Feds Were Investigating FTX Months Before Collapse

Feds Were Investigating FTX Months Before Collapse

Federal prosecutors in the Southern District of New York had been conducting a probe into defunct cryptocurrency platform FTX months before the company led by disgraced chief executive Sam Bankman-Fried filed for bankruptcy.

The U.S. Attorney’s Office famous for prosecuting financial crimes spent months examining cryptocurrency companies with both domestic and foreign branches, according to a report from Bloomberg. Lawyers had begun examining FTX, which is based in the Bahamas and incorporated in Antigua and Barbuda, for compliance with the Bank Secrecy Act, which demands that financial institutions work to detect money laundering and terrorism financing.

FTX filed for bankruptcy two weeks ago after users discovered that trading firm Alameda Research, a company run by Bankman-Fried love interest Caroline Ellison, had allegedly been using consumer holdings from FTX to make investments. John Ray III, the lawyer who represented plaintiffs after the collapse of Enron, noted that the cryptocurrency empire was the worst failure he has ever witnessed.

“Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here,” Ray, who succeeded Bankman-Fried as chief executive to manage the bankruptcy, said in court documents. “From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented.”

In a more recent statement, however, Ray said that “many regulated or licensed subsidiaries” of FTX have solvent balance sheets and responsible management. “It will be a priority of ours in the coming weeks to explore sales, recapitalizations or other strategic transactions with respect to these subsidiaries, and others that we identify as our work continues,” he remarked.

Bankman-Fried, whose considerable fortune disappeared overnight when the company filed for bankruptcy, sought $8 billion from investors to cover withdrawal requests made by customers after the bankruptcy filing. A number of institutional investors were forced to mark down their shares in the company to zero over the past several days.

Sequoia Capital, a leading venture capital firm in Silicon Valley, defended the company’s vetting process and announced a $150 million loss from the collapse in a letter to shareholders. “We are in the business of taking risk. Some investments will surprise to the upside, and some will surprise to the downside,” the message said. “We do not take this responsibility lightly and do extensive research and thorough diligence on every investment we make.”

The House Financial Services Committee is preparing to hold hearings regarding the collapse of FTX as the Justice Department and the Securities and Exchange Commission continue their own investigations. Officials in the Biden administration, including Treasury Secretary Janet Yellen, have expressed a willingness to implement more regulations on the nascent sector.

Meanwhile, the Federal Reserve announced the beginning of a simulated digital currency initiative alongside multiple financial institutions soon after the cryptocurrency sector collapsed. Central bankers are weighing the possibility of launching a central bank digital currency, which would preserve the international role of the dollar while mitigating pitfalls intrinsic to cryptocurrencies such as liquidity risk, according to a paper from the Federal Reserve.

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