Sam Bankman-Fried’s ‘House of Cards’ Teeters

S.B.F. in custody

The spectacular rise and fall of Sam Bankman-Fried, the founder of the failed crypto exchange FTX, came full circle on Monday, with his arrest in the Bahamas at the request of U.S. authorities, followed by the S.E.C. filing its own charges on Tuesday.

The Times reports that federal prosecutors in Manhattan, who are seeking his extradition, will charge Mr. Bankman-Fried with wire fraud, wire fraud conspiracy, securities fraud, securities fraud conspiracy and money laundering. A trial could start late next year.

“Sam Bankman-Fried built a house of cards on a foundation of deception while telling investors that it was one of the safest buildings in crypto,” Gary Gensler, the S.E.C.’s chair, said in a statement. His agency has charged S.B.F., as the entrepreneur is known, with defrauding investors in FTX out of $1.8 billion, including $1.1 billion from U.S. entities. A big part of the fraud, it alleges, was keeping backers in the dark about “the undisclosed diversion of FTX customers’ funds” to the exchange’s trading affiliate, Alameda Research.

The S.E.C. now asserts that S.B.F. was more involved in Alameda’s operations than he let on. In a major revelation, the agency says he directed $8 billion worth of customer deposits from an Alameda-controlled bank into a separate account, labeled “fiat @ftx.com,” in part to avoid getting charged interest, a move that could suggest intent. From the complaint:

The arrest took many by surprise. S.B.F. had been scheduled to testify on Tuesday before the House Financial Services Committee. The committee’s Democratic chair, Representative Maxine Waters of California, didn’t see this coming: “The public has been waiting eagerly to get these answers under oath before Congress, and the timing of this arrest denies the public this opportunity,” she said. (S.B.F. himself also said he did not expect to be arrested.)

“I have never seen a case approaching this scope proceed this quickly,” Renato Mariotti, a partner at Bryan Cave Leighton Paisner and a former federal prosecutor, told DealBook. Given FTX’s scale — with more than 100 companies based around the world — and the lengthy list of creditors, lawyers and extradition experts said the government had moved faster than expected.

S.B.F.’s media tour may have played a role: While most executives under criminal investigation clam up, the crypto entrepreneur has spoken out over and over again. That may have pushed prosecutors to act fast, according to Mariotti, to avoid S.B.F. “muddying the waters” of a potential case through repeated assertions that he was misguided and had made mistakes.

But has S.B.F. also admitted wrongdoing? On the Unusual Whales podcast on Monday, he initially denied knowing that customer funds had moved from FTX to Alameda without permission, but then professed less certainty: “Like I, like, kind of vaguely knew, kind of, sort of maybe, um, on a qualitative level what was going on.”

What could have been: News outlets including Forbes have obtained S.B.F.’s written testimony for Tuesday. It sets the ground for his claim to have simply made mistakes by professing he messed up with a profanity — which he stresses he is using “formally, under oath” — in the first sentence.

HERE’S WHAT’S HAPPENING

The E.U. plans to tax imports based on carbon emissions. The bloc has reached an agreement meant both to protect European products made using fewer greenhouse-gas emissions and to effectively set an international price for carbon. It would also probably irritate trading partners.

China begins a W.T.O. dispute over American chip export controls. Beijing accused the United States of trade protectionism by effectively blocking tech companies from selling advanced chips to China, hampering the Chinese tech industry. At the same time, Japan and the Netherlands are in talks to join the U.S. in tightening export controls on chipmaking machinery.

Congress scrambles to avert a government shutdown. Senator Chuck Schumer of New York, the Senate majority leader, proposed a one-week spending bill to give negotiators more time for a broader government spending deal. Without that, the federal government will begin partially shutting down this weekend.

The former C.E.O. of Wirecard moves to suspend his criminal fraud trial. A lawyer for Markus Braun told a Munich court that prosecutors had ignored crucial evidence and relied on an untrustworthy witness. The move is aimed at forestalling one of Germany’s biggest-ever fraud trials; the court is expected to rule on the motion in the coming weeks.

U.S. researchers are set to unveil a breakthrough in nuclear fusion. Scientists at the Lawrence Livermore National Laboratory in California are expected to announce on Tuesday that they have successfully used lasers to achieve nuclear fusion whose output exceeded the input from the lasers. It’s a significant step toward making fusion a plausible energy source — someday.

What FTX’s new C.E.O. will say about the exchange’s “utter failure”

Even with Sam Bankman-Fried in custody, the House Financial Services Committee hearing into the collapse of FTX will go on as scheduled this morning, and its star witness will now be the exchange’s new C.E.O., John Ray III.

Though Mr. Ray’s written testimony never calls FTX an outright fraud, the corporate restructuring expert will reiterate that he’s never seen “such an utter failure of corporate controls at every level of an organization.”

Mr. Ray will detail eight “unacceptable management practices” that he believes led to the downfall of Bankman-Fried’s crypto empire. They include:

• Evidence that “customer assets from FTX.com were commingled with assets from the Alameda trading platform.”

• Alameda, FTX’s trading arm, being able to borrow funds held at the non-U.S. business unit, FTX.com, for its trading and investing “without any effective limits.”

• Shoddy recordkeeping and lax fiscal controls, including no audits and no documentation for “nearly 500 investments made with FTX Group funds and assets.”

• Evidence that loans and payments in excess of $1 billion were made to company insiders, and that the company went on a roughly $5 billion spending spree beginning in late 2021.

Wall Street will be closely watching today’s inflation number

U.S. futures have been edging higher on Tuesday and global stock markets are up ahead of a consequential Consumer Price Index report due out at 8:30 a.m. Eastern.

An elevated C.P.I. would probably put the chill back into stock markets. If the inflation measure shows an annual rise above economists’ consensus estimate of a 7.3 percent, that could signal that the Fed’s interest-rate rises aren’t doing enough to slow the pace of inflation — and that more jumbo increases are needed. (Reminder: The Fed’s rate-decision day comes tomorrow.)

A tepid C.P.I. could do the opposite. JPMorgan Chase traders have gamed out a few scenarios. They believe a reading of 6.9 percent would lead to a healthy rally in the S&P 500, with the benchmark index jumping 8 to 10 percent. They put the odds of such a low number at about one in 20.

Central bankers and Wall Street pros have consistently forecast inflation wrong over the past year. In late 2021, many thought high inflation was a temporary phenomenon. It persisted. But then last month’s reading, which showed prices moderating, surprised many and triggered a rally in risky assets. “The inflation report is arguably the most uncertain of this week’s big macro event risks,” Alvin Tan, a foreign-exchange strategist at Royal Bank of Canada, said in an investor note on Tuesday.

“The bet was that free money would last indefinitely, and there doesn’t seem to have been a risk-management game plan.”

— Jon Burckett-St. Laurent, a senior portfolio manager at Exencial Wealth Advisors, on the financier Cathie Wood, who shot to prominence by investing heavily in money-losing tech companies. Wood’s flagship fund is trading at a five-year low as investors appear to have lost faith in her strategy.

Twitter dissolves its trust and safety council

Elon Musk has said that maintaining safety on Twitter is one of his highest priorities, and yet the social network just made a puzzling decision toward that end: On Monday night it disbanded an outside panel of experts that had advised it on matters of hate speech and safety.

“Thank you,” began an email sent to members of the council — made up of civil rights groups, academics and others, formed in 2016 — an hour before they were to meet on Monday. The message said the group wasn’t “the best structure” to advise on product and policy any longer; it was signed “Twitter.”

The dissolution of the board may have been inevitable, as three members had already quit last week over changes to Twitter’s content moderation. But it suggests Musk may ultimately centralize content policy in the interest of, as the email put it, “moving faster and more aggressively than ever before.”

The move adds to critics’ worries that Twitter is becoming less safe. The advisers who quit last week cited the company relying more on automated content moderation: “It is clear from research evidence that, contrary to claims by Elon Musk, the safety and wellbeing of Twitter’s users are on the decline,” they wrote in their resignation statement.

Meanwhile, Twitter’s former head of trust and safety, Yoel Roth, and his family reportedly went into hiding after Mr. Musk misrepresented his academic thesis about gay social networks online to falsely imply that it supported sexualizing children. (Professors who reviewed Mr. Roth’s thesis also received online abuse.)

In other Elon Musk news:

• The Twitter account that shows the movements of Mr. Musk’s private jet has been “shadowbanned,” according to its owner.

• The $5.7 billion worth of Tesla shares that Mr. Musk donated to charity last year went to his personal charitable foundation.

• Mr. Musk has lost his crown as the world’s richest person, at least by one measure, to Bernard Arnault of LVMH.

THE SPEED READ

Deals

• The private equity firm Thoma Bravo agreed to buy Coupa Software, which makes software to manage corporate expenses, for $8 billion, as it seeks to capitalize on declining valuations of tech companies. (FT)

• Speaking of which, Checkout.com, one of Europe’s biggest privately held tech companies, recently slashed its internal valuation by 72 percent, to $11 billion. (FT)

• Goldman Sachs reportedly plans to cut hundreds of retail banking jobs. (Bloomberg)

• Investors’ rush to withdraw from a big Blackstone real-estate fund may have broader fallout. (WSJ)

Policy

• The Supreme Court rejected a bid by British American Tobacco to halt California’s ban on flavored tobacco products. (Bloomberg)

• Chinese authorities arrested 63 people whom they accused of laundering $1.7 billion with the crypto token Tether. (Insider)

• Hong Kong has lifted more of its bar and restaurant Covid restrictions, as China continues easing pandemic rules. (FT)

Best of the rest

• The Wall Street Journal named Emma Tucker, the editor of London’s Sunday Times, to lead its newsroom, the first woman to hold that role. (NYT)

• “How Sexism Influenced Corporate Governance” (NYT)

• Amazon has delayed hiring college graduates to help cut costs. (FT)

• The back story on Taylor Swift choosing Searchlight, the art-house movie studio, over major streaming services for her debut as a feature-film director. (Puck)

• The hedge-fund mogul Ray Dalio and the director James Cameron are teaming up to make submarines for the ultrawealthy. (FT)

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