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Why must big City firms always fall for scams like FTX?

 (ES Composte)
(ES Composte)

THERE must be some very awkward meetings taking place across the City and Wall Street right now. The sort of encounters where people bang tables and demand explanations, where they look at PowerPoints and Excels, and gasp.

This is the ongoing fallout from the collapse of FTX, the once fast-growing, seemingly all-conquering crypto exchange. If you thought the impact of the firm’s bankruptcy was only confined to the distant world of TechUSA, think again.

The published 116-page “FTX Creditor Matrix” makes for illuminating and yes, depressing, reading. Among the banks caught up in the implosion are Goldman Sachs, JPMorgan, Wells Fargo, Deutsche, HSBC and MUFG. Also included in the thousands of entries are leading law firms, including London’s Slaughter and May, Linklaters, Hogan Lovells, Ashurst, Lewis Silkin, and Baker & McKenzie. PwC and other accountants crop up as well.

Other listed creditors include US government departments, securities regulators, crypto houses, media organisations, big tech players and PR and marketing advisors. The names of individuals are redacted and the size of the debts, if any, are not contained. Inclusion on the list doesn’t mean a firm is heavily exposed to FTX. All that can be said is that these organisations had some sort of connection with Sam Bankman-Fried’s once-giant exchange.

The list “is intended to be very broad for service purposes and includes parties who may appear in the debtors books and records for any number of reasons,” state the lawyers for FTX.

Still, it can be safely assumed there are those on the roll that have lost, or were advising clients who lost, substantial amounts in the FTX crash. Not for the first time, there will be colleagues, clients asking how they got into this mess?

Prior to its filing for bankruptcy in November last year, FTX was one of the largest crypto exchanges in the world. Once valued at $32 billion, FTX and its wunderkind boss, because that was how Bankman-Fried was viewed in some quarters, spent heavily on advertising, self-promotion and acquiring influence from political donations.

It’s now clear that what he was actually running was a monumental scam. This week, his co-founder and FTX’s former engineering director, Nishad Singh, pleaded guilty to six criminal charges in the US, including three counts of conspiracy to commit fraud. Bankman-Fried faces 12 criminal charges, which he denies. He’s on bail of $250 million while awaiting trial.

FTX went down suddenly, leaving users unable to withdraw their funds. US prosecutors allege that Bankman-Fried, the “King of Crypto”, was diverting customer deposits at FTX to his Alameda Research fund. From there, the cash went on all manner of purchases, including property, other investments and political donations.

Legal filings maintain that 27-year-old Singh knew what Bankman-Fried was doing. He’s a childhood friend of Bankman-Fried, worked at Alameda Research, and was part of the team that set-up FTX. Singh, too, was a political donor.

Singh admits to withdrawing $6 million for his own personal use. He wrote the software code that afforded special treatment to Alameda on the FTX platform. He was also responsible for helping Bankman-Fried backdate financial transactions to make FTX’s performance look better than it was.

He becomes the third member of Bankman-Fried’s senior management team to plead guilty, after former Alameda chief executive Caroline Ellison and ex-FTX CTO, Gary Wang. Perhaps alarmingly for Bankman-Fried, officials say Singh is now co-operating with the investigation into his pal and FTX’s former boss.

There is an all-too familiar pattern to these things. A business lands, as if from nowhere; it starts to generate huge amounts of publicity; speculators, investors, get excited and climb aboard; the bandwagon takes off.

Those who really ought to know better, who have seen this occur many times before, suspend reason and ignore any semblance of due diligence. Blinded by the promised pot of gold at the end of the rainbow they also charge in. Then, bang, the pack of cards comes hurtling down.

It’s extraordinary, and shameful, how even those who claim to be the brightest and the best — and charge accordingly — are sucked in. There should be a sign above reception and in the lifts in every professional and financial services office building: “If it’s too good to be true it probably is.”

What’s especially galling is the knowledge that while the bones of FTX are being picked over, a new scandal somewhere is almost certainly brewing. There will be another blow-up, followed by a list of creditors, some of whom will be nursing large losses. And on it goes. When are they ever going to learn?

Chris Blackhurst is the author of Too Big To Jail: Inside HSBC, the Mexican drug cartels and the greatest banking scandal of the century (Macmillan)