It’s been eight weeks since the collapse of FTX. Since then, FTX filed for bankruptcy, a new CEO John Ray III has been at the helm, the Senate House Committee held a hearing on FTX, fallen CEO Sam Bankman-Fried (SBF) was arrested in the Bahamas then subsequently extradited to the US to face criminal charges, former associates of SBF Caroline Ellison and Gary Wang pleaded guilty to criminal charges, and SBF secured a $250 million bail bond. SBF has since been under house arrest at his parents’ home in Palo Alto, California.
Some of this week’s unfolding developments in the FTX debacle include the resignation of the judge initially appointed to preside over the case, the DOJ’s investigation into an alleged FTX hack, and fresh lawsuits by FTX customers.
Judge Resigns, Cites Possible Conflict of Interest
A new judge was assigned on Tuesday to Sam Bankman-Fried’s crypto fraud case. US District Judge Lewis Kaplan will be presiding over the case, replacing Ronnie Abrams who recused herself from the case. Judge Abrams resigned from presiding over the case because her husband is a partner at David Polk & Wardwell LLP, a law firm that once served as FTX’s advisor.
“My husband has had no involvement in any of these representations. These matters are confidential and their substance is unknown to the Court. Nonetheless, to avoid any possible conflict, or the appearance of one, the Court hereby recuses itself from this action,” Judge Abrams wrote in her recusal statement.
The new judge Lewis Kaplan is known for his no-nonsense demeanor in the courtroom. Kaplan has overseen lawsuits including separate civil lawsuits against Donald Trump and Prince Andrew.
DOJ Launches Investigation into Post-Bankruptcy Hack
Nearly $400 million was stolen from FTX moments after it filed for bankruptcy in November. Reports by blockchain analytics firm Elliptic reveal that the hacker had swapped the majority of the hacked tokens for ETH through decentralized exchanges.
The US Department of Justice (DOJ) National Cryptocurrency Enforcement Team is leading an investigation into events that led to the hack at FTX, post-bankruptcy.
Hacken’s investigation of blockchain transactions linked to the hack revealed that the hacker tried to send USDT tokens on Tron’s blockchain but was unsuccessful; the wallet where the Tron-based USDT was held had no TRX for gas fees (transaction fees). The hacker further used a verified personal account on the crypto exchange Kraken to send 500 TRX into the hacked wallet to cover the transaction fees.
Kraken has since revealed that the identity of the suspected hacker is known. “We know the identity of the hacker,” Kraken Chief Security Officer Nick Percoco responded to a tweet that suggested that the hacker used Kraken to offload funds.
Sam Bankman-Fried Made Purchases with Customers’ Money
Sam Bankman-Fried has said in a court affidavit that he and Gary Wang, a former FTX executive, borrowed more than $500 million from Alameda Research earlier this year. The funds were “capitalized into” Emergent Fidelity Technologies, a firm owned by both Bakman-Fried and Wang.
The court documents further reveal that Emergent Fidelity then purchased 56 million shares in Robinhood, a nearly 8% stake, with the funds “capitalized into” it by Bankman-Fried and Wang.
Several parties have tried to lay claim to the Robinhood shares. Bankrupt crypto lender BlockFi has requested that the 56 million shares of Robinhood stock were transferred from the control of Emergent Fidelity to a neutral broker until the right party to take control of the shares is determined. BlockFi claims the shares back a loan made to Alameda Research. BlockFi filed for Chapter 11 bankruptcy protection following the collapse of FTX.
FTX Customers Seek First Priority Over Repayments
Four plaintiffs representing affected former customers of FTX have filed a lawsuit in the US Bankruptcy Court in Delaware against the fallen crypto exchange and its former executives. The lawsuit claims that FTX is to be held responsible for the misappropriation of their crypto accounts and they (the customers) deserve ownership of the remaining FTX’s digital asset holdings. The plaintiffs seek to make affected customers of FTX a priority over other creditors.
Sudden Movement of Funds on Alameda-Linked Wallets
There was a sudden movement of funds on Alameda-linked crypto wallets and millions of dollars worth of tokens were sold yesterday. ETH-based tokens were merged from various wallets into two wallets. The tokens were then sold for ETH on decentralized exchanges, then funneled through crypto mixing services. The pattern in which the funds were sent out of the wallets has raised eyebrows. Crypto mixing services are typically used by exploiters to obfuscate the destination of stolen funds and to hide their tracks.
Sam Bankman-Fried currently faces two counts of wire fraud and six counts of conspiracy. SBF is expected to enter a plea deal next as he appears back in the Manhattan federal court in early January, according to several reports.
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