The facts emerging from the multi-billion dollar fraud perpetrated by FTX and its shell companies are not looking good for the gang of nerds who concocted the system and executed the embezzlement. But the facts are also not looking good for Congress and particularly not good for the elite universities that granted degrees and status to those committing the crimes and those in charge of properly regulating such firms to prevent billion dollar frauds from occurring.
The issues involved cover lots of ground so picking a title proved difficult. It will be left to the reader to pick their favorite.
Is THIS What an Elite Education Gets Us?And the Congressional Chutzpah Prize for 2022 Goes To...
Will YOU Be My Regulator?
To understand why picking a title is problematic, first examine a partial roster of some of the key players gaining notoriety so far in the fraud:
Sam Bankman-Fried - FTX CEO - BS from MIT
Joseph Bankman -- father of SBF - professor of Law at Stanford
Barbara Fried - mother of SBF - professor of Law at Stanford (retired 9/2022)
Caroline Ellison -- Alameda Research CEO - BS Mathematics from Stanford
Glenn Ellison - father of Caroline Ellison - Professor of Economics at MIT
Sara Fisher Ellison - mother of Caroline Ellison -- Lecturer of Economics at MIT
Gary Wang -- FTX Co-Founder - BS Mathematics / Comp. Sci from MIT
Nishad Singh -- FTX Director of Engineering -- BSEE/CS from UC Berkeley
Ryan Salame - FTX Co-CEO - BS Finance from Georgetown University
Sam Trabucco - (former) Alameda Research Co-CEO - BSEE/CS from MIT
Tom Emmer - US Representative (R - Minnesota) - University of Alaska / William Mitchell College of Law
Warren Davidson - US Representative (R - Ohio) - Mendoza School of Business
Byron Donalds - US Representative (R - Florida) - BS Finance from Florida State University
Ted Budd - US Representative (R - North Carolina) - BSBA Appalachian State / MBA from Wake Forest
Darren Soto - US Representative (D - Florida) - BA Rutgers / JD from George Washington University
Jake Auchincloss - US Representative (D - Massachusetts) - BA Harvard / MBA MIT
Josh Gottheimer - US Representative (D - New Jersey) - BA University of Pennsylvania / JD Harvard
Ritchie Torres - US Representative (D - New York) - attended NYU
Is THIS What an Elite Education Gets Us?
The first thing that jumps out from that listing is that, with few exceptions, these players were not exactly night-school graduates of Whatsamatta U or Hickville State. The vast majority have undergraduate technical degrees, MBAs or JDs from the top universities in the country. If this fraud was as tightly held as the Bernie Madoff ponzi scheme, it might be understandable how six young criminals might have each independently entered the already suspect business realm of cryptocurrency and devised independent frauds stealing thousands or milliions from other cryptocurrency speculators. In fact, THAT is already happening every day in the crypto realm, if not in actual trading systems and currencies but in selling sure-fire trading training related to unique currencies.
That's not what happened with FTX. These six people worked in concert, across at least two shell companies (FTX and Alameda Research) and spent four to five years designing user experiences and back-office systems to allow embezzlement that fraudulently inflated assets of their two firms, allowed executives to cash out MILLIONS of dollars of REAL cash for their personal use and cover losses for a time by stealing assets from customer accounts. All while maintaining the illusion for customers that their cryptocurrency deposits were protected and present in their individual account.
The leaders of this fraud, Sam Bankman-Fried and Caroline Ellison, both have parents holding professor / lecturer positions in LAW and ECONOMICS at two of the world's most elite universities (Stanford and MIT). In the case of Joseph Bankman, he actually WORKED "part time" for FTX presumably providing legal advice at times but also as a "rainmaker" - attracting large scale investors in the months prior to the collapse and seeking emergency investments to fend off collapse before the meltdown. In the case of Glenn Ellison, at one point when Gary Gensler taught Economics courses at MIT, Ellison was Gensler's department head, a fact that might have been helpful in deflecting SEC focus when desired (see below...)
As the companies started up, it is very easy to imagine the canned "pitch" they would provide to prospective investors that would cite their prior work at firms like Google and Jane Street, then their technical pedigree and degrees from MIT, Stanford, Berkeley, Georgetown, yadda, yadda, yadda. Couple that with the fact that their parents teach LAW and ECONOMICS at MIT and Stanford and it seems obvious -- familiarity with money, banking, security, etc. was in their family DNA. We're not some freshman dropout pitching some Theranos pipe dream, we have serious academic chops and industry experience with well-respected and well-connected family in these fields.
How effective and insane was this cloak of intellectual pedigree? One anecdote seen online involved a video conference call between Bankman-Fried and a handful of HIGH DOLLAR hedge fund investors. As the pitch was being made and questions were being answered, one of the participants noticed a video game appearing on one of the giant monitors behind SBF on camera. If I had been on that call and recognized someone asking me for MILLIONS couldn't be bothered to give me their full attention and instead was MULTITASKING in the background PLAYING A GAME, I would have dropped the call immediately and thanked my stars I spotted such a scammer. In this case, the party who noticed it instead came to a much different conclusion… The participant typed in a chat channel of the call "I LOVE THIS FOUNDER!" He essentially concluded, "This guy is so cool and confident of what he's doing, he's playing (whatever) in the background. GIVE THIS GUY OUR MONEY NOW." And he did. The firm Sequoia Capital invested $210 million dollars and lost it all.
https://www.youtube.com/watch?v=20BEJouWBgY?t=480If you think this YouTuber is making the story up or that I'm making the story up, the story was recounted in a profile of FTX and Sam Bankman-Fried that Sequoia Capital published on its own web site on September 22, 2022. The story has subsequently been removed and replaced with a link to a letter the firm sent to its own customers explaining how $210 million of their money vanished.
https://www.sequoiacap.com/companies/ftx/So exactly what does one get when dropping $45,000+ per year for attending some of America's elite institutions? Any exposure to ethics? Any overarching insight that even if you're only a technical person writing software, if you're creating logic in accounting systems that initiate trades without logs, you might be participating in a felony? Does anyone believe the PARENTS of these actors didn't understand the risk of creating new fangled banking systems without any legitimate outside auditor and mention concerns to their children? If not, WHY ARE THEY TEACHING at these institutions?
There's one extra factor for Stanford University and its alumni to ponder as well. Because SBF made bail via his parent's pledge of a home, his bail terms require him to stay in his parent's home essentially under house arrest with an electronic ankle tracker. His parents's home is actually ON the campus of Stanford University, right across from the president's mansion. Because of SBF's high profile, the university has beefed up security and closed some campus streets to traffic to keep away press and the curious. I wonder if this will make alumni think twice the next time an endowment fund raiser email shows up in their inbox. Am I funding cutting edge research and top-notch undergrad education with my donation or am I paying for a university to operate a "Camp Cupcake" jail to protect an alum who traded on my school's name to steal billions and tarnished my degree?
https://stanforddaily.com/2022/12/23/sam-bankman-fried-to-be-under-house-arrest-on-stanford-campus/
And the Congressional Chutzpah Prize for 2022 Goes To…
Why are all of those US Representatives listed in this roster of players? They are all co-signers of what will likely prove to be one of the most cringe-worthy letters in political / economic / criminal history. That team of seven US Representatives sent a letter March 22, 2022 to SEC Chairman Gary Gensler itemizing THIRTEEN very specific concerns they had about how and why the SEC was bothering to spend time investigating cryptocurrency markets in general and any specific firms that might be in its crosshairs.
https://emmer.house.gov/_cache/files/0/c/0c7fc863-7916-4b19-bc44-52bef772287e/9B0B9D1CA9B3C215DDC762DF5B0F6864.3.16.22.emmer.sec.letter.pdfThe SEC’s regulatory functions, while broad, are limited to the extent of its statutorily mandated jurisdiction. Enforcement powers, while conceptually broader with respect to non-SEC regulated entities, are still circumscribed by statute, federal judicial review, congressional oversight and the Commission’s own policies and procedures for initiating and conducting inquiries and investigations. It appears there has been a recent trend towards employing the Enforcement Division’s investigative functions to gather information from unregulated cryptocurrency and blockchain industry participants in a manner inconsistent with the Commission’s standards for initiating investigations
The tone of the letter speaks for itself. This isn't pleading with the SEC Chairman to hurry up his work then share it with the House Financial Services Committee so they can get caught up as well to the state of crypto market stability and security. It is CLEARLY a warning shot across the SEC's bow to back off. That becomes especially apparent when it is known that FTX as a firm and its leaders individually donated to many members of the House Finance Committee, including these members. The letter had the intended effect. Gensler's staff tabled the investigations they were initiating and no new actions were taken regarding FTX or any other corporate parties. The SEC did announce sanctions against INDIVIDUAL players involved in PROMOTING various cryptocurrencies such as (sigh…) Kim Kardashian but no actual operators of specific currencies or exchanges.
Among all of the signatories, perhaps Ritchie Torres merits a special shoutout for sheer chutzpah. Torres is relatively new to Congress but has made adoption of cryptocurrency a focus of his policy proposals, under the assumption that new cryptocurrency exchanges and payment systems will become a lower-cost alternative to "traditional" high-fee banking services. He claims such innovations will aid the "under-banked" or "unbanked", a key demographic in his district.
Despite co-signing the March 2022 letter that clearly attempted to stifle SEC investigations into the current state of cryptocurrency exchanges, after the collapse of FTX, Torres sent a DIFFERENT letter on December 7, 2022 to the Government Accounting Office demanding an investigation of the SEC, flagging that same Gary Gensler as being "singularly responsible" for the fraud.
https://punchbowl.news/wp-content/uploads/Letter-to-GAO-on-FTX-Collapse.pdfI am writing to respectfully request that the Government Accountability Office (GAP) conduct an independent review of the SEC’s failure to protect the investing public from the egregious mismanagement and malfeasance of FTX, which has brought billions of dollars in losses to about a million creditors and customers.
Chair Gary Gensler, by the logic of his own public pronouncements, is singularly responsible for the regulatory failures surrounding the collapse of FTX and its affiliate FTX US. Chair Gensler has said on countless occasions that there is no need for authorizing legislation from Congress: the SEC presently possesses the authority it needs to regulate crypto exchanges. If the SEC has the authority Mr. Gensler claims, why did he fail to uncover the largest crypto Ponzi scheme in US history? One cannot have it both ways, asserting authority while avoiding accountability. It is on Congress to pass laws, but once the necessary laws have been enacted, it is on the regulators to apply those laws to conduct investigations and protect the public. When it comes to FTX, Chair Gensler fundamentally failed as a regulator, and he has no one but himself to blame.
The ironies here abound. Torres professes to be in favor of cryptocurrency adoption as a means of providing modern payment services at lower transaction fees for the poor and "un-banked,", a key demographic in his district. Yet anyone familiar with cryptocurrency technology knows that using blockchain ledgers to process payments is an incredibly INEFFICIENT means of journaling transactions - especially billions of transactions only worth pennies or dollars. Blockchain ledgers require large but widely distributed investments in compute and storage likely to need auditing and regulation to ensure protections of that software and infrastructure are in place. Yet, there he was in March of 2022 grandstanding in front of his DONOR constituency (crypto firms including FTX) by firing off a letter to the head of the SEC demanding they "stay in their lane" and not bother investigating unregulated entities supposedly outside their purview. After FTX tanks, Torres attempts to grandstand again in front of his VOTER constituency demanding the SEC be accountable for missing the fraud while still claiming the core nature of cryptocurrencies, exchanges and payment systems are secure and worthy of continued adoption.
But it gets better...
Prior to his December 7 letter, on December 5 Torres also introduced two bills that would impose regulations on the crypto industry:
HR 9421 Crypto Exchange Disclosure Act -- https://www.congress.gov/bill/117th-congress/house-bill/9421/textHR 9422 Crypto Consumer Investor Protection Act -- https://www.congress.gov/bill/117th-congress/house-bill/9422/textSEC. 2. CRYPTOCURRENCY EXCHANGES PROOF OF RESERVES DISCLOSURES.
A cryptocurrency exchange that holds assets on behalf of customers shall periodically (as determined by the Securities and Exchange Commission) disclose to the Securities and Exchange Commission information relating to proof of reserves of the exchange, including, with respect to the exchange at the time of the disclosure, the amount of assets held by the exchange compared to the liabilities of the exchange.
SEC. 2. LENDING, LEVERAGING, AND CO-MINGLING PROHIBITED.
A cryptocurrency exchange may not lend, leverage, or co-mingle the funds of a customer without the consent of such customer.
If cryptocurrency really is a currency, then a cryptocurrency EXCHANGE is actually operating as a combination of BANK (if customers are only "exchanging" tokens by converting them to intermediate coins with fractional values) and BROKERAGE (if customers are purchasing / selling cryptocurrency tokens for speculative gain). Any entity operating as a BANK or BROKERAGE should already be subjected to audits against Generally Accepted Accounting Principles and bank-specific accounting rules. We already have laws and regulations covering that so why should cryptocurrency firms be exempt from such regulations? Why should a PARALLEL set of regulations be created requiring some PARALLEL enforcement effort within the SEC when ongoing audits of reserves, capitalization and journals are already the purview of the Office of the Comptroller of the Currency?
Why is specific legislation required to prohibit the lending, leveraging or co-mingling of funds in cryptocurrency exchange accounts? Again, if cryptocurrency is currency, cryptocurrency exchanges are operating as BANKS or BROKERAGES and existing rules regarding disclosure of terms of service regarding account holdings already apply and any transfer of customer funds to other accounts without prior consent of the customer is already a crime - EMBEZZLEMENT.
Also worth noting for Ritchie Torres is that he was one of the Finance Committee members to get individual donations from FTX or its leaders. In total, $95,000 in donations were given to individual campaigns of eleven members of the house Financial Services Committee. Of course, Torres (and others as well) immediately announced he had identified the dollar amount of the contributions involved -- $35,000 for him alone -- and has immediately given it to a charity. Of course, that raises a question… When you become aware that the man who delivered a bag containing $35,000 to your front door likely STOLE those dollars among BILLIONS from other people, is giving the $35,000 to another third party the appropriate response? Shouldn't that money go BACK to those from whom it was stolen?
Will YOU Be My Regulator?
One key reason the political donations and committee actions are so important is they reflect a larger scandal about cryptocurrency specifically and corruption in general. As was the case in the financial meltdown of 2008, the concept of regulatory capture is crucial to understanding the real dangers still lurking even after the collapse of FTX. In the financial realm, stocks and bonds are labeled "securities" and companies and processes related to the trading of securities fall under the purview of the Securities and Exchange Commission. In contrast, options and derivatives originally stemmed from the trading of commodities like corn bushels, pork bellies, etc. and are regulated by the Commodities Futures Trading Commission which -- believe it or not -- falls under the jurisdiction of Agriculture committees in both the House and Senate.
That split is important for two reasons. One is that the members of those two committees are not interested in surrendering control / influence over such important aspects of the economy. That might because they have a genuine interest in the topic but it is ABSOLUTELY the case those members can rely on a continual stream of political donations from firms in those fields as long as they "play ball." The split is also important because historically, the Commodities Futures Trading Commission has been consistently underfunded given the costs of properly regulating the functions under its control. That is very advantageous for the firms subjected to its regulation if they know it will be perpetually understaffed and underfunded to truly execute its mission.
In the case of the cryptocurrency industry and in particular FTX, this known dichotomy of turf and enforcement funding led most cryptocurrency industry members to lobby Congress to AVOID having regulatory obligations assigned to the SEC and to ensure what few regulations might be devised were assigned to the CFTC. This goes beyond "regulatory capture" where an industry so thoroughly corrupts its assigned regulator that it can operate with near impunity. This is a case where the industry gets to CHOOSE its regulator from the outset. This was found to be a key contributing factor in the financial meltdown of 2008 as well. Here is a quote from teh book 13 Bankers published after the meldtown that summarizes the flawed regulatory climate at that time:
But banks also had a more direct means of putting pressure on their regulators -- the market for regulatory fees. The Federal Reserve makes the money for its day-to-day operations from its banking activities, and the FDIC makes its money from insurance premiums levied on banks. But the other major regulators, including the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS), are funded by fees levied solely on the banks that they regulate. And while each regulator nominally had its own sphere of jurisdiction -- bank holding companies for the Fed, national banks for the OCC, and so on -- financial institutions that fell under multiple regulatory agencies were allowed to select their primary regulator. As a result, regulatory agencies had to compete for funding by convincing financial institutions to accept their regulation, which created the incentives for a "race to the bottom," in which agencies attract "customers" by offering relatively lax regulatory enforcement.
The same corrupt forces were at work with FTX and the entire crypto industry. One other story widely circulating in crypto circles but not attracting much attention in more general media involves a battle for top-dog status between FTX and peer / rival Binance that hinged upon looming regulation as a weapon in the battle. Suspecting regulation was looming, FTX and Binance were hoping to disrupt the other's business enough that they would suffer major losses (in assets and market share) just as regulations were imposed. Each thought they could influence the regulation enough that it would serve as protection for market share and whoever was on top at the time regulations were imposed would cement that top dog status - permanently. Such sparring might have been taking place throughout the first half of 2022 but by early fall, Bankman-Fried actually approached his peer at Binance in the weeks before the collapse looking for a capital infusion. In the two or three days prior to the final collapse, FTX desperately sought out an infusion from Binance and its CEO publicly stated it would purchase FTX outright. In less than a day, however, that statement was retracted with Binance issuing a new statement via Twitter:
In the beginning, our hope was to be able to support FTX’s customers to provide liquidity. But the issues are beyond our control or ability to help.
After due diligence didn't take even twenty four hours to find a smoking gun, the willful suspension of disbelief of the entire industry was shattered and FTX folded.
The likelihood of corruption cannot be overstated here. Either via donations from FTX the firm or its individual leaders, nearly $40 million dollars was donated to Democratic PACs or specific candidates over the last three to four years. Bankman-Fried has also stated similar amounts were given to Republicans using dark money channels because it was clear if money was given to Republican efforts publicly, that would clash with the "charitable" front the firm and its leaders were trying to convey as part of their entire "effective altruism" charade. The matched dollar amounts clearly indicate the donors didn't assume one party or the other was more likely to regulate in their interest, they simply wanted to ensure access and influence regardless of who had control at any point.
WTH
