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(Kitco News) -
While Sam Bankman-Fried remains in the Bahamas, the U.S. government appears to be closing in on the former FTX CEO from all sides, with reports of a new Justice Department investigation underway even as Congress threatens to compel his testimony next week.
On Wednesday, the New York Times reported that prosecutors in the Southern District of New York have launched an investigation into Bankman-Fried’s potential involvement in the collapse of linked cryptocurrencies TerraUSD and Luna earlier this year.
Specifically, the Justice Department wants to know whether SBF used FTX and Alameda Research to manipulate the market for the two cryptocurrencies this past spring, leading to their collapse and kicking off a cascade of devaluations and illiquidity across the crypto ecosystem.
Bankman-Fried said he was “not aware of any market manipulation and certainly never intended to engage in market manipulation” in a statement in response to the TerraUSD/Luna investigation announcement. “To the best of my knowledge, all transactions were for investment or for hedging.”
According to the report, in May, cryptocurrency market makers received a high volume of “sell” orders for TerraUSD. Each order was for a relatively small number of the stablecoin, but there were many orders and they were placed very quickly.
This sudden stream of sell orders overwhelmed the system, as market makers couldn’t find enough buyers, which forced down the price of TerraUSD, causing a corresponding drop in the linked Luna price.
According to the report, the majority of these anomalous TerraUSD sell orders came from Alameda Research, which was also massively short on Luna, and stood to profit big from the price drop. However, the sell orders effectively destabilized the crypto pairing and resulted in the collapse of the entire TerraUSD-Luna ecosystem. The collapse ultimately bankrupted several major players in the crypto industry and erased over $1 trillion in value from the broader crypto market.
It now appears that the crash of TerraUSD and Luna – which may have been deliberately orchestrated by Bankman-Fried’s hedge fund – may also have been the key catalyst for the collapse of FTX and Alameda six months later, as the failed trades forced Alameda to ‘borrow’ billions in customer funds from FTX. This resulted in the funds being unavailable for withdrawal when customers began panicking in early November.
The investigation, which is still in the early stages, is part of a broader inquiry into the implosion of FTX and Alameda which led to the two firms filing for Chapter 11 bankruptcy protection on Nov. 11. It is the latest in a growing list of legal and regulatory actions taken against Bankman-Fried and his partners at FTX and Alameda.
The U.S. Securities and Exchange Commission is also investigating whether FTX’s transfer of billions of dollars’ worth of customer funds to Alameda was against the law. And even before the run on FTX which led to its downfall earlier this month, the exchange was under investigation for possible violations of U.S. money-laundering laws.
And Congressional investigations into the collapse of FTX are gearing up next week, with Maxine Waters, Chair of the U.S. House Committee on Financial Services, issuing her most stern threat yet in a week-long series of exchanges with SBF.
Lies are circulating @CNBC that I am not willing to subpoena @SBF_FTX. He has been requested to testify at the December 13th hearing. A subpoena is definitely on the table. Stay tuned.
— Maxine Waters (@RepMaxineWaters) December 8, 2022
Bankman-Fried also continues to lose business allies and celebrity endorsers as the FTX brand becomes more toxic by the day. Venture capitalist and Shark Tank host Kevin O’Leary told CNBC that he invested around $10 million of his own money into FTX, and he claims to have lost all of it when the company filed for bankruptcy.
“I felt that getting involved, when I was approached by Sam Bankman-Fried, that I can get an inside seat,” he said, adding that he saw “unbelievable” interest on the part of institutions for an equity stake in FTX. “Total deal was just under $15 million, all in,” said O’Leary. “I put about $9.7 million into crypto. I think that’s what I lost. I don’t know. It’s all at zero.”
O’Leary also told CNBC he had more than $1 million in equity in FTX, which also went to zero when the company declared bankruptcy.
It was also repored on Wednesday that superstar recording artist Taylor Swift nearly ended up in the same position as Tom Brady, Gisele Bundchen and other celebrity brand ambassadors, as she was in talks with FTX on a $100 million sponsorship deal months before the firm imploded. Bankman-Fried was reportedly the driving force behind the efforts, and the price tag, which his own marketing team balked at, characterizing the deal as “front of the soccer jersey level prices.”
Swift’s camp said that the sponsorship talks were never at the brand-ambassador level. “Taylor would not, and did not, agree to an endorsement deal,” a spokesperson for the pop star said. “The discussion was around a potential tour sponsorship that did not happen.”
