Holly Jolly Fraud Indictment • CEO Letter #76

"All I want for Christmas is to stop writing about FTX," I said recently. I don't think Santa plans to grant my wish. But at least this time, we definitely know that SBF is on Santa's naughty list. The gears of justice are grinding faster than usual…

Before we get into the details: I'm Taylor, CEO of Hedgehog, the crypto robo-adviser that helps keep your investments diversified and balanced.

As I like to remind you, there's a giveaway at the end of every newsletter. Last week the magic question was: eggnog, apple cider, or mulled wine? I feel like eggnog usually gets the most hype, but apple cider won resoundingly. Pro tip, heat it up on the stove with some cinnamon sticks in the pot, and your house will smell amazing. Or just use the microwave, I won't judge (or will I?).

Do not pass Go, do not collect $2,000,000,000

Sam Bankman-Fried's weird apology tour was cut short before he could tell Congress that it was all a big oopsy, (sigh 🥺). He was arrested in the Bahamas, pending extradition to the United States, indicted by US federal prosecutors in the state of New York, and accused of fraud in two civil cases filed by the SEC and CFTC respectively.

Now, I'm not one to give legal advice, but I gotta say, you really do not want SEC lawyers to be writing this kind of sentence about you: "Bankman-Fried was orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform's customer funds for his own personal benefit and to help grow his crypto empire." The filing gets… well, not worse, because how could it get worse without, like, actual murder? But it continues to sound terrible:

Bankman-Fried held himself out as a visionary leader in the crypto industry, and touted his efforts to create a regulated and thriving crypto asset market. He conducted an intensive public relations campaign to brand himself and his companies as honest stewards of crypto.

The reality was very different: From the start, contrary to what FTX investors and trading customers were told, Bankman-Fried continually diverted FTX customer funds to Alameda and then used those funds to continue to grow his empire, using billions of dollars to make undisclosed private venture investments, political contributions, and real estate purchases.

You get the picture. It's a pretty satisfying read, summing up the many appalling shockers that emerged during the past month. (Can you believe it's only been a month since the news first dropped?!) The CFTC filing is less punchy but covers similar ground.

Meanwhile, the guy hired to sort out what's left of FTX told the House Financial Services Committee:

"We've lost $8 billion," [current FTX CEO John Ray III] said. "I don't trust a single piece of paper in this organization."

Unlike Enron, another corporate collapse that Ray helped clean up, the scheme executives ran at FTX was "not sophisticated at all," Ray said. He called the Enron catastrophe "highly orchestrated" in comparison to FTX.

"This is really old-fashioned embezzlement," Ray said.

Per the article, John Ray "described FTX's financial situation as the worst mess he's seen in his career, noting that the multibillion dollar business ran its accounting through the small business bookkeeping software Quickbooks, if it recorded financial transactions at all." If it recorded financial transactions at all! If!! I'm amazed that FTX was able to even semi-function like that.

"It's really unprecedented in terms of the lack of documentation," said Ray, who called it a "paperless bankruptcy."

By contrast, SBF wanted to tell Congress that he still "deeply regrets" authorizing the FTX bankruptcy, and he's especially affronted that John Ray won't answer his emails. C'mon man.

Apparently legislators are still eager to chat with SBF: "'I think either way he needs to come talk to the committee, whether he's a prisoner or free on bail,' said Rep. Warren Davidson, R-Ohio."

Tldr: If a CEO doesn't trust a single piece of paper in their organization, the company is either paperless (yay!) or a pyramid scheme (boo).

Meanwhile at Binance

I haven't been following this one super closely, but here are a few not-so-comforting headlines about Binance:

"Skepticism pervades crypto exchange liabilities reports, and Mazars" (the accounting firm that created Binance's report)

Commentary: "This was not an independent audit. Mazars did not describe it that way and the company would not certify the methodology it used. Heck, neither Mazars nor Binance disclosed the precise methodology."

"U.S. Justice Dept is split over charging Binance as crypto world falters"
"Binance resumes USDC stablecoin withdrawals after temporary pause"
"Binance withdrawals hit $1.9 bln in 24 hours, data firm says"

Austin Campbell, the head of portfolio management at Paxos, the entity which issues BUSD (Binance USD — yeah, it's confusing that a different company actually mints the stuff), weighed in on the stablecoin aspect:

So let us say a stablecoin, we will call it CUSD for Canonical USD as our example, has $10B of assets. Maybe CUSD keeps $500mm at these fast payments banks, or 5% of total assets.

What that means is that CUSD can burn $500mm of the $10B during off hours, but if a $1B redemption comes in at our previous 3am Saturday NY time, you have to wait until NY banking hours to fulfill the remainder of it.

Is there an issue with the assets of CUSD? No. It's just a timing issue. But this timing issue can break pegs temporarily and is consistently a source of stablecoin FUD because people do not understand how settlement works in traditional financial markets.

Very interesting article about stablecoin operations at a high-volume exchange.

Tldr: Have I mentioned hardware wallets lately?

Phew. That was a lot. Whatever mistakes you've made this year, I bet you aren't being investigated by Congress or [insert federal agency here], so that's a win! Anyway, how about the giveaway?

Question of the week: If you had a choice, what government body would you prefer to be indicted by and why?

For me, it would either be the Coast Guard for illegally crossing the border while saving a drowning puppy, or the Smithsonian Police for trying to hangout with Robin Williams after hours.

Reply to this email with your answer for a chance to win. The lucky winner gets to choose three prizes from this list: