What Happens When Governance Is Ignored?

As the FTX and Alameda Research investigations unfold, we find ourselves privy to the private business practices, expenses, romances, and living arrangements of their executives. Poised against the backdrop of luxurious FTX perks are FTX founder Sam Bankman-Fried’s contrite confessions.  Mainstream and social media uniformly seek to reconcile how Wall Street and federal agencies allowed FTX to flourish and collapse.

Was it through plain old pretense? Bankman-Fried’s true nature can be seen through a brief survey of some of the recently revealed facts, Bankman-Fried’s statements, and the abhorrent luxuries and self-indulgence of other FTX and Alameda Research executives.

Bankman-Fried has been accused of being elitist and dismissive of financial regulations.  Regarding regulators, he told the Press, “F regulators…they make everything worse…they don’t protect customers at all.[1] And regarding the precepts of Environment, Social and Governance, Bankman-Fried said, “ESG has been perverted beyond recognition.[2]” The elitism and disdain in these statements are shocking when one considers the countless investors that would have welcomed U.S. federal regulators.

There is an expression- “You killed and asked for inheritance” – an underlying theme in Bankman-Fried’s posture.  That is what gave birth to the Slayer Rule, which prohibits one from inheriting if the beneficiary killed the testator.[3] Many are hoping that Bankman-Fried is not hiding assets so that he is blocked by Wall Street’s financial Slayer Rule.

After the world watched billions of investor dollars evaporate, Bankman-Fried took no blame. He wrote, “I have reached out to Mr. Ray and the Chapter 11 team numerous times. Sometimes I’ve been requesting access to my own data, but other times I’ve been attempting to alert them to potentially important information for their jobs and duties to creditors and customers of FTX. I have sent five emails to Mr. Ray. Mr. Ray has never responded, nor has he reached out to me to communicate in any other ways.”[4]

Continuing like a B movie from the 1980’s, Bankman-Fried wrote, “To the best of my knowledge, FTX U.S. has been and remains solvent, and could pay off all of its customers in full tomorrow. Unfortunately, the Chapter 11 team has frozen the FTX U.S. exchange, blocking customers’ access to their account, information and funds.”

There are horrific reports of corporate governance abandoned and set aside – emojis used to communicate decisions about corporate expenses, massive villas in the Bahamas in a private, exclusive estate, unabashed meth use, and the FTX stadium in Miami, all characterized by FTX as legitimate business expenses. All while investors have lost their funds. From many ordinary investors to Larry David to Kevin O’Leary to Tom Brady, the funds are gone, lost with debts under the supervision and rule of Chapter 11 bankruptcy procedures.

Remember when Bankman-Fried testified at Congress and boasted of FTX’s superior risk assessment mechanisms? So stringent that he offered to cooperate with the FBI? Before the collapse, Bankman-Fried told Congress, “We have also put a lot of work into the risk controls in our platform. This is true from the financial crime side where we conduct a sophisticated ‘know your customer diligence’ on all of our users in order to identify an illicit activity. We monitor via multiple solutions all blockchain transfers into and out of our exchange. It’s true of our risk engine, which is a 24/7 risk engine. That is unlike the traditional financial ecosystem where risk builds up overnight where there needs to be separate risk models for weekends and overnight activity and holidays where hours or days can go by without any ability to mitigate risk to the system. We have a transparent system where all of our data is, all of our public market data is, openly available and free where risk parameters are transparent.”

Bankman-Fried tried to present an opposite position after the collapse, and wrote in his hoped-to-be-delivered remarks to Congress, “Regarding risk management: while FTX International had a team dedicated to financials, and so many other areas of the business, it did not have a team, dedicated to risk management, or to user  position monitoring. I, as CEO, did not put adequate effort into monitoring risk on FTX. I thought that I could hold FTX together, despite the expansion. I was wrong. I bit off more than I could chew, and ended up failing to focus on risk management.”

Instead of contrition, Bankman-Fried continues to blame others for this fraud – he is indignant in this statement that he wrote, “And as of today, FTX U.S. is off, and U.S. customers cannot even access the account data, let alone withdrawal. To my knowledge, FTX U.S. is solvent and can make all customers whole. I’m surprised and saddened that it has not.”

The villa sits empty. Celebrities went home. No more perks. Investor losses are surfacing. All this as the tally of the FTX bankruptcy creditors spikes and major corporations like Blackrock and small life savings investors line up for ten cents on the dollar in bankruptcy court. If only FTX and Alameda Research had the environmental, social, and governance precepts that it boasted to Congress that they had. Bring some governance and regulations, Congress.

For questions related to white collar criminal defense matters, please contact Laurel F. Grass at lgrass@leechtishman.com or 212.603.6300. Laurel is Counsel with Leech Tishman and a member of the Litigation & Alternative Dispute Resolution, White Collar & Government Investigations, Corporate, and Data Privacy & Cybersecurity Groups.

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[1] Author, Kelsey Piper at Future Perfect, Vox.com. https://www.vox.com/future-perfect/23462333/sam-bankman-fried-ftx-cryptocurrency-effective-altruism-crypto-bahamas-philanthropy

[2] Id.

[3] Slayer Rule in Riggs v. Palmer, 115 N.Y. 506, 22 N.E. 188 (1889).

[4] Forbes Online, Exclusive Transcript, The Full Testimony Bankman-Fried Planned to Give to Congress. Author, Steven Ehrlich, Director of Digital Asset Research at Forbes.