Sam Bankman-Fried Quietly Bought an SEC-Registered Stock Trading Operation; There Are Big Questions as to What’s Happening with Customer Accounts

By Pam Martens and Russ Martens: December 13, 2022 ~

BubblesYesterday, just hours before Sam Bankman-Fried was arrested in the Bahamas at the request of Damian Williams, the U.S. Attorney for the Southern District of New York, Wall Street On Parade learned that Bankman-Fried had been allowed to purchase an SEC-registered retail brokerage firm in August of last year.

The brokerage firm at that time was called RJL Capital Group and was based in Staten Island, New York. Bankman-Fried changed the firm’s name to FTX Capital Markets LLC and moved its headquarters to Broad Street in the financial district in lower Manhattan.

According to Wall Street’s self-regulator, FINRA, FTX Capital Markets was licensed to conduct retail stock trading in 32 states. FINRA further notes that the firm’s SEC registration is “pending withdrawal” as of December 5 and all 32 state licenses are listed as “Termination Requested.” It is not clear if the firm has requested the withdrawal of its licenses and registration or if a regulator has initiated the action. (The SEC filed a broad range of charges this morning against Sam Bankman-Fried but it makes no mention of his ownership of a retail brokerage firm. The U.S. Attorney’s office is expected to unseal its indictment against Bankman-Fried later this morning.)

Wall Street On Parade reached out to FINRA to learn if the brokerage accounts are moving to another firm and how many customer accounts were held at FTX Capital Markets. We have not yet heard back.

We also contacted the Securities Investor Protection Corporation (SIPC), the organization that in case of a brokerage firm failure protects securities in the account up to $500,000, including up to $250,000 protection for cash that is held in the account for the purpose of trading securities. SIPC lists FTX Capital Markets as a “Member Firm.” SIPC advised via email that they were looking into the matter and would get back to us.

FTX Capital Markets is not listed as one of the more than 100 FTX group entities that filed for bankruptcy on November 11. The byzantine terms of its customer agreement, which spells out that neither cash nor securities will be held in the broker-dealer customer account but farmed out to other entities, raises further questions.

In June of this year, the parent of FTX US, West Realm Shires, Inc., announced it had purchased Embed Financial Technologies along with its subsidiary, Embed Clearing LLC. FTX Capital Markets indicates in its regulatory filings that it is Embed Clearing LLC that will provide its brokerage customers with “custody, execution and clearing services” for stock trades. Fortunately, SIPC also shows Embed Clearing as a member firm.

But when it comes to cash held for brokerage customers of FTX Capital Markets, things get a lot more troubling. The firm’s customer agreement contains this language:

“The MSB [Money Services Business] maintains Customer MSB Accounts at a bank which is a member of the Federal Deposit Insurance Corporation (FDIC). Customer holdings in their Customer MSB Accounts are insured up to $250,000 per depositor against the failure of the FDIC member bank. FDIC insurance does not protect against the failure of the MSB or malfeasance by any MSB employee. MSB and the bank at which Customer Accounts are held are not members of FINRA or SIPC and therefore your funds held in the Customer MSB Account are not SIPC protected.”

Sam Bankman-Fried does not exactly have a good track record with handling customers’ cash. The SEC complaint against him that was released this morning contains this insightful paragraph:

“Bankman-Fried thus gave Alameda [his hedge fund] carte blanche to use FTX customer assets for its own trading operations and for whatever other purposes Bankman-Fried saw fit. In essence, Bankman-Fried placed billions of dollars of FTX customer funds into Alameda. He then used Alameda as his personal piggy bank to buy luxury condominiums, support political campaigns, and make private investments, among other uses. None of this was disclosed to FTX equity investors or to the platform’s trading customers.”

One of the questions we posed to federal regulators related to a press release from the brokerage firm on May 19 of this year. The press release indicated that FTX Capital Markets (now dubbed “FTX Stocks”) was going further down the rabbit hole of mixing crypto with stock trading. It stated:

“The release of FTX Stocks marks the first time in industry history that retail brokerage accounts can be funded with fiat-backed stablecoins such as USDC via a partnership with the FTX US crypto exchange, in addition to the standard USD [U.S. dollar] deposit methods of wire transfers, ACH transfers, and credit card deposits.”

It came as news to us – and apparently regulators as well – that an SEC registered broker-dealer was allowed to accept crypto as deposits to trade stocks. (Laws and rules are apparently so yesterday to Sam Bankman-Fried.)

It’s also notable that Bankman-Fried picked a brokerage firm with a jaded history for acquisition. According to FINRA records, in 2016 RJL Capital Group was fined $75,000 and censured by FINRA. The regulator wrote:

“The findings stated that the firm failed to identify and investigate red flags associated with a customer’s trading in penny stocks. Consequently, the firm did not report the customer’s liquidations as potentially suspicious. The findings also stated that the firm failed to specifically tailor its supervisory systems to address customer trading in secondary public offerings (SPOs), and failed to identify and investigate potential Rule 105 violations by its customers. The firm’s AML [Anti Money Laundering] system also failed to consider its customers’ trading in connection with SPOs [Secondary Public Offerings] and the associated risks of potential violations of Rule 105, and therefore failed to detect and report those suspicious activities. The firm also failed to implement AML procedures that could be reasonably expected to detect and report potential violations of Section 5 and Rule 105. (FINRA Case #2013035864201)”

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