Where FTX’s Money Went and the law firms that helped.

Big Law Firm, Sullivan & Cromwell, Did Significant Legal Work for BankruptCrypto Exchange, FTX

 

This Is Where Bankrupt FTX’s Money Went: $74 Million for Caribbean Real
Estate; $59 Million to Politicians; Tens of Millions to Big Law, Celebrity
Endorsements…

 

** NEW BOOK: _A HACKER’S MIND_

[2022.11.11] [https://www.schneier.com/blog/archives/2022/11/new-book-a-hackers-mind.html] I have a new book coming out in February. It’s about hacking.

_A Hacker’s Mind: How the Powerful Bend Society’s Rules, and How to Bend them Back [https://www.schneier.com/books/a-hackers-mind/]_ isn’t about hacking computer systems; it’s about hacking more general economic, political, and social systems. It generalizes the term _hack_ as a means of subverting a system’s rules in unintended ways.

What sorts of system? Any system of rules, really. Take the tax code, for example. It’s not computer code, but it’s a series of algorithms — supposedly deterministic — that take a bunch of inputs about your income and produce an output that’s the amount of money you owe. This code has vulnerabilities; we call them loopholes. It has exploits; those are tax avoidance strategies. And there is an entire industry of black-hat hackers who exploit vulnerabilities in the tax code: we call them accountants and tax attorneys.

In my conception, a “hack” is something a system permits, but is unanticipated and unwanted by its designers. It’s unplanned: a mistake in the system’s design or coding. It’s subversion, or an exploitation. It’s a cheat — but only sort of. Just as a computer vulnerability can be exploited over the Internet because the code permits it, a tax loophole is “allowed” by the system because it follows the rules, even though it might subvert the intent of those rules.

Once you start thinking of hacking in this way, you’ll start seeing hacks everywhere. You can find hacks in professional sports, in customer reward programs, in financial systems, in politics; in lots of economic, political, and social systems; against our cognitive functions. A curved hockey stick is a hack, and we know the name of the hacker who invented it. Airline frequent-flier mileage runs are a hack. The filibuster was originally a hack, invented by Cato the Younger, A Roman senator in 60 BCE. Hedge funds are full of hacks.

A system is just a set of rules. Or norms, since the “rules” aren’t always formal. And even the best-thought-out sets of rules will be incomplete or inconsistent. It’ll have ambiguities, and things the designers haven’t thought of. As long as there are people who want to subvert the goals of a system, there will be hacks.

I use this framework in _A Hacker’s Mind_ to tease out a lot of why today’s economic, political, and social systems are failing us so badly, and apply what we have learned about hacking defenses in the computer world to those more general hacks. And I end by looking at artificial intelligence, and what will happen when AIs start hacking [https://www.schneier.com/academic/archives/2021/04/the-coming-ai-hackers.html]. Not the problems of hacking AI, which are both ubiquitous and super weird, but what happens when an AI is able to discover new hacks against these more general systems. What happens when AIs find tax loopholes, or loopholes in financial regulations. We have systems in place to deal with these sorts of hacks, but they were invented when hackers were human and reflect the human pace of hack discovery. They won’t be able to withstand an AI finding dozens, or hundreds, of loopholes in financial regulations. We’re simply not ready for the speed, scale, scope, and sophistication of AI hackers.

_A Hacker’s Mind_ is my pandemic book, written in 2020 and 2021. It represents another step in my continuing journey of increasing generalizations. And I really like the cover. It will be published on February 7. It makes an excellent belated holiday gift. Order yours [https://www.schneier.com/books/a-hackers-mind/] today and avoid the rush.

Must Read WallStreetOnParade gets into the FTX short and curlies

So …. Must Read WallStreetOnParade gets into the FTX short and curlies

Big Law Firm, Sullivan & Cromwell, Did Significant Legal Work for Bankrupt Crypto Exchange, FTX

Bankman-Fried was replaced as FTX CEO  with John J. Ray III to replace him, a lawyer serving as the chief counsel at Greylock Partners LLC, who previously oversaw the liquidation of Enron.

Ryne Miller, Former Sullivan & Cromwell Partner; Now General Counsel of FTX.US

Sullivan & Cromwell has been named as one of the advising law firms to the disgraced crypto exchange, FTX, in its bankruptcy proceedings. Sam Bankman-Fried, the co-founder and CEO of FTX, vaporized the high-profile crypto firm from a $32 billion valuation to smoldering ashes last week.

Reuters reported that Bankman-Fried had moved as much as $10 billion of FTX customers’ money to his separate hedge fund, Alameda Research, through a “backdoor” in its software. Alameda had lost much of the money on wild bets while $1 billion to $2 billion had just “disappeared,” according to Reuters. The Financial Times reported that FTX held just $900 million “in easily sellable assets” against $9 billion “of liabilities the day before it collapsed into bankruptcy.”

The General Counsel of FTX.US, the FTX exchange serving customers in the U.S., is former Sullivan & Cromwell partner, Ryne Miller, who had co-chaired the law firm’s commodities, futures and derivatives group and worked at the law firm for eight years prior to joining this speculative, upstart crypto exchange. Miller had previously served as legal counsel for the current SEC Chair, Gary Gensler, when Gensler was Chair of the Commodity Futures Trading Commission. FTX.US is also included in the recent bankruptcy filing of FTX, despite Bankman-Fried Tweeting that the firm was fine just days before the bankruptcy filing.
—

Visa ends global card partnership with FTX.

—

Ryne Miller @_Ryne_Miller Nov 12
1/ Statement from John Ray, Chief Restructuring Officer and CEO of @FTX_Official
— Consistent with their obligations as Chapter 11 Debtors-in-Possession, FTX US and FTX [dot] com continue to make every effort to secure all assets, wherever located.
2/ Among other things, we are in the process of removing trading and withdrawal functionality and moving as many digital assets as can be identified to a new cold wallet custodian. As widely reported, unauthorized access to certain assets has occurred.
3/ An active fact review and mitigation exercise was initiated immediately in response. We have been in contact with, and are coordinating with law enforcement and relevant regulators. (Statement from John Ray, Chief Restructuring Officer and CEO of @FTX_Official)

Ryne also recommends everyone read:

@zachdex
Ready for a spooky story? 👻🧵

CEO of LedgerX LLC (d/b/a FTX US Derivatives), a subsidiary of FTX US offering derivatives. previously cto & co-founder @ledgerx; backend lead @getthemirror

Ghost leverage is a little-known practice where US futures brokers offer US retail investors substantial leverage levels (100x or more) during day and/or night sessions, and auto-liquidate everyone trading on that leverage before market close
1) Ghost leverage creates material volumes for the two futures exchanges that dominate US markets, allowing risk-seeking traders to get around traditional margin levels, often with limited customer protections.
4) FTX research into the practice found intraday margin levels up to 8x lower than the required clearinghouse margin levels (or roughly 110x leverage) – all the way back in 2004.
6) As shown above, equity index futures products regularly trade on 100-500x leverage.
What’s even lesser-known: Customers can obtain an account – in minutes, with no knowledge tests or real suitability questions – that immediately permits these leverage levels.
7) The suitability question is typically something like, “is the trading of futures suitable for you?”
Click yes, and you’re in, at a typical range of 100-500x leverage. For US-regulated futures. The highest level our research found was 766x, shown above.

all the way to

30) The combination of extreme leverage for US retail futures traders, and the lack of transparency in the traditional clearing model around segregation of customer funds, is a dangerous mix for retail investors.

Michael Lewis will do an amazing job with the FTX story

Background

Edward Snowden
The White House sanctions and arrests kids for the “crime” of building privacy tools to protect you, while “regulators” were quietly palling around with the thieves who just robbed 5 million people.
The difference? The thieves were big political donors.

Sam Bankman-Fried https://twitter.com/SBF_FTX/ and the conscience of a crypto billionaire

SBF’s father was an expert in tax shelters and a professor at @StanfordLaw. On an entirely unrelated note, this is the FTX corporate structure:

The general counsel of FTX US had served as lead counsel to Chairman Gensler at the CFTC.

Gensler was Hilary Clintons campaign finance manager and Gensler’s daughter works for Elizabeth Warren.

SEC Chair Gary Gensler’s old boss Glenn Ellison at MIT is the father of Caroline Ellison who is the Co CEO of Alameda research.

Before joining Alameda in 2018, Caroline worked at Jane Street as a trader on the equities desk. Caroline Ellison graduated from North School in 2012. She won numerous math awards, like placing top 10 at the Harvard MIT math competition and receiving an honorable mention from Math Prize, in addition to representing the North math team.

She graduated from Stanford University with a bachelor’s degree in mathematics in 2016.

Caroline @carolinecapital April 5 2021 actually posted this to her twitter acct.“nothing like regular amphetamine use to make you appreciate how dumb a lot of normal, non-medicated human experience is
the dumbest thing is: this morning, I was lying on the couch reading a book. then I decided to go for a hike. but it took me like … a half an hour from that point to muster the energy and motivation to actually get up from the couch
and then after that the hike was good! my body had no problem making the countless exertions of effort involved in ascending to a much higher elevation using only my own muscles! but the effort to get off the couch and move to a standing position is somehow Herculean
the second dumbest thing is: apparently there’s about 20% of my brain that’s dedicated to food.
whatever else is happening, throughout the day, it’s just a significant percentage of my thoughts dedicated to “what should I do for dinner? how about dessert? should I have an afternoon snack before that? … you know what’s good? Ethiopian food. do they even have that in HK?”

Michael Lewis will do an amazing job with the FTX story

Michael Lewis Already Selling Movie Rights for Book on FTX’s $32 Billion Meltdown. The author of Moneyball and The Big Short has been following around FTX founder Sam Bankman-Fried for the past six months.

Moneyball Quotes

“No matter how successful you are, change is always good. There can never be a status quo. When you have no money you can’t afford long-term solutions, only short-term ones. You have to always be upgrading. Otherwise you’re fucked.”
― Michael Lewis, Moneyball: The Art of Winning an Unfair Game

“The inability to envision a certain kind of person doing a certain kind of thing because you’ve never seen someone who looks like him do it before is not just a vice. It’s a luxury. What begins as a failure of the imagination ends as a market inefficiency: when you rule out an entire class of people from doing a job simply by their appearance, you are less likely to find the best person for the job.”
― Michael Lewis, Moneyball: The Art of Winning an Unfair Game

“Years later he would say that when he’d decided to become a professional baseball player, it was the only time he’d done something just for the money, and that he’d never do something just for the money ever again. He would never again let the market dictate the direction of his life.”
― Michael Lewis, Moneyball: The Art of Winning an Unfair Game

It’s an admission few billionaires will make publicly: Sam Bankman-Fried is in it for the money.

“The pleasure of rooting for Goliath is that you can expect to win. The pleasure of rooting for David is that, while you don’t know what to expect, you stand at least a chance of being inspired.”
― Michael Lewis, Moneyball: The Art of Winning an Unfair Game

 

SBF caught in the Bahamas

Sam Bankman-Fried CAUGHT

FTX former CEO Sam Bankman-Fried, co-founder Gary Wang and director of engineering Nishad Singh are understood to be in the Bahamas and are “under supervision” by the local authorities. They will get sent back to the US. The Securities Commission of The Bahamas (SCB) highlighted that the government agency has frozen the assets of FTX.

CEO Caroline Ellison, in Hong Kong that means “she might be able to get to Dubai.”

So Ridiculous:
Gary Gensler was working closely with SBF for a while and had no idea FTX was insolvent? Starting to think FTX was an orchestrated psyop. With all its enormous resources the SEC did not uncover and warn investors about FTX and SBF (or Celsius, Voyager etc). The SEC was too busy meeting SBF.

FTX bought $74 million of real estate in the Bahamas this year – The Block

Sam Bankman-Fried Built a ‘Backdoor’ to FTX’s Compliance Systems
FTX had a “backdoor” built into its accounting software by SBF, which he used to move billions without triggering alerts to other staff, auditors etc –

PAULY.SOL, the founder of the nonfungible token (NFT) project Not Larva Labs, was one of the first to spur rumors of SBF’s arrest. The NFT founder retweeted a post of a Flightradar24 map that reported a private jet to have been grounded for around 40-minutes while on the way to Miami from Nassau — the capital of The Bahamas where FTX is headquartered.

“SBF was trying to sell his 7.6% share of Robinhood, worth $472M, on the app Signal. The shares were held by an Antigua and Barbuda entity called Emergent Fidelity, which is personally controlled by Bankman-Fried and NOT included in the FTX bankruptcy filing.” – Financial Times

FTX hacker identity discovered by Kraken Exchange team

Kraken Exchange CSO, Nick Percoco, just announced via a tweet reply that the hackers identity has been discovered.

We know the identity of the user.
— Nick Percoco (@c7five) November 12, 2022

Founder and CEO of IBCgroup.io, Mario Nawfal tweeted explaining that “the hacker is very likely an inexperienced insider.”

At least $1 billion of client funds missing at FTX

@ercwl
Let’s treat every CEX and custodian that control vast amounts of Bitcoin IOUs but refuse to establish a Proof-of-Reserves policy as scammers. Let’s not invite them to podcasts, conferences, let’s not interview them, let’s just respond with: “show your proof of reserves”.

Still involves trusting that they are giving you all/proper addresses, trusting auditors etc… Not a solution at all.
Just stop custodying your bitcoin on exchanges, don’t trust – self custody

Wait until you find out what #ETH 2.0 is.
The thing about fraud? It’s never hidden, it’s always open.
FTX was audited by an accounting firm with offices in the metaverse. No board, his girlfriend got billions of FTX cash to trade. No internal control.
Yet, established VC threw cash at him

How to Investigate Insider Threats (Forensic Methodology)
https://www.inversecos.com/2022/10/how-to-investigate-insider-threats.html

QUOTE OF THE MONTH
Last month, Shark Tank’s Kevin O’Leary said “if there’s ever a place I could be that I’m not gonna get in trouble, it’s gonna be at FTX.”

Kevin O’Leary aka Mr. Wonderful
VIDEO SOMEONE IS GOING TO ZERO I DON’T KNOW WHO BUT WE ARE DUE FOR ONE!!

PSA

If you have a bank account linked to FTX US, change your bank account password and stop sharing data immediately.

DELETE ANY FTX APP – don’t open it just delete it – don’t visit the website – don’t log into it.