How Alameda Research Got to Play the Market on "God Mode"

Plus a CFTC commissioner says lawyers and accountants need to look in the mirror for FTX blame.

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Olivia Radin has joined King & Spalding as a partner in its New York office.

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“God Mode”

One account had that flag set, says the presentation: Alameda. To the tune of $65 billion. Setting the borrow flag to $65 billion and the can_withdraw_below_borrow flag to true is functionally equivalent to “Alameda can take as much of FTX’s customer money as it wants, remove it from the exchange, and spend it on whatever.” (Slides 16 and 17 give you a sense of what “whatever” meant, including $253 million of Bahamas real estate — including $12.9 million for “The Conch Shack”??? — and $93 million of political donations.)

The presentation describes this setting as “God Mode,” which I am not sure is a technical term found in FTX’s actual codebase or documentation, but you get the idea. FTX built a video game for other people to trade crypto, but FTX — or rather its affiliate Alameda — had a cheat code. Everyone else got to trade crypto, and if they made money, they could take out the money that they made. Alameda got to trade crypto, and it got to take out as much money as it wanted, whether or not it made money. It was playing in God Mode.

by Matt Levine's Money Stuff (Bloomberg)

Crypto Lawyers Share Blame for FTX, Other Disasters, CFTC Commissioner Says

Lawyers, accountants and other financial professionals should have stepped in to halt the fatal mistakes going on inside crypto firms such as FTX long before they imploded, said Christy Goldsmith Romero, a commissioner with the U.S. Commodity Futures Trading Commission (CFTC).

At the risk of offending their crypto employers, Goldsmith Romero said the experienced hands – also including the investment firms backing these companies – “need to step up, and call for compliance, controls and other governance, without allowing the promise of riches and the company’s marketing pitch to silence their objections to obvious deficiencies.”

“FTX operated in a manner that simply should not be possible in the presence of appropriate independent governance and gatekeepers, even in an unregulated environment,” she said in remarks prepared for delivery Wednesday at an event examining the FTX bankruptcy, hosted by the Wharton School and the University of Pennsylvania’s Law School. “Gatekeepers should have seriously questioned the operational environment at FTX in the lead up to its meltdown.”

by CoinDesk

Bitzlato owner Anatoly Legkodymov arrested, charged with financial crimes

A lawsuit filed by one of the country’s most prominent attorneys seeks to extract U.S. law enforcement officials have arrested the Russian owner of a cryptocurrency exchange for allegedly failing to implement required anti-money-laundering safeguards, enabling criminals who used the platform to traffic drugs and steal people’s money and identities, the Justice Department said.

Anatoly Legkodymov — the 40-year-old majority owner of Bitzlato — was arrested in Miami on Tuesday evening and has been charged with conducting an unlicensed money-transmitting business. Legkodymov, who lives in China, was indicted Wednesday afternoon in a Florida federal courthouse. His company allegedly processed more than $700 million of illicit funds from 2018 to 2022.

by The Washington Post

👉 The DOJ announced yesterday morning that at noon it would be bringing a crypto-related case--resulting in a lot of anticipation and grand expectations. The case against the owner of Bitzlato didn't seem to meet those expectations for many on Twitter.

SEC: Statement on Jury’s Verdict in Trial of Bernard Findley and Halitron IncAfter a seven-day trial, a jury in the United States District Court for the District of Connecticut found Bernard Findley and Halitron Inc, liable for securities fraud in connection with their false and misleading statements in press releases as part of a scheme to defraud investors.

“We are pleased with the jury verdict holding Bernard Findley and Halitron, Inc., liable for securities fraud. Halitron and its CEO, Bernard Findley, issued multiple false and misleading press releases that materially misrepresented information about Halitron’s stock buyback program, the status of an audit of the company, as well as the value of certain assets in an effort to prop up the value of Halitron’s stock, to generate purchases of the stock on the OTC markets, and to attract financiers to provide funding to Halitron….

by SEC Press Release

Elon Musk Trial Opens to Debate Over Nature of Tesla Tweets

“His lies caused regular people like Glen Littleton to lose millions and millions of dollars,” Nicholas Porritt, an attorney for Mr. Littleton, said of Mr. Musk during opening statements Wednesday.

Alex Spiro, an attorney for the defendants, described Mr. Musk’s tweets as shorthand and “funding secured” as a throwaway term that, while technically inaccurate, didn’t differ enough from the actual state of affairs to matter to the market.

“This was not fraud. Not even close,” Mr. Spiro said. “Not all deals that are considered come to pass.”

Mr. Musk, who could testify as early as this week, has said in court filings that he believed he had support from Saudi Arabia’s sovereign-wealth fund to take Tesla private.

by WSJ

👉 Musk's attorney added that "No, Twitter haikus — they don’t move the market. CEOs who can accomplish what they set their mind to, meeting their considerations — that’s what moves the market.”

Should Agencies Disgorge Their Ill-Gotten Disgorgement Awards?

But in 2020 the Supreme Court finally stepped in and essentially told the SEC it had no lawful basis for many (if not most) of those disgorgement awards. More specifically, the Court held in Liu v. SEC that disgorgement is an equitable remedy only when it doesn’t exceed a wrongdoer’s personal net profits and is awarded for victims. Many SEC disgorgement awards failed this test, including the one challenged in Liu and countless others where the SEC either deposited the disgorged funds into the U.S. Treasury instead of reimbursing victims, obtained disgorgement jointly and severally among unrelated defendants, and/or failed to credit legitimate expenses to reduce the disgorgement amount. (Justice Thomas technically dissented from the otherwise unanimous decision, but only because he believed the law, as it existed up until then, precluded the SEC from obtaining disgorgement under any circumstances.)

You might think an honorable government, thus chastened, would diligently review its historical docket and promptly reimburse the funds it had unlawfully confiscated from private citizens and businesses over the years, but don’t hold your breath. The SEC not only has failed to do so but also beat back a putative class action seeking such refunds, which was dismissed because the plaintiff had paid its disgorgement pursuant to a settlement in which it waived any opportunity for subsequent judicial review. Thus, despite decades of unlawful confiscations, the SEC seems to have safely secured its loot under permanent lock and key.

by Russ Ryan, New Civil Liberties Alliance

A Question for Congress: Why Didn’t the SEC Stop FTX?

If the SEC has the authority to regulate crypto exchanges, it should have done so long before now. The SEC could have simply prohibited U.S. customer assets from being held by unregulated crypto exchanges. Instead, as we have written in these pages, the SEC’s only action made the problem worse by blocking banks and brokers from taking custody of crypto assets.

Similarly, the SEC has asked crypto exchanges to register with regulators, but it has provided no guidance making it possible to do so. Once the SEC does provide that guidance, it should require crypto exchanges to register or shut them down. Instead, the SEC has taken enforcement actions against alleged unregistered public offerings of crypto tokens for lack of disclosure, while largely ignoring the risky activities of crypto exchanges with millions of retail customers. Worse, as reflected in this month’s regulatory agenda, the SEC still has no plan to regulate crypto exchanges. Congress needs to investigate the SEC’s regulatory failings.

by WSJ

Delaware Supreme Court: No Coverage for Appraisal Action

One of the hotly contested issues in recent years has been whether or not there is D&O insurance coverage for shareholder appraisal actions. In a recent decision that was largely focused on choice of law issues, the Delaware Supreme Court affirmed the trial court’s dismissal of a policyholder’s action to try to obtain coverage for defense costs incurred in an underlying shareholder appraisal action. Though the insurers prevailed in this coverage dispute, the Court’s holding on the choice of law issues could have ominous implications for insurers’ prospects in future coverage disputes, as discussed below. The Delaware Supreme Court’s January 10, 2023, opinion in the Stillwater Mining Company coverage dispute can be found here.

by The D&O Diary

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