SBF on DealCrook

Six months ago FTX founder Sam Bankman-Fried told the House Agriculture Committee about his firm's "conservative risk model" and "strong customer protections."  SBF took the opposite stance in recent interviews, one which was sponsored by NYT Dealbook.

"There is something maybe even deeply wrong there, which was I wasn't even trying," the crypto mogul said. "Like, I wasn't spending any time or effort trying to manage risk on FTX and that that was obviously a mistake."

"If I had been spending an hour a day thinking about risk management on FTX, I don't think that would have happened," he added. "And I don't feel good about that."

Here is Sam's testimony to the Ag Committee from May:

We also have strong customer protections under our model. It is a safe and conservative risk model which would have helped to alleviate some of the instances that we have seen with recent futures exchanges like the LME nickel fiasco earlier this year by having the collateral pre-funded at the clearinghouse rather than relying on credit, and having a real-time risk engine.

We also have enhanced customer protections. We have all of the customer protections that exist on traditional features exchanges and on FCMs because we understand deeply that we have a responsibility to ensure that if there is direct access to the platform, that users are still afforded the same level of protection. On top of that, we have further customer protections, suitability, and transparency than what you find on most other platforms. 

Bankman-Fried got internal feedback on significant risk management, compliance and accounting weaknesses from staff who later quit.  Fox Business reported:

...... proposed setting up rigorous structures and systems for risk, compliance and accounting, Mr. Bankman-Fried was dismissive of the idea, according to the people.

He said such extensive controls could crimp Alameda’s activity and limit how fast the firm could move to place trades, the people said, reducing potential profit.

"I and a group of others all quit, in part because of concerns over risk management and business ethics."

SBF said other things that don't pass the smell test.

Sam Bankman-Fried says a multi-million-dollar house reportedly bought in his parents' name in the Bahamas was actually meant to be company property.

"I don't know the details of the house for my parents," Bankman-Fried told The New York Times' Andrew Ross Sorkin at the publication's DealBook summit on Wednesday. "I know it was not intended to be their long-term property. It was intended to be the company's property. I don't know how that was papered in."

FTX/Alameda was Sam's "personal fiefdom."  If he wanted the property for the company it would have been in a corporate name, not his parents.

A spokesperson for his parents, both Stanford University law professors, previously told Reuters that they had been trying to return the deeds to the company "since before the bankruptcy proceedings."

His father Joseph Bankman is a scholar in the field of tax law.  Did he advise SBF to set up in the Bahamas?

The Bahamas has no income tax, corporate tax, value-added tax or wealth tax for those investing in offshore companies. Foreign investment in tourism and banking is especially welcome.

His denial regarding taking FTX customer funds to cover trading losses at Alameda is not credible.

“I was nervous, because of the conflict of interest, of being too involved,” he said. “I didn’t have the bandwidth to run two companies at once.” At issue are the massive loans of customer money that FTX made to Alameda to cover the firm’s mounting losses, which — as with almost every bad decision that has come to light — Bankman-Fried framed as a mistake rather than deliberate wrongdoing. “I didn’t knowingly co-mingle funds,” he said.

SBF's fiefdom had 130 companies, not two.  His CEO and Board of Director hands are all over them.  Both roles come with fiduciary responsibilities.

SBF did not institute the most basic fiduciary controls (accounting, compliance and risk management., He had the accounting back door installed between FTX and Alameda.  So, why would he draw the line at conflicts of interest?  It makes as much sense as his answer as the veracity of his responses.

“I was as truthful as I’m knowledgeable to be,” he said.

Bankman-Fried had a duty to protect FTX customer accounts.  He highlighted that duty to a Congressional committee.  Instead he pilfered them.  That's the knowable truth and it indicts the former CEO.   SBF should be under the control of a legal authority, not speaking at a Dealbook Summit.

Update 12-2-22:  SBF forgot his prior sales talk of "strong customer protections" and "conservative risk model" with his advice that crypto investors should look for "all the things I wish FTX had been able to supply" when depositing their funds.

Adding to his malfeasance and outright incompetence:

SBF said he paid so little attention to his company expenses that he didn't realize he was spending more than he was taking in.

Sam Bankman-Fried says he "misaccounted" $8 billion after some FTX customer funds were mistakenly counted twice.

The balance sheet combined FTX and Alameda Research, the firm he said he didn't run due to conflicts of interest. I'm sure his CPA lobbyist Mike Conaway would've been glad to help explain things to SBF.

Bankman-Fried's statements are shocking in light of his closeness to political insiders of both Blue and Red teams.  They were going to rely on this guy to structure financial services?

“Regulators have some egg on their face,” he said. “Sam was very far along at pitching to be the cash Bitcoin market here in the US, both with the SEC and CFTC.”

Update 12-3-22:  CoinDesk called it SBF's self-incrimination tour. 

Update 12-6-22:  CoinMarketCap noted how the smartest guy in the room repeated pled ignorance, arrogance and stupidity during his "apology not jail" tour.  I've said for weeks he should be under the control of a legal authority.

Update 12-8-22:  CoinDesk added:

FTX was an improperly organized firm at its founding. Customer assets were always precariously placed. And we know this now because of SBF’s own description of its end.

Update 12-13-22:  SBF is finally under the control of a legal authority.  His planned Congressional testimony is quite the exercise in image management.

Update 1-1-23:  In an earlier financial crisis SBF promised lenders big returns for a cash infusion

....he promised annual returns as high as 20% in exchange for loans of cash or crypto, but offered few specifics.

Sounds like a young Rubenstein. 

Update 1-4-23:  The last count in the indictment is an allegation that SBF conspired with others to violate campaign finance laws.  SBF made "enormous illegal contributions disguised to look as if they were coming from SBF’s “wealthy co-conspirators.”

Update 1-5-23:  SBF's General Counsel at FTX "told prosecutors what he knew of Bankman-Fried's use of customer funds to finance his business empire."  He had over a year to learn how SBF did business.

8-3-2021:  Cryptocurrency exchange FTX.US named a former Sullivan & Cromwell LLP and U.S. Commodity Futures Trading Commission attorney as general counsel.

Meanwhile Sullivan and Cromwell remains the law firm for FTX, before, during and after the revelations of gross mismanagement and fraud.

Update 1-12-23:  SBF offered doublespeak on his Robinhood shares. 

Carlyle to Be Your Debt Supplier?

The Carlyle Group plans to raise its third credit opportunities fund.  Yahoo Finance reported:

It’s set to have a broad mandate, with the ability to invest in distressed and performing private debt, as well as special situations. The private credit market is increasingly becoming the only option for companies looking for debt financing in Europe and the United States

Carlyle snatched Brintons away from its founding family in a credit opportunity.  It got Mrs. Fields in a similar move.  

Former CEO Kewsong Lee steered Carlyle deeper into packaged credit.   Carlyle generally avoids putting good money after bad for stressed affiliates (Semgroup, Synagro, ManorCare).  It remains to be seen if they extend loans to affiliates with the money.

Homeland Threat Private Equity

Face the Nation hosted two former Homeland Security Chiefs, Jeh Johnson (Blue Team) and Michael Chertoff (Red Team).  Both are private equity underwriters (PEU).  Johnson is with Enlightenment Capital while Chertoff has his own PEU in The Chertoff Group.

Politicians Red and Blue love PEU and increasingly, more are one.  Far more common is PEU hiring of former elected officials/public servants.  It's true in healthcare, as well as homeland security.

Update 11-28-22:  Last year Jeh Johnson spoke on "Creating a More Just World."  That's not private equity's reason for being.

Former Medicare Chiefs' PEU Positions

America's healthcare non-system is stressed and one destructive force is greed.  Private equity underwriters (PEU) targeted healthcare over the last few decades.  Policy makers have not reigned in the PEU boys.   

Consider the Center for Medicare/Medicaid Services (CMS), formerly known as the Health Care Financing Administration (HCFA).  Many Medicare Chiefs went on to PEU positions.  

Tom Scully -- Welsh, Carson, Anderson and Stowe

Nancy-Ann DeParle -- Consonance Capital Partners

Andy Slavitt -- Town Hall Ventures

Marilyn Tavenner -- Serves on Board of WCAS and Apollo affiliates, as well as an SPAC with Tom Scully and Jeb Bush

And there's more:

TPG Capital employed two Medicare Chiefs, Seema Verma and Leonard Schaeffer.  Both have multiple PEU positions on their resume. 

Medicare Direct Contracting stands to funnel more money to the greed and leverage boys.  Over fifty lawmakers wrote a letter in opposition to the program.

Medicare Direct Contracting will hand Traditional Medicare to Wall Street investors, without input from seniors, doctors, or even Congress.  

Most of the 53 Direct Contracting Entities are owned and controlled by investors, including private equity firms, Wall Street investors, and large private payers.

DCEs spend as low as 60 percent of their budget on patient care, allowing them to keep 40 percent of revenues for profit. Meanwhile, Traditional Medicare spends 98 percent of its budget on patient care.

The current Medicare Chief is the former Managing Director of Manatt Health, where she consulted on health care financing issues from 2016 to her appointment in 2021.  This information is not included in her Medicare bio, however you can download a large picture of her. It remains to be seen which PEU hires her after her "public service."  I expect the competition to be fierce.

Politicians Red and Blue cater to PEU and that's why healthcare greed remains unchecked.  America is poorly led by people serving the richest and greediest amongst us.

Update 12-3-22:  Private equity is destroying U.S. healthcare and has been for a parasite for decades. 

“PE firms are gobbling up physician and dental practices; homecare and hospital agencies; mental health, substance abuse, eating disorder, and autism services; urgent care facilities; and emergency medical transportation.”

And former Medicare Chiefs are leading the overcharge.

“Financial engineers… raise large amounts of money and borrow even more to buy firms and loot them. These kinds of private equity barons aren’t healthcare specialists who help finance useful health products and services, they do cookie-cutter deals targeting firms/practices/hospitals they believe have market power to raise prices, who can lay off workers or sell assets, and/or have some sort of legal loophole advantage. 

Often, they will destroy the underlying business. The giants of the industry, from Blackstone to Apollo to Bain, are the children of 1980s junk bond king and fraudster Michael Milken. They are essentially super-sized mobsters.”

Update 12-7-22:   Carlyle Group co-founder David Rubenstein said last week

Right now, at Carlyle, an enormous percentage of our investments go into healthcare, not only in the US, but also around the world. It is one of the fastest-growing and likely most stable areas of economic growth. When I worked in the White House in the late 1970s, 7% to 8% of US GDP was in healthcare. Today, it’s roughly 20%.

The profit curve is being bent in the direction of the greed and leverage boys.   

Update 8-28-23:  Scully's legacy is obscene pharmaceutical price increases.

Former Rep. Conaway CPA Lobbied for FTX

The former Chair of the House Ethics Committee and Certified Public Accountant Rep. Mike Conaway lobbied for FTX.   A filing showed Conaway Graves Group lobbied on the issues of:

Congressional and Executive Branch issues related to the formation of orderly digital asset markets.

Conaway Graves Group is likely listed in the legions of creditors seeking payment from the now bankrupt FTX.  

I would expect a CPA to ask two questions before taking on a client.  One, what is the makeup of the board of directors?  And two, who is the auditor and for how long?  A small insular board and no name auditor should've been red flags to an accountant.

Conaway used his accounting skills to sniff out a $1 million fraud at the National Republic Congressional Committee.  Something should have smelled bad at FTX.  CME Group President Patrick Duffy told CNBC he detected a fraud after meeting with Bankman-Fried.

Duffy's May 2022 testimony to a Congressional committee should have given Conaway doubts about representing FTX.  Snippets are below:

...FTX’s market maker and backstop liquidity provider plans imported from its offshore practices in low regulatory jurisdictions raises serious questions about the potential conflicts of interest embedded in the FTX model.

Finally, the FTX proposal eliminates critical customer protections. Under their model, market participants will lose important customer segregation protections and could be exposed to increased collateral investment losses.

...The FTX proposal is not innovation. It is an evasion of best practices and prudent risk management.

Here's what Conaway's client FTX founder Sam Bankman-Fried told that same committee:

(FTX) We also have strong customer protections under our model. It is a safe and conservative risk model which would have helped to alleviate some of the instances that we have seen with recent futures exchanges like the LME nickel fiasco earlier this year by having the collateral pre-funded at the clearinghouse rather than relying on credit, and having a real-time risk engine.

We also have enhanced customer protections. We have all of the customer protections that exist on traditional features exchanges and on FCMs because we understand deeply that we have a responsibility to ensure that if there is direct access to the platform, that users are still afforded the same level of protection. On top of that, we have further customer protections, suitability, and transparency than what you find on most other platforms.

Did Conaway Graves help write his testimony to Congress?  The public knows FTX customer protections were a bald faced lie, given Bankman-Fried siphoned off customer funds while running his  "personal fiefdom."

Update 11-24-22:  Conaway Graves cut its ties with FTX.  Both Red and Blue political teams received funding from FTX executives.

Update 11-25-22:  FTX could use a good CPA like Mike:

According to the company's lawyers, they have no reason to believe financial statements were ever audited. That means that no trained professionals from outside the company and its dozens of affiliates ever looked over FTX's books objectively, to ensure investors received truthful information.

Did Mike Conaway's team ask for an audit prior to representing FTX on Capital Hill?

The company "had a lack of corporate controls at a level that none of us in the profession that have looked at it so far have ever seen."

Mike may have seen something similar at the NRCC. 

Update 11-26-22:  Which flimsy excuse is true?  

Bankman-Fried blames "confusing internal labeling" for why billions in customer funds were transferred to Alameda.  

Bankman-Fried implies in an interview that he forgot about $8 billion in customer deposits.

Conaway couldn't sniff this one out. 

Update 11-30-22:  Just the group for a CPA to lobby on behalf of:

... a group of employees quit ...after becoming concerned about what they say was his (SBF) cavalier approach to risk, compliance and accounting.

Update 12-1-22:  Red flags Rep. Conaway missed:

FTX commissioned two different audit firms to audit its 2020 and 2021 financial statements. The reports by Armanino LLP, which signed the report for the U.S. operation, and by Prager Metis LLP, which signed the opinion for the offshore operations, were issued at the end of March 2022.

The first red flag anyone receiving these reports should have seen is that there were two different audit firms producing them. 

The second red flag for any reader of the 2021 audit reports is that neither the Armanino nor the Prager Metis audit reports for 2021 provides an opinion on the FTX US or FTX Trading internal controls over accounting and financial reporting.

SBF said he donated millions to Conaway's Red Team using dark money channels. 

Update 12-2-22:  More clues missed by Mike Conaway?  

FTX's interim CEO said that it was impossible to rely on any of the group's financial statements because it didn't have its own accounting department and was audited by a little-known firm that had an office in the metaverse. 

Update 12-19-22:  Another CPA Congressman Brad Sherman has been trying to ban cryptocurrencies in the U.S. for five years.

Update 12-20-22:  The New Yorker did a piece on lack of crypto regulation but failed to give CPA Mike Conaway his due as former Chair of the Ag Committee and FTX lobbyist..

FTX followed the standard playbook of influencing Washington, and that’s buying influence on a bipartisan basis

Just like the PEU boys. 

Update 1-4-23:  The last count in the indictment is an allegation that SBF conspired with others to violate campaign finance laws.  SBF made "enormous illegal contributions disguised to look as if they were coming from SBF’s “wealthy co-conspirators.” 

Update 1-8-23:  Institutional Risk Analyst reported:

The question is how state and federal regulators, as well as elected officials in both political parties, did not see that the entire construct of crypto currency was at best a form of money laundering and at worse outright fraud.

Update 9-19-23:  FTX's insider money funnel included SBF's parents.   I'm sure Mike was on it.

Update 10-5-23:  Unchained wrote the SBF story is really about elite corruption.

Update 10-8-23:  SBF stole customer money from the beginning at FTX. 

Biden Back at Rubenstein's Nantucket Compound

President Biden will celebrate Thanksgiving at the Nantucket estate of private equity underwriter David Rubenstein, co-founder of The Carlyle Group.  Rubenstein's preferred carried interest taxation remains in force, thanks to the Blue Lucys.  Uncle Sam helped Rubenstein build his billions in wealth, indirectly and directly.  Carlyle located in D.C. to have greater access to Uncle Sam's wallet and elected officials.

Biden stayed at Rubenstein's estate in 2014, 2016, possibly 2019, 2021 and 2022.  

Update 11-24-22:  Speculation formed as to whether Rubenstein and his new lady friend would dine with the Bidens during the holiday.  DailyMail only found the 2014 stay.

Update 12-27-22:  Biden spoke at the Kennedy Center Honorees reception in the East Room of The White House.

And a special thanks to our friend David Rubenstein.  David, you’ve become a friend.  (Applause.)  David — David is Chairman of the Board of the Kennedy Center here and probably puts more time in there than does in his business.  But thank you, David, for all you do.

U2's Bono, a PEU with Elevation Partners, was also honored at the event.

Before FTX, Abraaj Failed

FTX founder Sam Bankman-Fried ran the cryptocurrency exchange and affiliated companies as “personal fiefdoms." 

The Abraaj Group, the Middle East's largest private equity fund failed similarly in 2018.

Liquidators overseeing Abraaj Group’s insolvency now estimate chief executive officer Arif Naqvi’s alleged theft to have cost the firm $385 million, an amount significantly more than what prosecutors claimed.

The SEC took action in the matter against a U.S. based Abraaj managing partner for fraud:

...potential investors were provided with an inflated performance track record for existing investments in prior funds managed by Abraaj's investment adviser entity...

...personnel responsible for valuations stated internally that certain write-downs were needed for a number of portfolio companies held by private equity funds managed by AIML. According to the order, Bourgeois-one of Abraaj's managing partners, the CEO of its New York office, and the global head of fundraising and investor relations-was aware of these advised write-downs on at least two separate occasions. The order finds that Bourgeois recommended that AIML not apply the write-downs (or delay doing so) to avoid the negative impact on APEF VI fundraising he anticipated would result if AIML's lower track record was shared with potential investors. 

Where was the oversight from the board or financial audit firms?  Absent.

....conflicts of interest between auditors and the private equity groups that employ them are an “eternal problem” in the sector.

KPMG played a key role enabling the Abraaj debacle.  FT reported:

KPMG has been blocked from winning new audit contracts in Abu Dhabi after regulators removed the Big Four firm from the list of accountants authorised to sign off companies’ financial statements. The move by the Abu Dhabi Accountability Authority comes just weeks after a separate watchdog in Dubai fined KPMG and one of its former partners $2mn for failings in its auditing of Abraaj, the emerging markets private equity group that collapsed in 2018. 

Failure to write down holdings to keep inflated performance figures is the current state of private equity.  That could keep the SEC very busy.