By Pam Martens and Russ Martens: February 27, 2023 ~
On December 13, the U.S. Department of Justice released an 8-count criminal indictment against the former crypto kingpin, Sam Bankman-Fried. He was charged with conspiracy to commit wire fraud, wire fraud, conspiracy to commit commodities fraud, conspiracy to commit securities fraud, conspiracy to commit money laundering, and conspiracy to defraud the Federal Election Commission and commit campaign finance violations.
Last Thursday, the Department of Justice added four additional criminal counts against Sam Bankman-Fried in a superseding indictment. These include: bank fraud; conspiracy to operate an unlicensed money transmitting business; and two counts involving the purchase and sale of derivatives.
Bankman-Fried’s jury trial is scheduled to start in October. The charge of bank fraud is something that jury members can get their minds around – particularly when the alleged bank fraud is shown to have taken place at federally-insured banks which are backstopped by U.S. taxpayers. And while the new indictment does not name any specific banks, it is well known that Bankman-Fried’s FTX crypto exchange and his hedge fund, Alameda Research, were involved with a number of federally-insured banks. (See, for example, Federally-Insured, Crypto-Focused Silvergate Bank Loses 43 Percent of Its Market Value Yesterday as Depositors Flee. Silvergate was a $160 stock in late April of last year. It closed on Friday at $14.33 following a massive bank run on deposits in the last quarter of 2022 as its ties to FTX became publicized.)
Here’s a sampling of what’s in the new indictment regarding Sam Bankman-Fried’s alleged diabolical plan to engage in bank fraud:
“SAMUEL BANKMAN-FRIED, a/k/a ‘SBF,’ the defendant, perpetrated this multi-billion-dollar fraud through a series, of systems and schemes that allowed BANKMAN-FRIED, through Alameda, to access and steal FTX customer deposits without detection. For instance, in 2021, FTX began to accept customer fiat deposits into an Alameda-affiliated bank account that itself was established through a fraudulent scheme that BANKMAN-FRIED directed…
“In part to obscure the relationship between FTX and Alameda, and in order to overcome Bank-1 ‘s refusal to open a bank account for FTX without extensive due diligence and licensing, in or about August 2020, SAMUEL BANKMAN-FRIED, a/k/a ‘SBF,’ the defendant, directed the incorporation of a new U.S.-based entity, North Dimension. BANKMAN-FRIED was listed as sole owner, CEO, and president of North Dimension, which had no employees or business operations outside of its bank account. BANKMAN-FRIED and others chose the name ‘North Dimension’ in part to conceal that there was a relationship between North Dimension and Alameda from FTX customers and from banks approving transactions with the North Dimension bank account. BANKMAN-FRIED also directed the creation of a website for North Dimension and used a credit card in his name to fund the hosting services for the website…
“Once the North Dimension bank account was opened, FTX directed customer dollar deposits to the North Dimension account. Thereafter, when FTX customers deposited or withdrew fiat currency, Alameda personnel, who maintained control over the North Dimension account and acted under the direction and supervision of SAMUEL BANKMAN-FRIED, a/k/a ‘SBF,’ the defendant, and his co-conspirators, manually credited or subtracted the customer’s FTX account with the corresponding amount of fiat currency on an internal ledger system…”
Investigative reporter, Gretchen Morgenson, reported for NBC News in December that North Dimension went to the trouble of creating a fake company website that marketed itself like this: “Our vision is to become most popular website for purchasing mobile phones and electronics by offering complete product information and a transparent purchasing procedure.”
It is more than a little noteworthy that the same day that the Justice Department released details on how easily Bankman-Fried was allegedly able to commit bank fraud, three federal bank regulators released new warnings to U.S. banks about getting involved in crypto. The federal regulators are the Board of Governors of the Federal Reserve System (Federal Reserve), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC).
One paragraph of the various warnings sounds like it is describing the negative impact to all crypto-related banks when a relationship like that between Silvergate and FTX/Alameda makes headlines. It reads:
“Deposits placed by a crypto-asset-related entity that are for the benefit of the crypto-asset-related entity’s customers (end customers). The stability of such deposits may be driven by the behavior of the end customer or crypto-asset sector dynamics, and not solely by the crypto-asset-related entity itself, which is the banking organization’s direct counterparty. The stability of the deposits may be influenced by, for example, periods of stress, market volatility, and related vulnerabilities in the crypto-asset sector, which may or may not be specific to the crypto-asset-related entity. Such deposits can be susceptible to large and rapid inflows as well as outflows, when end customers react to crypto-asset-sector-related market events, media reports, and uncertainty. This uncertainty and resulting deposit volatility can be exacerbated by end customer confusion related to inaccurate or misleading representations of deposit insurance by a crypto-asset-related entity.”