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(Kitco News) -
After a relatively quiet New Year following the release of FTX founder Sam Bankman-Fried on bail in late December, the bankruptcy and criminal court proceedings kicked into high gear this week with a series of new rulings and revelations that impact the exchange’s creditors and former leadership, and raise new questions about their relationships with institutions and one another.
On Wednesday afternoon, Judge Lewis A. Kaplan of the Southern District of New York, who is presiding over Bankman-Fried’s criminal trial, granted the request first made by the press on Jan. 3 to unseal the two signatories of SBF’s bail agreement. They are Andreas Paepcke, a Senior Research Scientist at Stanford University, and Larry Kramer, dean emeritus of Stanford Law School. This proved interesting, as both Joseph Bankman and Barbara Fried, Sam’s parents, are professors at Stanford Law School, and begs the question as to why these two eminences would assume the $250 million risk of his absconsion.
On Tuesday, Judge Kaplan ruled that Virtual Private Networks (VPN), which hide a user’s IP address, should be part of the list of privacy technologies that Bankman-Fried is banned from using under the conditions of his bail after Federal prosecutors filed a letter the day before alleging that he’d used VPNs on at least two occasions.
Sam’s lawyer claimed he only used the VPN to watch NFL football games, but prosecutors worried he could use the technology to “access international crypto exchanges, allow data transfers without detection and offer a covert method of getting onto the dark web.”
Things were even busier in Delaware on Wednesday, as U.S. bankruptcy judge John T. Dorsey green-lit a request from FTX's new management and the Official Committee of Unsecured Creditors to serve subpoenas to a number of exchange insiders demanding documents and correspondence related to misappropriated funds.
The subpoenas cast a wider net than previous court actions, as they also include SBF’s father, the aforementioned Joseph Bankman, who is asked for documents related to real estate purchased by FTX in the Bahamas, including the $16 million mansion for Sam’s parents.
Other FTX company insiders include former Alameda Research CEO Caroline Ellison and FTX cofounder Gary Wang, both of whom cut deals to cooperate with the Justice Department in December, and Nishad Singh, who is being asked to share documentation on FTX’s automated liquidation engine which allegedly contained exceptions for Alameda and who also recently met with prosecutors.
All the subpoenas include the demand to turn over all correspondence between the insiders and other FTX and FTX US executives. The requested documents must be delivered to the court no later than Feb. 16, except in the case of Bankman-Fried himself, who has until Feb. 17 due to the volume of documentation that is being demanded of him.
Judge Dorsey also denied a Dec. 1 motion from U.S. Trustee Andrew Vara to appoint an independent examiner for FTX, saying it would constitute an “unnecessary burden” on debtors and creditors.
“There’s no question that if an examiner is appointed here, the cost of the examination given the scope suggested by the Trustee at the hearing, would be in the tens of millions of dollars, and would likely exceed one hundred million dollars,” Dorsey said. “Every dollar spent in these cases on administrative expenses is a dollar less to the creditors.”
And the court heard on Wednesday that the exchange sent $7.7 billion in assets from the Bahamian estate to its U.S. companies’ accounts ahead of the Nov. 11 bankruptcy filing.
Christopher Shore, a lawyer representing the Bahamian court-appointed provisional liquidators, said $5.6 billion was transferred from FTX Digital, the exchange’s Bahamas unit, to U.S.-registered FTX Trading, while an additional $2.1 billion went to California-based Alameda Research. The Bahamas believes that these assets should be under their administration.
FTX lawyers addressed Shore’s statements in the context of the cooperation agreement struck between the U.S. and Bahamian bankruptcy lawyers, saying there remains a great deal to be resolved.
“The cooperation agreement is a starting point,” an FTX representative said. “But the issues as to whether assets belong in the Bahamian estate or in the U.S. estate are open issues.”
Last but not least, the New York Times reported on Wednesday that FTX’s new management is in talks to recover the $400 million investment Bankman-Fried made in fledgling hedge fund Modulo Capital shortly before FTX and Alameda imploded. According to the report, the money has been sitting safely in an account at JPMorgan, and Modulo’s founders are negotiating with FTX lawyers “to release them from certain legal liabilities in exchange for returning the money.”
The Modulo Capital story echoes themes that run through all of Bankman-Fried’s business dealings, where personal relationships result in very senior roles for relatively inexperienced people.
As Alameda was being run into the ground by SBF’s former romantic partner and Jane Street colleague Caroline Ellison, Modulo was formed in March of 2022 by former Jane Street colleagues Duncan Rheingans-Yoo, who had graduated from university just two years prior, and Xiaoyun (Lily) Zhang, who multiple sources claim had also been romantically involved with Bankman-Fried.
The new firm was also created and run out of the Albany residential compound in the Bahamas that housed FTX and Alameda, along with SBF and Ellison. Zhang and Rheingans-Yoo were Modulo’s only directors, according to its Bahamian incorporation papers, and Zhang and Bankman-Fried remained friends and would “sometimes travel together on charter flights to New York from the Bahamas.”
The Modulo investment was a point of contention among SBF’s inner circle, with Ellison expressing “reservations” about the arrangement.
