Sam Bankman-Fried tries to broker FTX’s rescue from his home in the Bahamas

Sam Bankman-Fried, CEO and founder of FTX, walks near the United States Capitol, in Washington, DC, September 15, 2022.

Graeme Sloan | Sipa via AP Images

NASSAU, Bahamas — Despite being ousted from the cryptocurrency giant he founded, Sam Bankman-Fried told CNBC that he is trying to block a multibillion-dollar deal to bail out FTX, which has filed for Chapter 11 bankruptcy protection at the beginning of this month.

In a brief interview with CNBC on Friday, the FTX founder declined to provide details on the downfall of his cryptocurrency conglomerate, or what he knew beyond the liabilities being “billions of dollars bigger than I thought.” Bankman-Fried declined an on-camera interview or broader discussion of the record. He said he was focused on recovering clients’ funds and is still seeking a settlement.

“I think we should try to get as much value as possible for users. I hate what happened and wish I had been more careful,” Bankman-Fried told CNBC.

Bankman-Fried also said there are “billions” of dollars in client assets in jurisdictions “where there used to be segregated balances,” including the United States, and said “there are billions of dollars of potential funding opportunities there out” to make customers whole .

What was once a $32 billion global empire has imploded in recent weeks. Rival Binance had signed a letter of intent to buy FTX’s international business as it faced a liquidity crunch. But her team decided the trade was unsalvageable, with a Binance executive describing the balance as if “a bomb had gone off.” FTX filed for Chapter 11 bankruptcy protection on Nov. 11 and named John Ray III as its new CEO, whose corporate experience includes restructuring Enron in the wake of its historic collapse.

Despite losing access to corporate email and all corporate systems, Bankman-Fried says he can play a role in the next steps. Venture capital investors told CNBC the 30-year-old had been calling to try to secure financing in recent weeks. However, investors said they could not imagine any company with a large enough balance sheet or risk appetite to bail out beleaguered FTX.

A long-term deal, brokered by Bankman-Fried, would be viewed in the same way as any competitive bailout offer, according to legal experts.

“He is no different than any third-party suitor at this point, other than that he is a majority shareholder of FTX,” said Adam Levitin, a Georgetown University law professor and principal of Gordian Crypto Advisors. “He could walk into Delaware with an unsolicited offer and say I want to buy out all the creditors for one price. But that would have to be approved by the bankruptcy court. He can’t force a deal.”

The new FTX CEO also said he was open to a bailout. On Saturday, Ray said the crypto firm is looking to sell or restructure its global empire.

“Based on our review last week, we are pleased to learn that many regulated or licensed subsidiaries of FTX, inside and outside the United States, have solvent balance sheets, responsible management and valuable franchises,” said the FTX chief Ray, in a statement, adding that it is “a priority” in the coming weeks to “explore sales, recapitalizations or other strategic transactions.”

After reviewing the state of FTX’s finances last week, Ray said he has never seen “such a complete failure of corporate controls and such a complete absence of reliable financial information” in his 40-year career. He added that Bankman-Fried and the top executives were “a very small group of inexperienced, unsophisticated and potentially compromised individuals”, calling the situation “unprecedented”.

Battle in the Bahamas

Part of Bankman-Fried’s ability to sign a deal may depend on which jurisdiction has more say in the bankruptcy process.

In a recent filing, FTX’s new CEO Ray cited a conversation with a Vox reporter last week in which Bankman-Fried suggested that clients would be in a better position if “we ‘could'” win a jurisdictional battle. against Delaware”. Lui also told Vox that he “regrets” filing for Chapter 11 bankruptcy, which stripped him of control over any restructuring of FTX, adding “regulators fk.”

Billions in FTX client assets are now trapped in limbo between a bankruptcy court in Delaware and liquidation in the Bahamas.

John Ray put FTX and more than 100 subsidiaries under Chapter 11 bankruptcy protection in Delaware, but that didn’t include FTX Digital Markets, which is based in the Bahamas. The Nassau-based leg of FTX does not own or control any other entities, according to the organizational chart Ray filed.

The Bahamas Securities Commission has hired its own liquidators to oversee the asset recovery and is upholding a Chapter 15 trial in New York, which gives recognition to foreign representatives in US proceedings. As part of that process, Bahamian regulators said they transferred customers’ cryptocurrency to another account to “protect” creditors and customers. He also said that the US Chapter 11 bankruptcy process does not apply to them.

The Bahamian move goes against what is happening in Delaware.

The FTX estate said those withdrawals were “unauthorized” and accused the Bahamian government of collaborating with Bankman-Fried on that transfer. FTX’s new management team challenged Bahamian liquidators and asked the US court to step in as it imposes an automatic stay, a standard feature of Chapter 11 proceedings. Typically, bankruptcy is intended to fence off assets to ensure that cannot be touched without court approval.

The FTX team claimed that the Bahamian group had no right to move money and called the withdrawals in the Bahamas “unauthorized”. Data firm Elliptic estimated the value of the transfer, which was initially thought to be a hack, at around $477 million.

“There are some issues that require coordination or a struggle to resolve. There will be some backlash when it comes to resources in the Bahamas versus the United States,” said Daniel Besikof, partner at Loeb & Loeb. “The people of the Bahamas are interpreting their mandate more broadly and the United States is adopting a more technical reading.”

The chaos of bankruptcy is partly the result of messy bookkeeping on FTX’s part. Under Bankman-Fried’s leadership, John Ray said the company “did not maintain centralized control of its liquidity” – “there was no accurate list of bank accounts and signatories” – and “insufficient attention to creditworthiness of banking partners”.

Part of the Bahamian motivation for control may come down to economic interests. FTX hosted a high-profile finance conference with SALT in Nassau and planned to invest $60 million in a new venue that one senior executive likened to Google or Apple’s Silicon Valley campus.

“Part of it is about protecting domestic creditors – this is a Bahamian company. There is also a lot of money to be made for local Bahamian law firms, you have the whole cascading effect,” said Georgetown’s Levitin . “There will be some level of competition between the Delaware bankruptcy court and the Bahamian regulator.”

The future of Bankman-Fried

Some experts say Bankman-Fried could ask for a bailout to reduce his criminal liability and possible prison term. Bankman-Fried did not respond to a request for comment about potential charges.

Justin Danilewitz, a partner of Saul Ewing who focuses on white-collar crime, said that while the odds of someone scrambling to complete FTX are “highly unlikely given the staggering losses,” mitigating customer losses can be a tactic to look better in the eyes of the court.

“This is often highly advisable if a defendant is in real trouble and the evidence is compelling. It’s a good idea to try to make amends as quickly as possible,” Danilewitz said.

Some have compared that outcome to what happened to MF Global, formerly run by former New Jersey Governor Jon Corzine. The company has been accused of using customers’ money to pay the company’s bills. But Corzine settled with the CFTC for $5 million, without admitting or denying wrongdoing.

The approach could backfire, Danilewitz said. That move could “reflect a degree of culpability or be seen as an admission and someone taking responsibility for what happened.”

Even if Bankman-Fried manages to play a role in recovering the funds through a bailout, or somehow gains more control through a Bahamian liquidation process, it could face years of legal wrangling from possible wire fraud to litigation civil.

Cable fraud requires proof that a defendant engaged in a scheme to defraud and used interstate cables to achieve this. The maximum term established by law is a maximum sentence of 20 years, in addition to pecuniary sanctions. Danilewitz called it “the federal prosecutor’s favorite tool in his toolbox.” The key question, he said, will have to do with the defendant’s intent. “Was this all a major accident or was there intentional misconduct that could give rise to federal criminal liability?”

Others have compared Bankman-Fried’s legal plight to Bernie Madoff and Elizabeth Holmes, the latter of whom was sentenced Friday to 11 years in prison for fraud after misleading investors about the alleged effectiveness of her company’s blood testing technology .

“The Theranos verdict shouldn’t have left him well,” said Levitin of Georgetown. “He has a real risk here. There is the possibility of criminal liability and civil liability.”


Leave a Reply

%d bloggers like this: