The Tribune

• Admitted client funds misuse to Securities Commission

• Regulator requested ‘urgent’ police probe on same day

• Revelations increase Bankman-Fried’s legal jeopardy

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

The head of FTX’s Bahamian subsidiary sparked an “urgent” police probe into possible criminal misconduct when he confessed to local regulators about the misuse of multi-billion dollar client funds.

Christina Rolle, the Securities Commission’s executive director, in a November 10, 2022, affidavit said the admissions by Ryan Salame during the final hours of the crypto currency exchange’s implosion sealed the decision to place FTX Digital Markets in provisional liquidation under the Supreme Court’s supervision.

The freshly-unsealed affidavit revealed that the outcome of the previous day’s conference call with Mr Salame, which was also attended by Allyson Maynard-Gibson KC, the former attorney general, in her capacity as FTX Digital Markets’ local attorney, “exacerbated the need for the intervention” of the Supreme Court given revelations that will place Sam Bankman-Fried and his inner circle in further legal peril.

Mr Salame, FTX Digital Markets’ president and chief executive, effectively provided more evidence to support the multiple US fraud-related charges against Mr Bankman-Fried by confirming that monies belonging to clients of the crypto exchange had been misappropriated without their permission to cover massive losses incurred by Alameda Research, the latter’s hedge fund/trading entity.

While this had long been suspected, Mr Salame’s conference call with Ms Rolle likely marks the first time a high-ranking insider has admitted to conduct that could see the fallen FTX founder jailed for up to 115 years if found guilty on all charges at trial.

“On November 9, 2022, I had a call with Ryan Salame, Allyson-Maynard Gibson KC (in her capacity as local counsel on behalf of FTX Digital Markets) and Ryne Miller, counsel for FTX US, in an attempt to gather further information,” Ms Rolle revealed.

The Securities Commission was becoming increasingly alarmed at Mr Bankman-Fried’s failure to respond to its questions over FTX’s liquidity crunch, which had already forced the crypto exchange to suspend client withdrawals following a $6bn run, and its failed potential acquisition by rival Binance. Mr Salame’s disclosures, though, merely unnerved the Bahamian digital assets regulator even more.

“The statements made by Mr Salame have exacerbated the need for the intervention of this honourable court on an urgent basis,” Ms Rolle asserted. “Specifically, Mr Salame advised that clients’ assets which may have been held with FTX Digital Markets were transferred to Alameda Research to cover financial losses of Alameda.

“Alameda and FTX Digital are related companies, that is, Sam Bankman-Fried is the beneficial owner of both. I understood Mr Salame during the call as advising the Commission that the transfer of clients’ assets in this manner was contrary to the normal corporate governance and operations of FTX Digital Markets. Put simply, that such transfers were not allowed or consented to by their clients.”

However, the FTX Digital Markets chief quickly sought to distance himself from any fraudulent misappropriation allegations by seeking to pin the blame firmly on Mr Bankman-Fried and his inner circle. “Mr Salame further advised the Commission that there were only three persons who had the necessary codes (or passwords) to transfer clients’ assets to Alameda in this manner,” Ms Rolle asserted.

“That is, the founders of FTX, namely Sam Bankman-Fried, Nishad Singh and Zixiao (Gary) Wang. Given such actions may be deemed criminal, the Commission has requested by way of letter dated November 9, 2022, that the Royal Bahamas Police Force carry out an investigation related to the same.”

The misuse of FTX client assets to cover multi-billion losses at Mr Bankman-Fried’s Alameda Research is at the heart of the fraud-related charges brought against him by the US Justice Department, as well the separate civil lawsuits initiated by both the Securities and Exchange Commission (SEC), the US capital markets regulator, and the Commodities Futures Trading Commission (CFTC).

Ms Rolle, in her November 9, 2022, letter to Royal Bahamas Police Force (RBPF) commissioner, Clayton Fernander, likely written within hours of Mr Salame’s revelations, called for an “urgent” probe into the potential criminal misconduct.

“The RBPF may be aware of the reports in both the international and local media, which directly relates to and impacts FTX Digital, including the possible mishandling of clients’ assets,” Ms Rolle wrote.

“Regrettably, the Commission was informed today by Ryan Salame, who is the chairman (sic, president and chief executive) of FTX Digital that clients’ assets, which may have been held with FTX Digital, were transferred to Alameda Research. Alameda and FTX Digital are related companies. Specifically, Samuel Bankman-Fried is a founder of both FTX Digital and Alameda.

“The Commission understood Mr Salame as advising that the transfer of clients’ assets in this manner was contrary to the normal corporate governance and operations of FTX Digital. Put simply, that such transfers were not allowed and therefore may constitute misappropriation, theft, fraud or some other crime,” the Securities Commission chief continued.

“Given this possible unlawful activity and the ramifications associated with same, we wish for the RBPF to investigate this matter on an urgent basis. Based on the Commission’s knowledge, Mr Bankman-Fried, Mr Nishad Singh and Mr Zixiao (Gary) Wang are presently on the island of New Providence and all normally reside at Albany. Mr Salame is not in the jurisdiction and is reportedly in Washington DC at present.”

The Securities Commission’s action against FTX Digital Markets, which included revocation of its licence under the Digital Assets and Registered Exchanges (DARE) Act and, ultimately, successfully petitioning the Supreme Court for the appointment of provisional liquidators, built over several days. It was triggered by global media reports on the embattled crypto exchange’s financial woes, which had prompted it to seek a deal with rival Binance.

Ms Rolle asserted that FTX Digital Markets was in breach of its legal DARE Act obligations to respond to the Securities Commission’s questions and concerns in a timely manner prior to the conversation with Mr Salame.

She initially contacted Mr Bankman-Fried and Jessica Murray, FTX Digital Markets’ Bahamian compliance officer and money laundering reporting officer, on November 8 to set up a meeting on the reported liquidity woes and Binance deal. Ms Murray, who was subsequently said to have resigned, responded to say she would try to confirm a time and date.

With Ms Rolle pressing for a meeting that same day, Mr Bankman-Fried gave the vaguest of responses. His November 8 reply stated: “Hey! I’m pretty pressed for time but will make sure that we talk to you ASAP. I’ll briefly say that, as of now, no sale has happened or been finalised although there are active talks. We’ll keep you updated about those.”

Ms Rolle replied: “Thank you for your note, Sam We are keen to understand the issues as they specifically relate to the regulated entity including potential impact for clients. Please get in touch soonest.” The Securities Commission chief then set out the regulator’s concerns in a detailed set of questions sent to Mr Bankman-Fried and Mr Salame the following morning.”

With global media reports questioning the links between FTX and Alameda Research, and potential misuse of the former’s client monies to finance speculative and risky investments by the latter, Ms Rolle asked the duo to provide “details of the connection between” the two entities, including the services provided to each other and the related party transactions with them.

She also sought information on “the extent to which FTX Digital Markets’ clients’ assets may have been invested, loaned, used as collateral or otherwise hypothecated or encumbered on behalf of FTX Digital Markets, Alameda, other related parties and/or third parties”. Details on client numbers and the collective value of their assets, whether FTX Digital Markets kept them separate from its own, and total client withdrawals over that week were also requested.

No such answers were provided, and Ms Rolle asserted: “The Commission has grave concerns as a result of the lack of responsiveness on the part of Sam Bankman-Fried (and FTX Digital Markets generally) to the correspondence from the Commission.

“The Commission regards the lack of responsiveness on the part of FTX Digital Markets and its officers as a breach of their statutory obligations under the DARE Act, including but not limited to the duty to provide information relevant to the operations of the business as the Commission may require, and to deal openly, honestly and co-operatively with the Commission.”

Ms Rolle pointed to Mr Bankman-Fried’s admission in his November 10, 2022, e-mail to Ryan Pinder KC, the attorney general, that he had yet to brief the Securities Commission as confirmation of her position. “Ultimately there is a paucity of information available to the Commission at this stage, including the financial affairs of FTX Digital,” she continued.

“The vague representations in Sam Bankman-Fried’s e-mail does not quell the concerns on the part of the Commission.... The Commission has not received a response from Sam Bankman-Fried relative to the transfer of assets to Alameda. In light of the foregoing, particularly the representations made by Mr Salame, it is paramount that the Commission protect the welfare of investors, creditors and clients of FTX Digital, as well as maintain the integrity and reputation of The Bahamas in the digital assets space.

“In the circumstances, I hereby confirm that the Commission has determined that it is in the public interest of FTX Digital’s investors and clients, and the reputation of the Commonwealth’s finance industry generally, for a provisional liquidator to be appointed immediately to safeguard FTX Digital’s assets until further Order of this court....

“The evidence.. makes out a strong case that the assets of FTX Digital, including investors’ assets, need protection and that there may have been director misconduct and/or mismanagement. There is also a strong case for taking action in the public interest.” Mr Bankman-Fried, as FTX Digital Markets’ chairman, was just one of two directors. The other was Mr Salame.