U.S. authorities are asking crypto investors and trading firms that worked closely with FTX to hand over information on the company and its key figures, including founder Sam Bankman-Fried and the former head of his Alameda Research investment arm, Caroline Ellison.
The U.S. Attorney's Office for the Southern District of New York recently sent out a slew of requests, asking recipients to voluntarily hand over information on a list of FTX employees and associates, according to people familiar with the case.
Recipients include firms that frequently traded on FTX and may have had conversations with platform executives or hold other information that might help the criminal investigation, the people said. Such requests are often used to start tapping into potential sources of information held by witnesses, investors or customers without seeking grand jury subpoenas.
SEC parallel
Attorneys from the U.S. Securities and Exchange Commission's enforcement division, which is running a parallel civil probe into the exchange operator's collapse, sent similar requests for information to companies that invested in or traded on the crypto platform, people familiar with those inquiries said.
The agency is seeking to learn more about relationships those companies had with the former crypto giant, as well as communications with former top brass at FTX and Alameda, including Bankman-Fried and Ellison, the people said. The SEC is also trying to get a better sense of what FTX representatives told investors and whether any misrepresentations were made that would violate securities laws, the people said.
The moves show authorities are casting a wide net as they embark on their investigations into FTX's collapse, examining what the company and its leaders told investors and customers as the exchange imploded last month. So far, authorities haven't accused anyone of wrongdoing.
Representatives for SDNY prosecutors and the SEC declined to comment. FTX and Bankman-Fried didn't respond to requests for comment.
'Egg on their face'
Galaxy Digital Chief Executive Mike Novogratz, whose crypto financial-services firm disclosed a $76.8 million exposure to FTX, acknowledged in a Bloomberg Television interview Thursday that authorities have been getting in touch with firms that had interactions with FTX.
"Broadly, yes," the prominent crypto investor said when asked if the SEC, Commodity Futures Trading Commission or Justice Department was reaching out to FTX clients such as his company. He declined to elaborate.
"Regulators have some egg on their face," he said. "Sam was very far along at pitching to be the cash bitcoin market here in the U.S., both with the SEC and CFTC."
Employees and allies
The flurry of activity from authorities provides an insight into the early innings of the criminal investigation.
FTX, Alameda or any of its former top executives haven't been accused of any wrongdoing by U.S. authorities. The opening of criminal or civil investigations doesn't necessarily mean that they will press charges or take other actions.
The probe would start wide, focusing on customers and trading partners that had a lot of contact with FTX before narrowing down onto the crypto platform's key figures.
Former prosecutors, who spoke on the condition of anonymity because their clients were tied up in the FTX bankruptcy case, said investigators would look for material false statements in what Bankman-Fried and his allies, including Ellison and Gary Wang, told customers or trading partners.
Slow burn
Despite the public revelations about FTX's chaotic recordkeeping and allegations about the misuse of customer funds, the investigation will likely be a slow burn.
"While the crypto industry is evolving, the statutory enforcement tools really aren't," said Seth DuCharme, a former acting U.S. Attorney in Brooklyn.
Investigators will use blunt, well-established powers to determine the extent of any criminal wrongdoing, such as statutes dealing with wire fraud, money laundering and conspiracy, said DuCharme, now a partner at the Bracewell law firm.
"You can lose a lot of money and no one may have done anything intentionally wrong," he added. "Mistake is a defense to a crime."
The fact FTX was run out of the Bahamas and its founder still lives there adds a layer of complexity to the investigation.
If they need to act fast, prosecutors can seek a provisional warrant and request that Bahamian authorities arrest Bankman-Fried. The U.S. then has 60 days, according to an agreement between the two countries, to file a formal extradition request through diplomatic channels.
Anyone arrested could waive their right to an extradition hearing in the Bahamas, in turn speeding up their arrival on U.S. soil.
The entire process can be avoided if there is an agreement with U.S. prosecutors to surrender.
Lack of action
Short-changed investors have publicly criticized the lack of enforcement action to date and made comparisons to the swift arrest of the notorious fraudster Bernie Madoff.
In an interview with "Good Morning America" aired on Thursday, Bankman-Fried said he understood the comparison with Madoff but it wasn't who he was at all.
"I think when you look at the classic Bernie Madoff story there is no real business there," he said from the Bahamas. "The whole thing as I understand it, I think, was just one big Ponzi scheme. FTX was a real business."
