The Collapse of FTX: Case, Materials, and Questions

February 10, 2023

Frank Fagan*

Abstract
This case study was designed for a law school course in Corporate Finance to help students
better understand the balance sheet, liquidity, collateral haircuts, the use of rules versus
standards in financial regulation, and the challenges of prosecuting financial crime. The case
can easily be used for courses in Securities Regulation, White Collar Crime, and Compliance,
as well as Financial Instruments and Capital Markets. It can also be used in business school
courses when teaching related areas.

The materials consist of a news report, a Department of Justice press release, a summary of
the elements of wire fraud and criminal conspiracy, the leaked FTX balance sheet, and the
criminal indictment of Sam Bankman-Fried. The materials are followed by a series of questions
that focus on the concepts listed above. I have appended a short teacher’s guide, which
summarizes how I discuss the questions in class.

* Associate Professor, South Texas College of Law Houston. Please send any comments or suggestions to
ffagan@stcl.edu. Some of the questions in this case study refer to famous business law cases often taught at
American law schools. For instance, money transferred from FTX to Alameda is analogous to the personal
“loans” found in Francis v. New Jersey. I teach FTX after working through several introductory chapters of Robert
Rhee’s excellent ESSENTIAL CONCEPTS OF BUSINESS FOR LAWYERS (3d ed. 2020). In his treatment of the balance
sheet, Rhee includes Francis as well as the other cases mentioned in the questions below.

Electronic copy available at: https://ssrn.com/abstract=4353923

 The Collapse of FTX
CASE AND MATERIALS

Excerpt from Niccolo Conte, Visualized: FTX’s Leaked Balance Sheet, VISUAL CAPITALIST
(Nov. 15, 2022), https://www.visualcapitalist.com/ftx-leaked-balance-sheet-visualized/

Visualizing FTX’s Balance Sheet before Bankruptcy

In a difficult year for the crypto space that has been full of hacks, failing funds, and
decentralized stablecoins going to zero, nothing has compared to FTX and Sam Bankman-
Fried’s (SBF) rapid implosion.

After an astronomical rise in the crypto space over the past three years, crypto exchange FTX
and its founder and CEO SBF have come crashing back down to earth, largely unraveled by
their misuse of customer funds and illicit relationship with trading firm Alameda Research.

This [spreadsheet] is FTX’s leaked balance sheet dated to November 10th [. . .].1 The
spreadsheet shows nearly $9 billion in liabilities and not nearly enough illiquid cryptocurrency
assets to cover the hole.

How did FTX wind up in this position?

How FTX’s Bankruptcy Unfolded

FTX’s eventual bankruptcy was sparked by a report on November 2nd by CoinDesk citing
Alameda Research’s balance sheet. The article reported Alameda’s assets to be $14.6 billion,
including $3.66 billion worth of unlocked FTT and $2.16 billion of FTT collateral.

With more than one-third of Alameda’s assets tied up in FTX’s exchange token FTT (including
loans backed by the token), eyebrows were raised among the crypto community.

1 Editor’s note: the balance sheet is appended below at page 5.

Electronic copy available at: https://ssrn.com/abstract=4353923

Four days later on November 6th, Alameda Research’s CEO, Caroline Ellison, and Sam
Bankman-Fried addressed the CoinDesk story as unfounded rumors. However, on the same
day, Binance CEO Changpeng Zhao (CZ) announced that Binance had decided to liquidate
all remaining FTT on their books, kicking off a -7.6% decline in the FTT token on the day.

Back and Forth with Binance’s CZ

While Ellison publicly offered to buy CZ’s FTT directly “over the counter” to avoid further
price declines and SBF claimed in a now-deleted tweet that “FTX is fine. Assets are fine.”,
FTX users were withdrawing their funds from the exchange.

Less than 24 hours later on November 7th, both SBF and CZ tweeted that Binance had
signed a non-binding letter of intent for the acquisition of FTX, pending due diligence.
The next day, the acquisition fell apart as Binance cited corporate due diligence, leaving SBF
to face a multi-directional liquidity crunch of users withdrawing funds and rapidly declining
token prices that made up large amounts of FTX and Alameda’s assets and collateral for loans.

FTX’s Liabilities and Largely Illiquid Assets

In the final days before declaring bankruptcy, FTX CEO Sam Bankman-Fried attempted a
final fundraising in order restore stability while billions in user funds were being withdrawn
from his exchange.

The balance sheet he sent around to prospective investors was leaked by the Financial Times,
and reveals the exchange had nearly $9 billion in liabilities while only having just over $1 billion
in liquid assets. Alongside the liquid assets were $5.4 billion in assets labeled as “less liquid”
and $3.2 billion labeled as “illiquid”.

When examining the assets listed, FTX’s accounting appears to be poorly done at best, and
fraudulently deceptive at worst.

Of those “less liquid” assets, many of the largest sums were in assets like FTX’s own exchange
token and cryptocurrencies of the Solana ecosystem, which were heavily supported by FTX

Electronic copy available at: https://ssrn.com/abstract=4353923

and Sam Bankman-Fried. On top of this, for many of these coins the liquidity simply wouldn’t
have been there if FTX had attempted to redeem these cryptocurrencies for U.S. dollars or
stablecoin equivalents.

While the liquid and less liquid assets on the balance sheet amounted to $6.3 billion (still not
enough to equal the $8.9 billion in liabilities), many of these “less liquid” assets may as well
have been completely illiquid.

Relationship with Alameda Research

When looking at FTX’s financials in isolation, it’s impossible to understand how one of
crypto’s largest exchanges ended up with such a lopsided and illiquid balance sheet. Many of
the still unfolding details lie in the exchange’s relationship with SBF’s previous venture that he
founded, trading firm Alameda Research.

Founded by SBF in 2017, Alameda Research primarily operated as a delta-neutral (a term that
describes trading strategies like market making and arbitrage that attempt to avoid taking
directional risk) trading firm. In the summer of 2021, SBF stepped down from Alameda
Research to focus on FTX, however his influence and connection with the firm was still deeply
ingrained.

A report from the Wall Street Journal cites how Alameda was able to amass crypto tokens
ahead of their announced public FTX listings, which were often catalysts in price surges.
Alongside this, a Reuters story has revealed how SBF secretly moved $10 billion in funds to
Alameda, using a bookkeeping “back door” to avoid internal scrutiny at FTX.

While SBF responded to the Reuters story by saying they “had confusing internal labeling and
misread it,” there are few doubts that this murky relationship between Alameda Research and
FTX was a fatal one for the former billionaire’s empire.

Electronic copy available at: https://ssrn.com/abstract=4353923

 FTX Balance Sheet (unaudited), ~November 2022

Electronic copy available at: https://ssrn.com/abstract=4353923

 Department of Justice
Office of Public Affairs
FOR IMMEDIATE RELEASE
Tuesday, December 13, 2022

FTX Founder Indicted for Fraud, Money Laundering, and

Campaign Finance Offenses

A federal grand jury in Manhattan returned an indictment today

charging Samuel Bankman-Fried, aka SBF, 30, of Stanford, California,
with conspiracy to commit wire fraud, wire fraud, conspiracy to
commit commodities fraud, conspiracy to commit securities fraud,
conspiracy to commit money laundering, and conspiracy to defraud
the Federal Election Commission and commit campaign finance
violations.

The charges in the indictment arise from an alleged wide-ranging

scheme by Bankman-Fried to misappropriate billions of dollars of
customer funds deposited with FTX, the international cryptocurrency
exchange founded by Bankman-Fried, and mislead investors and
lenders to FTX and to Alameda Research, the cryptocurrency hedge
fund also founded by Bankman-Fried. Bankman-Fried was arrested
yesterday in the Bahamas on these charges and will be presented before
a Bahamian magistrate judge today.

“The Justice Department has filed charges alleging that Samuel

Bankman-Fried perpetrated a range of offenses in a global scheme to
deceive and defraud customers and lenders of FTX and Alameda, the
defendant’s crypto hedge fund, as well as a conspiracy to defraud the
United States government,” said Attorney General Merrick B.
Garland. “We allege that the defendant conspired to defraud
customers by misappropriating their deposits; to defraud lenders; to
commit securities fraud and money laundering; and to violate
campaign finance laws. As this indictment demonstrates, the U.S.

Electronic copy available at: https://ssrn.com/abstract=4353923

Department of Justice will aggressively investigate and prosecute
alleged criminal wrongdoing in the financial system and violations of
federal elections laws. We will continue to work to ensure U.S. capital
markets operate honestly and with the integrity that investors, lenders,
and the American people are entitled to.”

“One month ago, FTX collapsed, causing billions of dollars in losses

to its customers, lenders, and investors,” said U.S. Attorney Damian
Williams for the Southern District of New York. “Now, a federal grand
jury in New York has indicted the former founder and chief executive
officer of FTX and charged him with crimes related to the phenomenal
downfall of that one-time cryptocurrency exchange, including fraud on
customers, investors, lenders, and our campaign finance system. As
today’s charges make clear, this was not a case of mismanagement or
poor oversight, but of intentional fraud, plain and simple.”

“As the indictment today alleges, Bankman-Fried knowingly defrauded

the customers of FTX.com through the misappropriation of the
customer deposits to pay expenses and debts of a different company
he also owned as well as make other investments,” said Assistant
Director Michael J. Driscoll of the FBI New York Field Office. “If you
deceive and defraud your customers, the FBI will be persistent in our
efforts to bring you to justice.”

According to the indictment, Bankman-Fried was the founder and

chief executive officer of FTX, an international cryptocurrency
exchange. Since 2019, Bankman-Fried and his co-conspirators
perpetrated a scheme to defraud customers of FTX by
misappropriating billions of dollars of those customers’ funds.
Bankman-Fried allegedly used billions of dollars of FTX customer
funds for his personal use, to make investments and millions of dollars
of political contributions to federal political candidates and

Electronic copy available at: https://ssrn.com/abstract=4353923

committees, and to repay billions of dollars in loans owed by Alameda
Research, a cryptocurrency hedge fund also founded by the Bankman-
Fried. Bankman-Fried also allegedly defrauded lenders to Alameda
Research and equity investors in FTX by concealing his misuse of
customer deposits in financial information that was provided to them.

Bankman-Fried and his co-conspirators made millions of dollars in

political contributions funded by Alameda Research to federal political
candidates and committees in advance of the 2022 election. To conceal
the fact that those contributions were paid for using funds from a
corporation and to evade contribution limits and reporting
requirements, Bankman-Fried caused contributions to be reported in
the names of co-conspirators rather than in the name of the true source
of the funds.

Bankman-Fried is charged with two counts of wire fraud conspiracy,

two counts of wire fraud, and one count of conspiracy to commit
money laundering, each of which carries a maximum sentence of 20
years in prison. He is also charged with conspiracy to commit
commodities fraud, conspiracy to commit securities fraud, and
conspiracy to defraud the United States and commit campaign finance
violations, each of which carries a maximum sentence of five years in
prison. A federal district court judge will determine any sentence after
considering the U.S. Sentencing Guidelines and other statutory factors.

U.S. Attorney General Merrick B. Garland, U.S. Attorney Damian

Williams for the Southern District of New York, and Assistant
Director in Charge Michael J. Driscoll of the FBI New York Field
Office made the announcement.

The FBI is investigating the case with the assistance of the Justice
Department’s Office of International Affairs, National

Electronic copy available at: https://ssrn.com/abstract=4353923

Cryptocurrency Enforcement Team, Public Integrity Section, and the
DEA, as well as that of the Securities and Exchange Commission and
the Commodity Futures Trading Commission, both of which
separately initiated civil proceedings against Bankman-Fried today.
The Bahamas Office of the Attorney-General & Ministry of Legal
Affairs as well as the Royal Bahamas Police Force also provided
assistance. The Money Laundering and Transnational Criminal
Enterprises Unit and Assistant U.S. Attorneys Samuel Raymond and
Thane Rehn for the Southern District of New York also contributed
to the investigation.

The U.S. Attorney’s Office for the Southern District of New York’s
Securities and Commodities Fraud Task Force is handling the case.
Assistant U.S. Attorneys Nicolas Roos and Danielle Sassoon for the
Southern District of New York are prosecuting the case.

An indictment is merely an allegation. All defendants are presumed innocent until

proven guilty beyond a reasonable doubt in a court of law.

Electronic copy available at: https://ssrn.com/abstract=4353923

 The Key Elements of Wire Fraud
U.S. Department of Justice Criminal Resource Manual Section 941.18
U.S.C. 1343

1) that the defendant voluntarily and intentionally devised or

participated in a scheme to defraud another out of money;
2) that the defendant did so with the intent to defraud;
3) that it was reasonably foreseeable that interstate wire
communications would be used; and
4) that interstate wire communications were in fact used.

Wire fraud generally carries a maximum sentence of 20 years

imprisonment and fines of up to $250,000.

The indictment below includes counts of wire fraud, as well as

commodities and securities fraud. There is an ongoing debate as to
whether crypto assets should be regulated by the Commodity Futures
Trading Commission or the SEC. Notice that in the indictment below,
the count related to commodities fraud references “swaps”. Swaps are
a type of derivative that we will study later in the course. The
indictment also includes violations of federal election laws related to
FTX’s political campaign contributions.

Most of the counts include a parallel count of conspiracy. You may

recall from your criminal law course that conspiracy consists of three
elements:

1. Two or more people agree to commit a crime

2. All conspirators possess the specific intent to commit the
crime
3. At least one of the conspirators commits an overt act (most
states)

10

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See JOSHUA DRESSLER, UNDERSTANDING CRIMINAL LAW § __
(2011).

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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK

UNITED STATES OF AMERICA

V.

SAMUEL BANKMAN-FRIED,
a/k/a “SBF,”
r

SEALED INDICTMENT

22 Cr.
-
Defendant. :

COUNT ONE
(Conspiracy to Commit Wire Fraud on Customers)

The Grand Jury Charges:

1. From at least in or about 2019, up to and including

inor about November 2022, in the Southern District of New

York, andelsewhere, SAMUEL BANKMAN-FRIED, a/k/a “SBF,” the

defendant, ’and others known and unknown, willfully and

knowingly did combine, conspire, confederate, and agree

together and with each other to commit wire fraud, in

violation of Title 18, United States Code,Section 1343.

2. It was a part and object of the conspiracy that

SAMUELBANKMAN-FRIED, a/k/a “SBF,” the defendant, and others

known and unknown, knowingly having devised and intending to

devise a scheme and artifice to defraud, and for obtaining

money and property bymeans of false and fraudulent pretenses,

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 representations, and promises, would and did transmit and

cause to be transmitted by means of wire, radio, and

television communication in interstate and foreign commerce,

writings, signs, signals, pictures, and sounds for the purpose of

executing such scheme and artifice, inviolation of Title 18, United

States Code, Section 1343, to wit,BANKMAN-FRIED agreed with others to

defraud customers of FTX.comby misappropriating those customers’

deposits and using thosedeposits to pay expenses and debts of Alameda

Research, BANKMAN-FRIED’s proprietary crypto hedge fund, and to make

investments.

(Title 18, United States Code, Section 1349.)

COUNT TWO
(Wire Fraud on Customers)

The Grand Jury further charges:

3. From at least in or about 2019, up to and including in

or about November 2022, in the Southern District of New York and

elsewhere , SAMUEL BANKMAN - FRIED , a/k/a ” SBF , ” the defendant knowingly having

devised and intending to devise a scheme andartifice to defraud, and for

obtaining money and property by means of false and fraudulent pretenses,

representations and promises, transmitted and caused to be transmitted by

means of wire, radio,and television communication in interstate and foreign

commerce, writings, signs, signals, pictures, and sounds for the purpose

ofexecuting such scheme and artifice, to wit, BANKMAN-FRIED, along with

others, engaged in a scheme to defraud customers of FTX.com by

misappropriating those customers’ deposits, and using those deposits to

pay expenses and debts of Alameda Research, BANKMAN-FRIED’s proprietary

crypto hedge fund, and to make investments.(Title 18, United States Code,
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Sections 1343 and 2.)

COUNT THREE
(Conspiracy to Commit Wire Fraud on Lenders)

[...]

COUNT FOUR
(Wire Fraud on Lenders)

[...]
COUNT FIVE
(Conspiracy to Commit Commodities Fraud)

The Grand Jury further charges:

7. From at least in or about 2019, up to and including in

or about November 2022, in the Southern District of New York,

and elsewhere, SAMUEL BANKMAN-FRIED, a/k/a “SBF,” the

defendant, and others known and unknown, willfully and

knowingly did combine, conspire, confederate, and agree

together and with each other tocommit an offense against the

United States, to wit, commodities fraud, in violation of

Title 7, United States Code, Sections 9(1) and 13(a)(5), and

Title 17, Code of Federal Regulations, Section 180.1.a.

It was a part and an object of the conspiracy that SAMUEL

BANKMAN-FRIED, a/k/a “SBF,” the defendant, and others known

and unknown, willfully and knowingly, would and did,

directly andindirectly, use and employ, and attempt to use

and employ, inconnection with a swap, a contract of sale

of a commodity in interstate commerce, and for future delivery

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 on and subject to the rules of a registered entity, a

manipulative and deceptive device and contrivance, in

contravention of Title 17, Code of Federal Regulations,

Section 180.1, by: (a) using and employing, and attempting

to use and employ, a manipulative device, scheme, and artifice

to defraud; (b) making, and attempting to make, an untrue and

misleading statement of a material fact and omitting to state

a material fact necessary in order to make the statements made not

untrue and misleading; and (c) engaging, and attempting to engage

in an act, practice, and course of business, which operated and

would operate as a fraud and deceit upon a person, in violation of

Title 7, United States Code, Sections 9(1) and 13(a)(5), to wit,

BANKMAN-FRIED agreed with others to defraud customers of FTX.com

trading or intending to trade swaps by misappropriating those

customers’ deposits and using those deposits to pay expenses and

debts of Alameda Research, BANKMAN-FRIED’s proprietary crypto

hedge fund, and to make investments.

8. In furtherance of the conspiracy and to effect the

illegal object thereof, the following overt act, among others, was

committed in the Southern District of New York and elsewhere: in

or about June 2022, SAMUEL BANKMAN-FRIED, a/k/a “SBF,” the

defendant, and others misappropriated FTX.com customer deposits in

order to, among other things, satisfy loan obligations owed by

Alameda Research.

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 (Title 18, United States Code, Section 371.)

COUNT SIX
(Conspiracy to Commit Securities Fraud)

The Grand Jury further charges:

9. From at least in or about May 2022, up to and including

in or about November 2022, in the Southern District of New York,

and elsewhere, SAMUEL BANKMAN-FRIED, a/k/a “SBF,” the defendant,

and others known and unknown, willfully and knowingly did combine,

conspire, confederate, and agree together and with each other to

commit an offense against the United States, to wit, securities

fraud in violation of Title 15, United States Code, Sections 78j(b)

and 78ff, and Title 17, Code of Federal Regulations, Section

240.10b-5.

10. It was a part and an object of the conspiracy that SAMUEL

BANKMAN-FRIED, a/k/a “SBF,” the defendant, and others known and

unknown, willfully and knowingly would and did, directly and

indirectly, by use of a means and instrumentality of interstate

commerce and of the mails, änd of a facility of a national

securities exchange, use and employ, in connection with the

purchase and sale of a security registered on a national securities

exchange and any security not so registered, a manipulative and

deceptive device and contrivance, in violation of Title 17, Code

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of Federal Regulations, Section 240.10b-5, by: (a) employing a

device, scheme, and artifice to defraud; (b) making an untrue

statement of material fact and omitting to state a material fact

necessary in order to make the statements made, in the light of

the circumstances under which they were made, not misleading; and

(c) engaging in an act, practice, and course of business which

operated and would operate as a fraud and deceit upon a person, in

violation of Title 15, United States Code, Sections 78j(b) and

78ff, to wit, BANKMAN-FRIED agreed with others to engage in a

scheme to defraud investors in FTX.com by providing false and

misleading information to those investors regarding FTX.com’s

financial condition.

11. In furtherance of the conspiracy and to effect the

illegal object thereof, the following overt act, among others, was

committed in the Southern District of New York and elsewhere: on

or about September 18, 2022, SAMUEL BANKMAN-FRIED, a/k/a “SBF,”

the defendant, caused an email to be sent to an FTX investor in

New York, New York that contained materially false information

about FTX’s financial condition.

(Title 18, United States Code, Section 371.)

COUNT SEVEN
(Conspiracy to Commit Money Laundering)

The Grand Jury further charges:

12. From at least in or about 2020, up to and including in

or about- November 2022, in the Southern District of New York, and

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elsewhere, SAMUEL BANKMAN-FRIED, a/k/a “SBF,” the defendant, and

others known and unknown, intentionally and knowingly did combine,

conspire, confederate, and agree together and with each other to

violate Title 18, United States Code, Sections 1956(a)(1)(B)(i)

and 1957(a).

13. It was a part and an object of the conspiracy that SAMUEL

BANKMAN-FRIED, a/k/a “SBF,” the defendant, and others known and

unknown, in an offense in and affecting interstate and foreign

commerce, knowing that the property involved in a financial

transaction, to wit, one or more monetary transfers, represented

the proceeds of some form of unlawful activity, would and did

conduct and attempt to conduct such a financial transaction, which

in fact involved the proceeds of specified unlawful activity, to

wit, the wire fraud alleged in Count Two of this Indictment,

knowing that the transaction was designed in whole and in-part to

conceal and disguise the nature, the location, the source, the

ownership, and the control of the proceeds of specified unlawful

activity, in violation of Title 18, United States Code, Section

19 5 6 (a) (I) (B) (i) .

14. It was a further part and an object of the conspiracy

that SAMUEL BANKMAN-FRIED, a/k/a “SBF,” the defendant, and others

known and unknown, within the United States, would and did

knowingly engage and attempt to engage in a monetary transaction

in criminally derived property of a value greater than $10,000 and

that was derived from specified unlawful activity, to wit, the

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wire fraud alleged in Count Two of this Indictment, in violation

of Title 18, United States Code, Section 1957(a).

(Title 18, United States Code, Section 1956(h).)

COUNT EIGHT
(Conspiracy to Defraud the United States and Violate the
Campaign Finance Laws)

The Grand Jury further Charges:

15. From at least in or about 2020, up to and including in

or about November 2022, in the Southern District of New York, and

elsewhere, SAMUEL BANKMAN-FRIED, a/k/a “SBF,” the defendant, and

others known and unknown, knowingly did combine, conspire,

confederate, and agree together and with each other to defraud the

United States, in violation of Title 18, United States Code,

Section 371, and willfully and knowingly did combine, conspire,

confederate, and agree together and with each other to commit

offenses against the United States by engaging in violations of

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federal law involving the making, receiving, and reporting of a

contribution, donation, or expenditure, in violation of Title 52,

United States Code, Sections 30109(d)(1)(A) & (D)

16. It was part and an object of the conspiracy that SAMUEL

BANKMAN-FRIED, a/k/a “SBF,” the defendant, and others known and

unknown, would and did defraud the United States, and an agency

thereof, by impairing, obstructing, and defeating the lawful

functions of a department and agency of the United States through

deceitful and dishonest means, to wit, the Federal Election

Commission’s function to administer federal law concerning source

and amount restrictions in federal elections, including the

prohibitions applicable to corporate contributions and conduit

contributions, in violation of Title 18, United States Code,

Section 371.

17. It was a further part and object of the conspiracy that

SAMUEL BANKMAN-FRIED, a/k/a “SBF,” the defendant, and others known

and unknown, would and did knowingly and willfully make

contributions to candidates for federal office, joint fundraising

committees, and independent expenditure committees in the

other persons, aggregating to $25,000 and more in a calendar year,

in violation of Title 52, United States Code, Sections 30122 and

30109(d)(1)(A) & (D).

18. It was a further part and object of the conspiracy that

SAMUEL BANKMAN-FRIED, a/k/a “SBF,” the defendant, and others known

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and unknown, would and did knowingly and willfully make

contributions to candidates for federal office and joint

fundraising committees a tion t tO 25 000 and

more in a calendar year, in violation of Title 52, United States

Code, Sections 30118 and 30109(d)(1)(A).

20. In furtherance of the conspiracy and to effect the

illegal objects thereof, the following overt act, among others,

was committed in the Southern District of New York and elsewhere:

in or about 2022, SAMUEL BANKMAN-FRIED a/k/a “SBF,” the defendant,

and one or more other conspirators agreed to and did make corporate

contributions to candidates and committees in the Southern

District of New York that were reported in the name of another

person.

Title 18, United States Code, Section 371.)

FORFEITURE ALLEGATIONS

21. As a result of committing the offenses alleged in Counts

One, Two, Three, and Four of this Indictment, SAMUEL BANKMAN-

FRIED, a/k/a “SBF,” the defendant, shall forfeit to the United

States, pursuant to Title 18, United States Code,

81 a 1 C and Title 28 United States Code, Section

2461(c), any and all property, real and personal, that constitutes

or is derived from proceeds traceable to the commission of said

offenses, including but not limited to a sum of money in United

States currency representing the amount of proceeds traceable

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to the commission of said offenses.

22. As a result of committing the offense alleged in Count

Seven of this Indictment, SAMUEL BANKMAN-FRIED, a/k/a “SBF,” the

defendant, shall forfeit to the United States, pursuant to Title

18, United States Code, Section 982(a)(1), any and all property,

real and personal, involved in said offense, or any property

traceable to such property, including but not limited to a sum of

money in United States currency representing the amount of property

involved in said offense.

23. If any of the above-described forfeitable property, as

a result of any act or omission of the defendant: (a) cannot be

located-upon the— exercise oi due diligence, (b) has been

transferred or sold to, or deposited with, a third person; (c) has

been placed beyond the jurisdiction of the Court; (d) has been

substantially diminished in value; or (e) has been commingled with

other property which cannot be subdivided without difficulty, it

is the intent of the United States, pursuant to Title 21, United

States Code, Section 853(p) and Title 28, United States Code,

Section 2461(c), to seek forfeiture of any other property of the

defendant up to the value of the above forfeitable property.

(Title 18, United States Code, Section 982;

Title 21, United States Code, Section 853; and
Title 28, United States Code, Section 2461.)

DAMIAN WILLIAMS
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 United States Attorney

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 Form No. USA-33s-274 (Ed. 9-25-58)

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

UNITED STATES OF AMERICA

SAMUEL BANKM4N-FRIED,
a/k/ a ”SBF , ”

Defendant.

SEALED INDICTMENT

22 Cr.

(Title 7, United States Code, Sections

9(1) and 13(a)(s); Title 17, Code of
Federal Regulations, Section 180.1; Title
15, United States Code, Sections 78j(b) and
78ff; Title 17, Code of Federal
Regulations, Section 240.10b-5; Title 18,
United States Code, Sections 371, 1343,
1349, 1956, and-19579-TiDle 52-, -Uni-ted-
States Code, Sections 30118, 30122 and
30109(d)(1)(A) & (D).)

DAMIAN WILLIAMS
United States Attorney

A TRUE BILL

Foreperson

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Questions

1. Liquidity of a firm is often assessed by examining working

capital. This makes sense for businesses that own short- and long-term
assets. For firms engaged in the business of trading financial assets,
how can liquidity be assessed?

2. How does SBF attempt to assess the liquidity of FTX? Is this

approach reasonable? Consider that following the Global Financial
Crisis of 2007-08, and the passage of the Dodd-Frank Act, the
Commodities Futures Trading Commission (CFTC) implemented
margin requirements for traders of uncleared swaps.2 Margin is a type
of collateral. For instance, a party who enters into a swap transaction
valued at 100 might be required to set aside 10 in a quarantined
account. What types of assets can be set aside? Cash, of course, is the
most straightforward, but other assets can be used. When assets other
than cash are used, they present risks. The CFTC, therefore, requires a
“haircut,” or a reduction in the amount used for reaching the margin
requirement. For instance, if a trading firm owns an equity swap valued
at 100 and wishes to use the swap as margin, the maximum amount
permitted under the regulation is 75: 100 asset value less a haircut of 25 (i.e.
100 multiplied by the 25% figure in the table below).

2 Uncleared swaps are swaps that are traded between two parties directly, without an
intermediary that “backs” the trade, that is, the intermediary (known as a centralized
clearing counter-party) bears the default risk of each party to the trade. The regulation
is found at 17 CFR 23.156 (b)(2). An identical regulation exists in Europe at
Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016.

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 Asset class (all derivatives) Haircut (% of notional value)
Cash 0
Credit (0-2 years maturity) 2
Credit (2-5 years) 5
Credit (5+ years) 10
Commodity 15
Equity (Fortune 500) 15
Equity (Fortune 501-1500) 25
FX 6
Interest Rate & Inflation (0-2 years maturity) 1
Interest Rate & Inflation (2-5 years) 2
Interest Rate & Inflation (5+ years) 4

Imagine the SEC and CFTC wished to create a haircut table for
cryptocurrencies used as collateral. What types of challenges would it
face?

3. For entities that possess bank charters, law addresses illiquidity

with minimum capital requirements.3 Why do minimum capital
requirements make less sense for exchanges? Is FTX an exchange?
What are some of the challenges regulators and entrepreneurs face
when relying on specific definitions and rules-based architectures (as
opposed to standards-based ones) to foster compliance?

4. SBF classifies some of the assets listed on the FTX balance

sheet as “less liquid” and “illiquid.” How might you explain the
distinction? What are some differences between a less-liquid or illiquid
financial asset and a long-term capital asset like a factory? What are
some similarities?

5. Many cryptocurrencies, especially new and small currencies,

experience low trading volumes. If FTX holds a large percentage of

3 Generally, an entity that takes deposits and makes credits satisfies the legal
definition of a bank and requires a banking license. See, e.g., Art 4.1(1) of the Capital
Requirements Regulation (EU) No. 575/2013, which defines “credit institution” as
“an undertaking the business of which is to take deposits or other repayable funds
form the public and to grant credits for its own account.” See also amending
Regulation (EU) No 648/2012; 26 U.S.C. § 581 (same). If the entity is not a “bank,”
that is, if it does not take deposits, then no minimum capital requirements are
imposed.

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the total coins outstanding of a particular currency, and decides to sell
its coins, what will happen to the price of those coins? Why?
Oftentimes, when there are discrepancies between book value and
market value, firms would like to revalue an asset at its current market
price (Klang v. Smith’s Food & Drug Centers, 702 A.2d 150 (Del. 1997)).
What challenge does valuation of a “less liquid” cryptocurrency
represent? How should its market value be reflected on a balance
sheet?

6. SBF notes that the FTX account holding cash “fiat@” was
poorly labeled. Suppose “fiat@” represents customer funds held by
the FTX exchange. Are these funds an asset or a liability? What would
be a good name for this account? Suppose SBF withdrew customer
funds in order to purchase cryptocurrencies on behalf of his firm
Alameda Research that he thought would appreciate in value, and
honestly planned to return the customer funds to FTX at a later date.
Under this circumstance, what asset should appear on FTX’s balance
sheet? (Hint: recall Francis v. United Jersey Bank A.2d 814 (N.J. 1981)).

7. Prior to its downfall, about $5.9 billion (more than one-third)

of FTX assets were a cryptocurrency, or token, known as FTT. This
token was created by FTX itself. Holders of this token were given
preferential treatment in the form of lower fees when executing trades
on the FTX exchange. Holders could also use FTT for collateral when
trading derivatives on FTX (see Question 2 above for a related
example).
In order to maintain the value of FTT, the exchange FTX
would use one-third of its income generated from commissions and
trading fees to repurchase and destroy (or “burn”) FTT tokens. By
destroying supply, the exchange thought it would maintain or increase
the value of FTT. This process was supposed to continue until half of
the FTT tokens were destroyed. Of course, following the CoinDesk

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news report4 and Binance sale of the token, FTT experienced a severe
decline (compare its value on the FTX balance sheet labeled “before
this week” and currently “deliverable”). Of all of the assets on the FTX
balance sheet, this one declined the most (by 10.7x). Presumably, its
customers were alarmed and withdrew funds. Why would customers
be alarmed by the declining value of FTT? Why would customers who
only hold fiat on the exchange, and perhaps some Bitcoin or
Ethereum, be alarmed?

Consider the following commentary from Matt Levine, Money

Stuff: FTX’s Balance Sheet Was Bad, BLOOMBERG (Nov. 14, 2022):

And then the basic question is, how bad is the mismatch. Like, $16
billion of dollar liabilities and $16 billion of liquid dollar-denominated
assets? Sure, great. $16 billion of dollar liabilities and $16 billion worth
of Bitcoin assets? Not ideal, incredibly risky, but in some broad sense
understandable. $16 billion of dollar liabilities and assets consisting
entirely of some magic beans that you bought in the market for $16
billion? Very bad. $16 billion of dollar liabilities and assets consisting
mostly of some magic beans that you invented yourself and acquired
for zero dollars? WHAT? Never mind the valuation of the beans;
where did the money go? What happened to the $16 billion? Spending
$5 billion of customer money on Serum would have been horrible, but
FTX didn’t do that, and couldn’t have, because there wasn’t $5 billion
of Serum available to buy. FTX shot its customer money into some
still-unexplained reaches of the astral plane and was like “well we do
have $5 billion of this Serum token we made up, that’s something?”
No it isn’t!

8. Suggest a theory of the securities fraud case prosecuted by

4 The excerpt of Visualized: FTX’s Leaked Balance Sheet provided above notes that
CoinDesk, a cryptocurrency media outlet, reported on November 2, 2022 that
Alameda Research, a trading firm with apparent ties to FTX and initially run by SBF
and later by his ex-girlfriend, held $14.6 billion in total assets. CoinDesk reported
that Alameda’s single biggest asset was $3.66 billion worth of “unlocked” FTT. Its
third largest asset was $2.16 billion worth of FTT “collateral.” Thus, about $5.82
billion, or one-third, of Alameda’s assets were, in one way or another, homegrown
FTTs. Tokens are often “locked” for a time to temporarily prevent token developers
from dumping their tokens and running off with cash. Collateralized tokens
represent an ownership claim to a locked token. In contrast, unlocked tokens can be
immediately exchanged for cash or other assets.

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Assistant U.S. Attorneys Nicolas Roos and Danielle Sassoon. What
element will be the most difficult to prove? How might you attempt
to show it?

9. Pursuant to the forfeiture section of the above indictment,

what money can be seized? From whom? In general, assess the
likelihood that FTX customers will be made whole.

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 TEACHER’S GUIDE
Suggested discussion points for questions.
1.
 Discuss working capital differences between manufacturing
and trading firms.
 Discuss some liquidity factors of financial assets (e.g.
exchange-based?, market volume, and volatility)

2.
 SBF parses assets into three categories. While not exactly a
clean break between working capital and long-term capital
assets, it is a reasonable method to think about the liquidity of
FTX (even if an inaccurate application).
 Relationship between liquidity and value of collateral (discuss
fire-sales)
 CFTC
o OTC derivatives vs. exchange-traded
o OTC: cleared vs. uncleared
 Discuss challenges of applying a haircut table to crypto-assets
(difficult to value: little history, volatility)

3.
 Banks take demand deposits and grant credits
 Primary business of exchange is an intermediary
 FTX is an exchange, but it holds customer deposits as they
sit on sidelines
 Since FTX is not a chartered bank, it is not subject to
minimum capital requirements
 Bank is a “rule”
 Dodd-Frank’s “systemically important financial institution”
is a standard

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 4.
 Difference b/w less liquid and illiquid
o Time it takes to sell may be some months vs.
never
 No market? (Trumplose token, 2020
election is passed)
 “Other ventures” may be worthless
today, but not at time they were booked
on balance sheet
o Fire-sale prices likely (if sale is even possible)
 Compare long-term capital assets that have depreciated
o Any residual value is booked when asset is sold
o Some value is there, and if nothing is there, then
it has been fully depreciated

5.
 Cryptos w/ low volumes
 FTX moves the price when buying or selling
o Other buyers see demand is strong or weak and asset
price moves accordingly
 What are the market values of thinly traded assets? What is
value if FTX sells off its entire position (assuming it can)?
 Should FMV be tied to volume, volatility, what else?

6.
 Customer funds should be booked as a liability
 “Customer Funds Accounts Payable”
 Corresponding entry for cash
 Since Alameda was delta-neutral, perhaps SBF and others
honestly planned to return the funds, and thought they could
do so with certainty

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  Cash should be reduced, and “accounts receivable” should be
added “Alameda Loans”

7.
 FTX likely used FTT as collateral for its loans
 As FTT value collapsed, creditors sought more collateral to
support existing loans
 FTX may have been tempted to use customer funds to pay
for the increase in its collateral requirements
Also
 FTX may have used customer money (fiat@) to “buy” FTT
 But it created FTT
 Where did customer money go?

8.
 Knowingly mislead customers, creditors, equity investors as
to nature of FTX
o Evidenced by moving fiat@ to Alameda?
o Role of FTT?

9.
 See forfeiture section of indictment

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