FTX Client Fund Issue and Missing $1 Billion Is Probed by the DOJ and SEC

FTX client fund issue is probed: Sam Bankman-Fried built a crypto empire, and for a time, people saw him as a savior. He soared to success, making billions quickly and becoming something of a poster child for crypto. However, it all came tumbling down in the past few weeks, and now, Sam Bankman-Fried faces investigations due to an FTX client fund issue of at least $1 billion in missing funds.

Hero to villain: Bankman-Fried once said that he and his enterprise were immune to the crypto downturn, showing remarkable confidence in his empire. However, the truth was different. Alameda Research, his trading house, invested in failing firms with borrowed money.

He then reportedly siphoned customers’ deposits to meet debt obligations, which is part of what is being investigated in the FTX client fund issue.

• Bankman-Fried once said that a fundamental principle of his was playing the markets with incomplete information. “You know you’re being approximate, but you have to try to figure out what trade to do anyway.”
• On many accounts, the decisions made by Bankman-Fried often seemed impulsive, with him over-extending only to cover it up afterward however he could. Some even question the legality of his actions in his attempts to cover things up.

Missing money: Before FTX collapsed, Bankman-Fried moved $10 billion in customer funds from FTX to Alameda Research, with a large portion of it disappearing after. In fact, somewhere between $1 billion and $2 billion simply vanished, and nobody knew about it for quite some time.

It was not until Bankman-Fried shared records with executives in recent weeks that the missing funds were discovered.

• Bankman-Fried disagrees with the way people are characterizing the transfer, commenting that it was not a secret transfer and that internal confusion was responsible for the mixup.

Built-in backdoor: The missing FTX client funds are alarming enough, but there have also been reports of a built-in “backdoor” created by Bankman-Fried. The backdoor was implemented in the bookkeeping system and supposedly allowed him to alter company financial records without setting off alarms.

• The backdoor not only worked against internal discovery but worked to avoid alerting external auditors.
• Bankman-Fried denied implementing the backdoor in his correspondence with Reuters, which broke the story about the missing funds.

Investigation into FTX client fund issue: The rapid and unexpected fall of FTX, as well as the disappearance of FTX client funds, has gained a lot of attention. That includes investigations by the Department of Justice (DOJ) and Securities and Exchange Commission (SEC) as authorities try to uncover whether there were securities violations or the intent to deceive on Bankman-Fried’s part.

• If there is evidence of the international to deceive, Bankman-Fried could face criminal charges, which could include potential jail time. However, if it is found that the failure resulted from incompetence, there will be no criminal charges.
• There is a high chance that the missing FTX client funds will become a major part of the investigation.

Lawsuits are on the way: The criminal investigation is not the only legal action potentially on the horizon. There are many civil suits in the works as investors and clients look to get their money back. Among those looking to recoup their losses are the VCs that put their money and trust in the hands of Bankman-Fried.

• Investors sank $2 billion in FTX, and they lost it all. Among those who took a major hit were Paradigm and Sequoia Capital, which both lost over $200 million.
• Clients of FTX lost billions as well, and it is unknown whether they will ever get their money back. Experts say that some might, while other clients might never get their crypto back. And even if some do get their money back, it is likely to take years.