish if SBF and FTX committed fraud by mixing its customers’ money with Alameda’s.

The idea is that if SBF was to testify over a video call as a free man, sitting comfortably in his living room in the Bahamas, the US law enforcement authorities would feel embarrassed. They had until the 13th to get SBF detained, and they did.

Being under arrest, SBF was now unable to testify, but Forbes managed to obtain the full text of the testimony that he’d prepared. Here is how it begins.

SBF goes on to repeat many of the same things he said in the interviews:

• the lawyers pressured him into filing for bankruptcy;
• Binance engineered a negative PR campaign to bring down FTX;
• the US legal team was refusing to work with the Bahamian team and regulators, assuming them to be “incompetent”msimply because they weren’t American;
• he believed FTX to be solvent and had “billions of dollars” in offers of financing, but those offers were only valid if FTX would start working again;
• The US liquidation lawyers can get hundreds of millions of dollars in fees, money that could otherwise go to FTX’s creditors;
• He’s been “sad” and taking antidepressants for many years.

The arrest and the charges

On Dec 12 SBF was arrested in the Bahamas at his home by the local police, after the US authorities informed their Bahamian colleagues that criminal charges had been filed. Bankman-Fried is charged on 8 counts:

1. Wire fraud on customers
2. Wire fraud on lenders
3. Customers wire fraud conspiracy
4. Lenders wire fraud conspiracy
5. Commodities fraud conspiracy
6. Securities fraud conspiracy
7. Money laundering conspiracy
8. Conspiracy to defraud the United States and violate campaign finance laws. This is in relation to SBF’s election campaign donations: the US Attorney for SDNY stated that SBF and Alameda donated customers’ money but reported those transfers as coming from other people.

Altogether, the charges carry a maximum sentence of 115 years in prison, as per Cointelegraph.

Separately, the SEC has charged Bankman-Fried with defrauding customers in the US and concealing the fact that their money was transferred to Alameda. Meanwhile, the CFTC (Commodity Futures Trading Commission) has also charged SBF with fraud, saying that the platform’s code allowed Alameda to get access to unlimited amounts of FTX users’ funds - and even that SBF received loans from Alameda to buy real estate.

What about Caroline Ellison?

We’ve mentioned that SBF shared a luxury penthouse in the Bahamas with a group of friends. One of them was Caroline Ellison, the CEO of Alameda Research who used to date Bankman-Fried. In fact, there are reports that all  ten inhabitants of the Albany penthouse were romantically linked to each other at some point or another.

Ellison (born in 1994) started out as a Wall Street trader at age 19, joined Alameda in 2018, and became its co-CEO in 2021 alongside Sam Trabucco. She was the sole CEO between August and November 2022.

Caroline Ellison was fired by John J. Ray III when Alameda filed for bankruptcy, but so far she hasn’t been charged with anything. However, a complaint filed by the SEC mentions her admitting that she was aware of Alameda’s use of FTX customers' funds.

Ellison was recently spotted in New York, and there is talk that she is collaborating with the prosecution.

Extradition and bail

• At the hearing in Nassau on December 13, Sam Bankman-Fried was denied bail. The extradition hearing was scheduled for February 8, 2023. On December 16, his lawyers submitted a new bail request, to be heard in court on January 17. Until that point, he was to remain in jail in the Bahamas, which is known for its overcrowding and harsh conditions.
• The extradition process could take a very long time (potentially years), but SBF decided ont to oppose it. On December 20, he signed an agreement to be extradited. On December 21, Bahamian authorities confirmed that he was about to be flown to New York in a private plane.
• Also on December 22, Bankman-Fried appeared in court in New York and was released on a $250 million bail. Actually no payment was to be made: instead, SBF’s parents' mansion was used as collateral, plus another unnamed family member co-signed for him. They will have to pay $250 million or lose the house if SBF goes on the run.
• Bankman-Fried also had to sign what is called a ‘personal recognizance bond’ - essentially a promise that he will turn up for all future hearings.
• SBF will remain confined to his home, and his location will be monitored. Interestingly, a user spotted him ‘chilling’ in a business lounge in JFK together with his parents, lawyers, and FBI agents. Later he was photographed flying business class.

• It’s hard to say how many years in prison Bankman-Friend will get. Elizabeth Holmes was sentenced to 12 years for defrauding investors of $145 million with her blood-testing startup,  Theranos. Bernie Madoff got 150 years for his billion-dollar Ponzi scheme.

The FTX story will likely have many more twists and turns, and we at Pontem will keep updating you accordingly. The main lesson that this story teaches us is: Not your keys, not your coins. Storing your crypto in a non-custodial wallet is always safer. (But make sure it’s audited, of course.)For example, our own Pontem Wallet has passed two blockchain audits, and the Liquidswap DEX has passed three.

User security is Pontem’s number one priority, and Aptos and Move itself are extremely safe by design. Check if the DEXes, wallets, and DeFi dApps you use are audited (see our article on the importance of audits).

Follow Pontem Network on Twitter, Discord, and Telegram for more analysis on FTX and the crypto bear market - and updates on our Aptos products, including Liquidswap, ByteBabel, and Pontem Wallet.

About Pontem

Pontem Network is a product studio building for Aptos and the wider Move ecosystem. We work in close collaboration with the Aptos Foundation to deliver secure audited dApps, such as Pontem Wallet and the Liquidswap DEX. We also offer groundbreaking tools for coders, including ByteBabel (the first EVM implementation for Aptos) and Move Code Playground, the first browser code editor for Move.