By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

US prosecutors are exploiting the $426m transfer of digital assets to the safekeeping of Bahamian regulators to press for a harsher prison sentence for FTX founder Sam Bankman-Fried.

Damian Williams, the US federal attorney for southern New York, in court documents filed on Friday, is demanding a “two-level enhancement” to Mr Bankman-Fried’s jail term on the basis that he breached the worldwide asset freeze imposed by FTX’s Chapter 11 bankruptcy filing in transferring assets to the Securities Commission of The Bahamas’ care. 

His call, part of a bid to persuade the New York court to impose a 40 to 50-year sentence on Mr Bankman-Fried, who was last year found guilty of perpetrating a multi-billion dollar crypto fraud, effectively turns the rationale for the transfer - for which the Securities Commission had obtained permission from the Bahamian Supreme Court - on its head.

For Mr Williams’ filings not only ignore assertions that the transfers were conducted to protect client assets from hacking, but also neglect to mention recently-filed Supreme Court evidence that the Securities Commission is content to initiate a process that will see them ultimately handed over to John Ray, head of the 134 FTX entities currently in Chapter 11 protection in the Delaware bankruptcy court.

And, in a further blast at The Bahamas, Mr Williams and his prosecutorial team reproduced the 2.27am email sent by Mr Bankman-Fried on Thursday, November 10, 2022, to Ryan Pinder KC, the attorney general, in which he offered open up the crypto exchange to allow only Bahamian clients to withdraw their assets.

“As FTX struggled to meet customer demands, Bankman-Fried approved halting customer withdrawals from the exchange. Shortly thereafter, however, Bankman-Fried - who was residing in The Bahamas at the time - reopened withdrawals only for customers in The Bahamas in order to curry favour with the Bahamian government,” US prosecutors alleged, referring to the e-mail to Mr Pinder.

“Opening withdrawals exclusively for Bahamians resulted in millions of dollars being withdrawn from the exchange by Bahamians and FTX insiders located in The Bahamas, while other customers of FTX.com had no ability to access withdrawals.”

Court filings at the time suggested this enabled some 1,500 investors to withdraw a combined $100m in assets at a time when FTX’s business was supposed to have been frozen by a combination of the provisional liquidation imposed by the Supreme Court and the Chapter 11 proceedings.

It is unclear, though, whether all those 1,500 are “Bahamian”, while Mr Pinder at the time told Tribune Business that “no authorisation was given by any party” to Mr Bankman-Fried to open the exchange for withdrawals. However, Mr Williams and his team are citing this - and the asset transfer to the Securities Commission - as factors that should influence harsher sentencing for the FTX founder.

“On November 11, 2022, FTX, FTX US, Alameda and other related entities all filed for bankruptcy. As discussed in detail below, after FTX entered bankruptcy, Bankman-Fried told Wang that Bankman-Fried was still chief executive of the FTX Bahamian entity because the bankruptcy applied only to FTX and FTX US,” Mr Williams said of the FTX chief’s conversation with his fellow co-founder, Gary Wang.

“Bankman-Fried took Wang to meet with Bahamian regulators. Prior to meeting with the regulators, Bankman-Fried told Wang that he was going to offer to transfer FTX’s remaining assets to the regulators to curry favour with officials in The Bahamas.

“After Bankman-Fried met with Bahamian regulators outside Wang’s presence, Bankman-Fried and the Bahamian regulators directed Wang to move FTX funds to a Bahamian cold wallet and Wang complied. Bankman-Fried told Wang to stall with those representing the US bankruptcy if they tried to engage Wang in securing additional assets, and to tell the lawyer that he was still with Bahamian regulators.

“As Wang moved the assets to the Bahamians, Bankman-Fried also sent messages to those trying to resume securing assets for the US bankruptcy stating that he and Wang were unavailable because they were still meeting with regulators. Ultimately the FTX assets that Bankman-Fried and Wang were able to access were transferred to the authorities in The Bahamas, not to the bankruptcy estate.”

Christina Rolle, the Securities Commission’s executive director, gave a completely different interpretation of what occurred in a December 29, 2022, affidavit, in which she said the regulator had no choice but to work with Mr Bankman-Fried and Mr Wang to protect investors from hacking attempts as they were the only ones who held the “keys” to access the assets.

Ms Rolle alleged that the Securities Commission was first warned about the hacking threat to FTX Digital Markets client assets three days later, when it conducted a “sworn examination” of Mr Bankman-Fried that lasted from 12.40pm to 3.08pm.

The FTX founder told the regulator that himself and Mr Wang, who subsequently made a plea bargain deal with US prosecutors in which he admitted to several offences, had “spent much of the night trying to move assets out of harm’s way”.

This was corroborated by Brian Simms KC, the Lennox Paton senior partner, who in his capacity as FTX Digital Markets’ provisional liquidator said he had received reports - including information from Mr Bankman-Fried and Mr Wang - informing him of the hacking threat to clients of the crypto exchange’s Bahamian subsidiary.

This prompted the Securities Commission to seek, and obtain, Justice Loren Klein’s November 12, 2022, court order authorising it to take control of - and transfer - FTX Digital Markets’ client assets to a digital wallet under the regulator’s control for safe-keeping.

However, Mr Williams, in his sentencing submissions on Friday, alleged that Mr Bankman-Fried told Mr Wang to effect the transfers in defiance of both the US Chapter 11 freeze “and a directive from attorneys not to do so”.

The US attorney added: “Specifically, Wang testified that on November 12, 2022, the day after FTX’s bankruptcy, the defendant asked Wang to drive with him to the Bahamas’ Securities Commission. During that drive, the defendant told Wang that ‘ideally [they] should transfer [customer assets] to The Bahamas’ liquidators or The Bahamas’ regulators.

“The reason the defendant wanted to transfer FTX assets to Bahamas authorities, as opposed to the US bankruptcy, is because ‘they seemed friendly and seemed willing to let [the defendant] stay in control of the company’. Once they got to the Securities Commission, the defendant, his father, and his attorney met with the Securities Commission, while Wang waited.

“According to the defendant’s attorney, Krystal Rolle KC, the meeting, which began at noon, went for a little under three hours, and then they left and went back to the FTX offices. She did not testify about what was discussed at the meeting.

“But, according to Wang, the defendant said ‘the meeting went well’, ‘the Securities Commission believed ... things he told her’, and ‘they were going to order us to transfer the assets ... to The Bahamas’,” Mr Williams added.

“While the defendant and Wang were driving back to FTX’s offices, the defendant said that the ‘bankruptcy lawyers that had taken over FTX’ in the US were ‘asking [him] to finish transferring the remaining assets to the US, and [the defendant] told [Wang] that [they] should try to stall them’.”

Mr Bankman-Fried and Mr Wang then began to effect the asset transfers, according to US prosecutors. “According to Rolle, at some point they were shown an order on a laptop that purported to require the transfer of the assets to the Bahamas authorities,” Mr Williams and his team said in a seeming reference to the Supreme Court order.

“Then, over several hours, until approximately 2am, Wang and the defendant transferred the remaining customer assets to The Bahamas authorities. The process took a while because the Bahamian regulators were struggling to figure out how to do a cryptocurrency transfer.

“While Wang and the defendant were transferring the assets, they received instructions from the US bankruptcy attorneys not to transfer assets to the Bahamian regulators. Over a Signal chat, the defendant told the US bankruptcy team that the Securities Commission was directing them to transfer the assets to them.

“Ryne Miller, an attorney for FTX who was working with the US bankruptcy team, instructed Bankman-Fried, who by that time was no longer an executive of FTX, that there was ‘a significant question of who owns the assets’ and that the defendant ‘cannot transfer any funds that are the subject of the bankruptcy estate’,” prosecutors alleged.

“Miller added: ‘Before folks transfer to Bahamas, absolutely consult with me and I will bring in the appropriate counsel’. The defendant, however, instructed Wang to ‘ignore the instructions and continue transferring the funds’. Ultimately, millions of dollars in assets were transferred.”

Ironically, the same assets that US prosecutors are complaining about are now due to be transferred to Mr Ray. Mr Simms, the Lennox Paton senior partner, in a January 12, 2024, affidavit supporting the Bahamian liquidators’ bid for Supreme Court approval of the settlement with Mr Ray, disclosed that the Securities Commission is “content” to hand over the assets it secured.

This will enable the FTX Digital Markets trio to fulfill one part of their agreement with Mr Ray in that they would use “commercially reasonable efforts” to ensure the digital assets held by the Securities Commission are ultimately transferred to their US counterpart.