Tag: North Dimension

Tether, FTX, and Deltec Bank: MONEY TIME

  • By Amy Castor and David Gerard

There’s a lot of class action lawsuits in crypto. We mostly don’t note these — they so rarely go anywhere — but a consolidated class action against FTX’s various enablers has turned up some interesting allegations concerning everyone’s favorite stablecoin, Tether, and its remaining US dollar banker, Deltec Bank of the Bahamas.

Tether has banked with Deltec since 2018. Deltec was one of the few banks in the world that would have anything to do with Tether after their deal with Crypto Capital led to $850 million of the Tether reserve being frozen.

We already knew that FTX/Alameda, also based in the Bahamas, was in it up to their necks with Tether. Alameda was Tether’s largest customer between 2020 and 2022 that wasn’t a crypto exchange.

The new allegations, filed in a Florida federal court, are that Deltec was an active and enthusiastic part of the FTX and Alameda business schemes that lost billions of customer dollars and for which Sam Bankman-Fried is now in jail.

The amended complaint

The new amendment to the complaint, filed on February 16, is based on 7,000 pages of direct text messages that were offered up in discovery. The full amended complaint is 158 pages. The Deltec shenanigans are paragraphs 133 to 260. [Motion, PDF; Complaint, PDF; Case docket] 

The complaint hammers on Deltec’s relationship with Tether, FTX, and Alameda. It states that Jean Chalopin, the head of Deltec, and Gregory Pepin, Deltec’s deputy CEO, played a key role in FTX’s money laundering.

FTX/Alameda: MONEY PARTY THE BEST PARTY

Bankman-Fried’s empire came crashing down in November 2022, when it was revealed the company had an $8 billion hole in its customer accounts. The complaint lists the various defendants in the case — Gary Wang, Nishad Singh, Caroline Ellison, Ryan Salame, and others. 

Deltec provided banking for FTX Trading, FTX US, and Alameda. Pepin manually allocated incoming customer funds to FTX accounts and moved the funds to Alameda. Deltec also extended a “secret line of credit” to Alameda of $1.8 billion.

Deltec was a money launderette for FTX. They would happily let all those annoying compliance requirements slide for their very good friends at FTX.

Deltec would pass compliance questions from intermediary banks to FTX or just make up fake invoices to account for otherwise unexplained transactions. Here’s Pepin:

[Ibanera] are asking info about [the foregoing FTX customer] do you have the agreement linked to this deposit? so i can get [the wire] release asap?

Idea 🙂 Send me a PDF of the term and condition + Invoice and I’ll send

… Now if you send me a XLS sample or whatever of invoice I can populate invoice myself later can do? 

Pepin would send ecstatic messages in the group chat when a batch of wires came in. The complaint has a whole page of Pepin posting like this:

MOOONNNEEEYYY TTTIIIIMMMMEEEE

I HEAR A MONEY TIME IS HAPPENING HERE I THINK I NEED TO BE A PART OF IT

doing my best to hold the wall but such money tsunami is hard to handle dude

MONEY PARTY THE BEST PARTY

it is MONEY TIME INDEEDE

Deltec Bank also moved FTX customer deposits directly to Alameda on request, in the billions. Deltec would even run out of cash to pay FTX customer withdrawals and have to ask Alameda to cover for them. Pepin: “Lena you send today the 300m? or later? As we won’t have liquidity”.

Moonstone Bank

Chalopin bought Farmington Bank in Washington in 2020 in a deal with FTX, turning a tiny local bank into a crypto service company — mostly for FTX and Alameda. The bank was then renamed Moonstone.

Moonstone joined the Federal Reserve without notifying the Fed of its change of business plan from a local farmers’ bank to a crypto money launderette. The Fed shut Moonstone down in August 2023.

North Dimension: Ipad 11 “ich Cell Phone

North Dimension was a fake electronics company that FTX/Alameda created so they could set up accounts at Silvergate Bank and Signature Bank in its name. FTX had customers wire money to North Dimension’s Silvergate and Signature accounts so that it would go directly to Alameda. This was part of the money laundering charge that Bankman-Fried was convicted on.

Pepin made sure that deposits from North Dimension came through to Deltec and were sent to FTX or Alameda as needed.

FTX put actual effort into the North Dimension bit of the fraud, if only the barest minimum. North Dimension even had a website!

The site didn’t actually work — all the product links went to the contact page. It was “rife with misspellings and bizarre product prices,” including “sale prices that were hundreds of dollars above a regular price” — such as the fabulously desirable “Ipad 11 “ich Cell Phone,” normally $410, but available at a sale price of just $899.

The North Dimension website is in the Internet Archive. The “About” page is a trip. The company logo comes from DesignEvo Free Logo Maker — it’s their “3D Orange Letter N” logo. You can see every penny of the twenty-five cents they spent on this. [North Dimension home page, archive; product page, archive; about page, archive; DesignEvo]

Tether and Deltec

When Tether became a Deltec customer in November 2018, it deposited about $1.8 billion — making up nearly half of Deltec’s total deposits at the time.

Alameda was the second-largest creator of tethers (USDT) — “about one-third of USDT minted at any time went to Alameda.”

The USDT was funded with FTX customer deposits which Deltec routed to Alameda. Remember that Alameda and FTX were claiming at this time to be completely separate operationally.

Alameda created and redeemed tethers directly via Alameda and Tether’s Deltec accounts. Alameda would first send a message to the Alameda/Tether/Deltec group chat. Transfers would often have to wait for Pepin to be awake.

Alameda pumping out new tethers seems to have been the engine for the billions of tethers printed in 2020, 100 million at a time: “In total, Alameda minted more than $40 billion USDT through this scheme, encompassing nearly half of USDT in circulation at the time.”

How solidly backed was USDT by the account at Deltec? About as solidly as it was in 2017 when Tether didn’t have a bank account at all for months at a time:

… in November 2018, Deltec Bank provided an assurance letter stating that USDTs were fully back by cash, one U.S. dollar for every USDT. However, the next day, Tether began to transfer hundreds of millions in funds out of its Deltec Bank account, such that within 24 hours, Deltec Bank’s assurance letter was no longer true.

FTX’s alleged Tether scam

The complaint postulates that Alameda was furiously printing tethers so that Alameda could make less than a tenth of a percent from arbitraging the price of USDT:

Upon information and belief, Alameda and Tether profited from the scheme as follows. Alameda would create USDT in amounts and at times that would inflate the market price of the stablecoin. Alameda would promptly sell the USDT in the market, at several basis points above the purchase price. Tether, in turn, would receive U.S. dollars for stablecoins it minted from nothing.

This sounds unlikely to us — there just isn’t the volume on any existing USD-USDT trading pair. To turn USDT into dollars in any quantity, you need to buy crypto then sell that at an actual-dollar exchange.

Deltec allowed Alameda a three-day grace period to pay for its freshly created USDT — that $1.8 billion line of credit. We think Alameda’s scam would have been to do some market-moving trades to make enough dollars to pay for the tethers they’d just bought.

Attachments to the complaint

Also attached to the complaint is a declaration from Caroline Ellison, former head of Alameda. Ellison apparently settled with this class action’s plaintiffs in January 2024 and offered to assist them. This declaration asserts the accuracy of the claims in the complaint as far as Ellison directly knows.

FTX former counsel Dan Friedberg adds a declaration. Friedberg has also settled with the plaintiffs of this class action. He only confirms the plaintiffs’ claim that Avinash Dabir managed FTX’s celebrity sponsorships out of FTX’s Miami office.

The last attachment on the amended complaint is a transcript of a podcast with Dabir talking to Joe Pompliano on the Joe Pomp Show about FTX’s celebrity sponsorships.

Harborne corrects the record by lawsuit

Christopher Harborne, shareholder of 12% of the Tether empire under his Thai name, Chakrit Sakunkrit, is suing the Wall Street Journal for an article it wrote in March 2023. The story was about Tether’s efforts to get banking after they were cut off by correspondent bank Wells Fargo in 2017. [Complaint, PDF, archive]

The WSJ story said that Harborne aided Tether’s efforts to skirt the traditional banking system by using his company AML Global to set up an account at Signature Bank: “The Sakunkrit name had earlier been added to a list of names the bank felt were trying to evade anti-money-laundering controls when the companies’ earlier accounts were closed, but Mr. Harborne’s hadn’t.”

Harborne states that “AML’s Signature Bank account was never used for Tether or Bitfinex whatsoever.” WSJ told him that the story didn’t imply that he had committed crimes, but he is suing over a claimed inference that he had.

WSJ edited the story on February 21 to remove the bits about Harborne. [WSJ; archive of March 3, 2023]

Harborne’s lawyers also reached out to Mike Burgersburg, a.k.a. Dirty Bubble Media, asking him to take down his article on Harborne. Mike kept the story up but made edits. [Dirty Bubble, archive of November 30, 2023]

Originally Mike had noted that the account Harborne set up at Signature was a back door for Bitfinex to access the US banking system. His source was the WSJ. “This was edited because WSJ removed those comments from their story. I am not making this claim, and there is no evidence at present for this assertion,” Mike said. 

Tether is run by a handful of people, some known and many unknown. Former CTO Paolo Ardoino is the named CEO and he acts like a social media intern. This reeks of Ardoino being the fall guy for whoever actually is running Tether.

Harborne doesn’t want to be thought to be that person. He says he “is not now and never has been in any management or executive role at Bitfinex or Tether; he is merely a minority shareholder.” A large chunk of his net worth is apparently in ether. His son, Will Harborne, has worked for various iFinex entities over the years.

Squeal!

Pig butchering scams, a.k.a. romance scams, have taken $75 billion from victims, according to a study by University of Texas finance professor John Griffin and his student Kevin Mei.

Once scammers collect the funds, they most often convert them to tethers: “Funds exit the crypto network in large quantities, mostly in Tether, through less transparent but large exchanges—Binance, Huobi, and OKX.” [SSRN]

Zeke Faux researched Tether’s pig butchering use case in depth for his book Number Go Up. That chapter of the book was put up by Bloomberg as a teaser. [Bloomberg, 2023, archive]

Griffin has been following Tether for some years. He was behind another paper on Tether money flows, 2018’s “Is Bitcoin Really Un-Tethered.” That study showed how Tether was used to prop up the price of bitcoin for most of the 2017 crypto bubble. 

Tether shills on Twitter have been frantically congratulating Tether on its “deal” with the Department of Justice to combat romance scams. No such deal has been announced. [Twitter, archive]

Just in case

USDT tokens are currently available on 15 different blockchains. Most of the issuance is on Ethereum and Tron.

Tether has proudly announced a recovery tool in case any of these blockchains have problems and your USDT becomes inaccessible. [Tether, archive]

We doubt Tether would make an announcement like this without a gun to their heads. So this reads to us like Tether reassuring the crypto whales that their tethers will be protected if Tron goes down.

Heading for the trillion

Tether crossed 100 billion USDT in circulation on March 5. This is completely in line with Dan Davies’ theory from Lying for Money that frauds snowball over time: 

The reason for this is that unlike a genuine business, a fraud does not generate enough real returns to support itself, particularly as money is extracted by the criminal. Because of this, at every date when repayment is expected, the fraudster has to make the choice between whether to shut the fraud down and try to make an escape, or to increase its size; more and more money has to be defrauded in order to keep the scheme going as time progresses.

The news about crossing 100 billion made it into Reuters, which noted Tether’s remarkably non-transparent reserves and the risks Tether poses to crypto and the broader financial system. [Reuters; Reuters]

Tether needs to be shut down. We’ve been saying this since 2017. It’s a risk to anyone who holds crypto. It’s also helped to accelerate other scams, so they’ve grown to a whole new level. 

As we write this, Tether has just printed 2 billion USDT — its biggest issuance yet. Tether has printed 5 billion new USDT in just the past week. Gotta keep number going up. MOOONNNEEEYYY TTTIIIIMMMMEEEE!

Image: Gregory Pepin photographed on the ipad 11 “ich sell phone.

(Updated March 12 at 5PM ET to add a quote from Mike Burgersburg and clarify why he edited his story on Tether.)

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Posted on by Amy Castor 3

FTX: John Jay Ray files second interim report, sues Daniel Friedberg

  • By Amy Castor and David Gerard

Me: [turning to guy at gas station] so the polycule was mostly in the dark about the fraud. SBF had back door access
Guy: [pulling out taser from under seat] is that right

— Ed Zitron

“Attorney-1” was a bad boy

John Jay Ray III, the CEO of FTX in bankruptcy, has released a second interim report detailing how FTX skirted bank secrecy laws and commingled funds — and how an FTX lawyer, “Attorney-1,” served as Sam Bankman-Fried’s fix-it and hatchet man. [Report, PDF]

(We covered the first interim report, which came out in April, here.)  

“Attorney-1” is very obviously Daniel Friedberg, who was FTX’s compliance officer and Alameda’s general counsel. A day after Ray released the interim report, FTX filed suit against Friedberg, alleging malfeasance in the course of his duties. The complaint details many of the same incidents in the report. [WSJ; redacted complaint, PDF]

In 2008, Friedberg was a colleague of Stuart Hoegner at Ultimate Bet, where the pair helped cover up a multi-million-dollar scandal in which the site cheated its players. Hoegner now works for Tether, a dubious stablecoin issuer. 

SBF hiring Friedberg should have been the first clue that FTX.com was a massive fraud. 

Friedberg resigned around the time the FTX Group filed for bankruptcy. Weeks later, he met with the FBI, the DOJ, and the SEC and told them he wanted to cooperate with any investigations.

There’s an interesting line in the interim report:

The Debtors have identified on Attorney-1’s hard drive a final copy of the false written testimony that Bankman-Fried provided to Congress.

FTX has access to the hard drive from Friedberg’s computer. Did Friedberg just leave the evidence behind when he quit FTX? Or did he willingly hand over his laptop to FBI agents? This hard drive seems to have had all sorts of interesting documents on it.

Friedberg hasn’t been charged with any crimes as yet — but based on Ray’s report and the ensuing lawsuit, we wouldn’t be surprised if there’s a sealed indictment out there waiting for him.

Following the money

FTX owes $8.7 billion in customer funds — over $6.4 billion of which is cash and stablecoins. According to Ray, Friedberg lent a helping hand when FTX executives “used commingled customer and corporate funds for speculative trading, venture investments, and the purchase of luxury properties, as well as for political and other donations designed to enhance their own power and influence.”

Ray details what he found about various FTX accounts and the flows of cash in and out of them. Tracking money flows was “extraordinarily challenging”:

… from the inception of the FTX.com exchange, the FTX Group commingled customer deposits and corporate funds, and misused them with abandon … Commingling and misuse occurred at their direction, and by their design.

Ray and his team have recovered $7 billion in “liquid assets” so far, which is astounding — though we’re not sure how liquid the crypto component of that will be in practice, or how much is unsaleable FTT tokens.

The report does not include FTX in Japan, Cyprus, or Singapore — areas where funds were properly segregated by law. It also does not address FTX.US, which Ray says is still under investigation. 

No, no, it’s research 

FTX lied to banks — a lot. Alameda Research had “research” in its name so that it could get bank accounts without immediately being flagged for enhanced due diligence as a money services business. FTX couldn’t get banking, so they used Alameda bank accounts to receive customer cash, right from the start. 

But banks started asking inconvenient questions. When “Bank-1” — likely either Signature or Silvergate — asked why FTX was sending money to Alameda, an Alameda employee told them that “customers occasionally confuse FTX and Alameda” but that all wires through the account were to settle trades with Alameda.

This was false. In just 2020, one of Alameda’s accounts received more than $250 million in deposits from FTX customers and more than $4 billion from other Alameda accounts that were funded in part by customer deposits, says the report.

When banks started rejecting wires to Alameda accounts, FTX set up North Dimension so it could continue to funnel money to FTX. Friedberg and SBF told “Bank-1” that North Dimension was a crypto trading firm with substantial operations. In fact, it was an empty shell with no employees or operations.

Friedberg also engaged his old law firm to create a fake corporate register for North Dimension for the bank: “Specifically, after Bank-1 asked for a copy of the register, Attorney-1 directed a law firm to create a register.”

Time travel by document

In 2021, FTX Trading Ltd was planning to go public. As part of the paperwork for that, it needed an audited financial statement.

The problem was that from April 2019 when FTX.com first launched until the end of August 2020, FTX.com customers had been sending cash deposits to Alameda bank accounts. FTX needed to cover up the fact that they were just using Alameda to move customer and company funds around without any agreement to do so.

So in January 2021, Friedberg had his old law firm draft a “cash management agreement” to explain why Alameda held FTX cash. Friedberg created from this a fake “Payment Agent Agreement.”

FTX usually signed documents with DocuSign to provide an electronic record. In this case, to avoid a DocuSign timestamp, SBF wet-signed the document on behalf of Alameda and FTX on April 16, 2021 — backdated to 2019 “for the sole purpose of providing it to an external auditor.”

How did Ray’s team know the document was backdated? They found the original document file on Friedberg’s hard drive:

While metadata reflects that Attorney-1 created the Payment Agent Agreement on April 12, 2021, and that the executed version was last modified on April 16, 2021, the agreement purports to have an “Effective Date” of June 1, 2019 —nearly two years earlier.

The IPO never happened — but the fake document did help the FTX companies get more funding from “potential investors in connection with its $400 million Series C financing that closed in January 2022.”

Sam the philanthropist

SBF was famous for his Effective Altruism. He used FTX funds by preference:

The Debtors have been able to identify certain transactions that appear clearly to have been funded in part with commingled customer deposits. These include political and “charitable” donations, venture investments and acquisitions, and the purchase of luxury real estate for senior FTX Group employees in the Bahamas.

Sam’s charitable donations got a bit esoteric. The FTX Foundation gave one guy $300,000 to “Write a book about how to figure out what humans’ utility function is” — a question that LessWrong rationalist philosophy needs to answer so as to construct the perfect superintelligence to rule over us all. And that hopefully won’t turn out to be Roko’s basilisk. [LessWrong, PDF, 2004]

The Foundation gave someone else $400,000 to make YouTube videos to promote LessWrong rationalism and Effective Altruism.

Closer to home, the Foundation gave $20 million to the Guarding Against Pandemics PAC, which was run by Sam’s younger brother Gabe Bankman-Fried.

FTX sues Friedberg

Friedberg’s malfeasance was egregious enough that FTX  is suing him for “damages caused by breaches of fiduciary duties, legal malpractice, and other wrongdoing, and to recover fraudulent transfers.” 

The suit also alleges Friedberg paid off whistleblowers rather than deal with the compliance issues they raised.

Friedberg worked at FTX from 2017 until its collapse in 2022, the last 22 months of that as general counsel at Alameda and chief compliance officer at FTX. Joe Bankman, SBF’s father, pushed Sam to hire Friedberg and keep him “in the loop … so we have one person on top of everything.”

FTX paid Friedberg millions of dollars in salary and bonuses, and tens of millions in crypto — a $300,000 salary at FTX.US, a $1.4 million signing bonus, an 8% equity stake in FTX.US, and a $3 million payment from Alameda. 

Plaintiffs want compensatory damages to be determined at trial, disgorgement of all of Friedberg’s compensation including the cryptos, punitive damages, and attorney’s fees.

Chief noncompliance officer

Friedberg’s putative job as chief compliance officer was to make sure the proper checks and balances were in place to prevent fraud, commingling of funds, and other wrongdoings. Per the complaint, he didn’t do any of that. Instead, “Friedberg actively participated in and facilitated such misconduct.”

Money was funneled to FTX insiders and booked as “personal loans” — which were never repaid, and which there was never any serious discussion of paying — “despite Friedberg’s false statement to the outside accountants that interest was paid quarterly on the loans.”  Friedberg was involved in more than $2 billion in such “loans.”

Friedberg also encouraged the use of Signal for corporate messaging, preferably set to make messages disappear.

Ray is still appalled at how bad FTX’s accounting was:

Those entities that did produce financial statements used QuickBooks, Google documents, Slack communications, Excel spreadsheets, and other inadequate means for measuring the level of assets and liabilities held by the FTX Group. Entries in QuickBooks were often made months after transactions occurred, rendering real-time financial reporting and risk management impossible.

Hush money

Friedberg served as SBF’s fixer. He paid off whistleblowers and “retained” whistleblowers’ attorneys — that is, he paid them off too. 

In November 2019, FTX and Alameda were hit with a class action lawsuit that accused the companies and their executives of racketeering and market manipulation. [Docket; Decrypt, 2019]

The lawsuit doesn’t name “Plaintiff’s Attorney-1” — but this is clearly Pavel Pogodin, who set up Bitcoin Manipulation Abatement for the sole purpose of filing crypto class actions.

Alameda said at the time: “The troll has no evidence of any wrongdoing, and will not further discover any — because there was no wrongdoing to discover evidence of.” [Medium, 2019]

Nevertheless, Friedberg took the suit seriously enough that he paid Pogodin off. (The details are redacted.) The suit was dismissed in December 2019.

As a California Bar member of flawless repute, Pogodin is happy to be paid not to do anything. He sent a letter in January 2022 threatening further possible action against FTX. Friedberg offered him “$1.6 million and $50,000 paid on a monthly basis.”

In sum, Friedberg arranged for the FTX Group to pay Plaintiffs’ Attorney-1 $3,320,000 through July 2022. Upon information and belief, Plaintiffs’ Attorney-1 provided no actual legal services to the FTX Group after signing the engagement letter.

An FTX.US employee on a $200,000 salary was fired after less than two months. She sent a demand letter in December 2021 claiming that “Alameda [was] nothing more than an extension of FTX, used to bolster investor confidence in FTX projects, and in turn drive up the prices of projects FTX had developed or invested in itself” and let employees insider-trade.

Friedberg gave this employee an “extraordinary settlement” (redacted in the filing) — and made a $12 million deal to retain Whistleblower-1’s attorney. Their only work for FTX was a three-page memo.

In early 2022, an attorney working at FTX for less than three months discovered that Alameda owned North Dimension. He flagged to Friedberg that North Dimension accounts were being used to fund FTX customer withdrawals and that Alameda didn’t have the proper money transmitter licenses.

Friedberg promptly fired him. The complaint details how the attorney was paid a large (redacted) severance package.

Other FTX news

John Ray’s team has so far racked up $200 million in fees — and the fee examiner thinks this is quite reasonable. Gotta pay the undertaker: [Bloomberg; summary report, PDF] 

Without question, the fees incurred to date are remarkable, but so is the professionals’ performance. The Fee Examiner has been struck by the creativity, professionalism, and personal sacrifice of the Retained Professionals who sprung into action in November to begin transforming a smoldering heap of wreckage into a functioning Chapter 11 debtor-in-possession.

Over in the criminal case, SBF moved to dismiss 10 of the 13 charges against him. Judge Lewis Kaplan has told SBF to get knotted: “The Court has considered all of the arguments of the parties. To the extent not addressed herein, the arguments are either moot or without merit.” [Doc 136, PDF; Doc 148, PDF; Doc 149, PDF; NYT; Doc 167, PDF] 

Sam wants to blame his troubles on Fenwick & West, the law firm used by FTX and Alameda, who apparently told him that all the hamfistedly obvious crimes he did were all totally legal. The DoJ and FTX objected, and Judge Kaplan has again told Sam to get knotted: “Neither Fenwick nor the FTX Debtors are part of the ‘prosecution team,’ and the government has no obligation to produce materials that are not within its possession, custody, or control.” [Bloomberg; Doc 150, PDF; Doc 151, PDF; Doc 151-1, PDF; Doc 156, PDF; Doc 159, PDF; Doc 166, PDF]

Over at Lightcone, who build and run LessWrong and the Effective Altruism Forum: “Funding is quite tight since the collapse of FTX.” They’re asking the users for $3 million to $6 million over the next year. [LessWrong]

Posted on by Amy Castor 5