Could There be an Impact on Robinhood Shareholders with the SBF Share Seizure
Creditors and customers of FTX may be able to reclaim some assets that were wiped out as the feds have been seizing the 7.50% stake in Robinhood (HOOD) stock held by Sam Bankman-Fried (SBF). SBF faces charges of fraud and a myriad of financial crimes after the collapse of FTX in November. The impact of the collapse is having an effect on other areas of finance, including assets that had been controlled by SBF. The Robinhood shares are valued near $450 million, and while this may bring some hope or relief to those that will receive a distribution, there is a risk to HOOD investors.
Background
The FTX bankruptcy has left a line of claimants to recapture what they can from the cryptocurrency giant. Bankruptcies are seldom easy; those that could involve layers of fraud become tied up in even larger disputes and legal battles. For example, the large Robinhood holding is tied up in a dispute between FTX and bankrupt crypto lender BlockFi. The company alleges that SBF put up the shares as collateral for a loan to Alameda Research, a company he also owned.
The HOOD stake was purchased in 2022 through a holding company SBF controlled, Robinhood of course is the innovative broker specializing in self-directed individual investors. Through the DOJ, authorities are going after the shares of HOOD and accounts that are held at the bank Silvergate Capital (SI) which is a banker for the crypto industry.
Separately, court filings on January 4th brought awareness to a NY federal judge ordered last month requiring the seizure of some $93 million that an FTX arm held in accounts at Silvergate. As it relates to this seizure. The Justice Department says it believes the assets seized are not the property of the bankruptcy estate, while a lawyer for FTX maintains that the seizures were from accounts not directly controlled by the company. They were ordered in connection with the criminal case involving SBF.
FTX investors’ asset claims in the exchange, which was once valued at $32 billion, come after creditors and other rightful claimants.
How This Could Impact Robinhood Shareholders
Asset seizures and later distribution to those hurt by fraud involve liquidation of the assets seized. In the case of stocks, they will be sold and turned into cash. Imagine a sudden effort to sell 7.50% of any company. That is a large percentage to move. The stake, worth between $400 and $500 million, may serve as a dark cloud depressing share prices and slowing any planned growth of the company. It may eventually culminate in liquidation at a pace not conducive to retaining a level stock price.
Lack of Crypto Governance, Oversight, Standards, and Risk Management Frightens Feds
Three Federal Agencies have warned banks about the dangers of dealing with digital assets. On the first banking day of the new year, the Federal Reserve (Fed), the FDIC, and the Office of the Controller of the Currency (OCC), the three banking regulators in the US, issued a three-page joint warning to banks. It points to eight risks that banking organizations should not let migrate to the US banking system. And highlights processes to mitigate these risks while the three agencies develop frameworks to oversee the ever-changing asset class.
The Joint Statement on Crypto-Asset Risks to Banking Organizations is for the consumption of banks of all types and sizes through the US that have or may adopt policies. It warns the events of 2022 have “been marked by significant volatility,” and that vulnerabilities in the crypto-asset sector have surfaced.
The joint statement explains that banking organizations that have in the past seeked to engage in activities that involve crypto-assets. Have been taken on a case-by-case basis. “The agencies continue to build knowledge, expertise, and understanding of the risks crypto-assets may pose to banking organizations, their customers, and the broader U.S. financial system.” The statement says that the significant risks “highlighted by recent failures of several large crypto-asset companies,” will cause the three agencies to take a careful and cautious approach.
The agencies highlighted eight risks that they wanted banking organizations engaged in crypto-assets to understand may not be in accordance with safe and sound banking practices:
Risk of fraud and scams among crypto-asset sector participants.
Legal uncertainties related to custody practices, redemptions, and ownership rights, some of which are currently the subject of legal processes and proceedings.
Inaccurate or misleading representations and disclosures by crypto-asset companies, including misrepresentations regarding federal deposit insurance, and other practices that may be unfair, deceptive, or abusive, contributing to significant harm to retail and institutional investors, customers, and counterparties.
Significant volatility in crypto-asset markets, the effects of which include potential impacts on deposit flows associated with crypto-asset companies.
Susceptibility of stablecoins to run risk, creating potential deposit outflows for banking organizations that hold stablecoin reserves.
Contagion risk within the crypto-assetsector resulting from interconnections among certain crypto-asset participants, including through opaque lending, investing, funding, service, and operational arrangements. These interconnections may also present concentration risks for banking organizations with exposures to the crypto-asset sector.
Risk management and governance practices in the crypto-asset sector exhibiting a lack of maturity and robustness.
Heightened risks associated with open, public, and/or decentralized networks, or similar systems, including, but not limited to, the lack of governance mechanisms establishing oversight of the system; the absence of contracts or standards to clearly establish roles, responsibilities, and liabilities; and vulnerabilities related to cyber-attacks, outages, lost or trapped assets, and illicit finance.
Take Away
In 2022 the young crypto asset class took a beating similar to high-tech stocks. There is a reason banks are limited to their stock market activity. It seems that these three federal agencies, which do not include work being done by the SEC (or CFTC), are now working hard to regulate what banks can do involving these assets; in the meantime, they want to let banking organizations know that crypto-assets need to be dealt with extreme caution, perhaps moderation, and know that as far as the regulators are concerned, if they still want to serve crypto customers, they should discuss all planned activities with the appropriate regulator prior to filing an application and should ensure that risk management, including board oversight, policies, procedures, risk assessments, controls, gates and guardrails, and monitoring, are in place to effectively identify and manage risks.
Caroline Ellison Now Enters a New Stage of Her Young Life
Caroline Ellison, the 28-year-old former CEO of Alameda Research, pleaded guilty to seven criminal charges, including wire fraud and conspiracy to commit securities fraud, according to her plea agreement, signed Monday. Caroline, the former chief executive of Alameda Research, a trading firm with close ties to FTX, is said to face up to 115 years in prison. Her admitted role in allowing customer funds to flow through an electronic “backdoor” to be used by Sam Bankman Fried (SBF) of FTX tells us a little bit about her recent past, but who is Ms. Ellison, and how did she get to be CEO of Alameda?
What is Alameda Research?
SBF’s portfolio of crypto companies started with his founding of Alameda research in 2017. Alameda Research was, until very recently, a cryptocurrency trading firm known to specialize in quantitative research and providing liquidity to cryptocurrency and digital assets markets.
Ellison joined the Alameda team as a trader in 2018 and became its co-CEO in 2021.
Bankman-Fried had started Alameda Research as a high-risk, high-reward crypto trading firm using high-risk tactics. He has admitted he included “research” in the name to give it a better vibe. In an NPR podcast in 2017, he was shown to be aggressively taking advantage of the “wild west” crypto playing field. SBF grew his crypto-related business into more complex cryptocurrency trading, accessible to the masses, with his founding of FTX, a crypto exchange, in 2019. He did this by leveraging his image as highly experienced in crypto, which helped him to raise money from firms like BlackRock.
Who Is Caroline Ellison?
In a now-removed YouTube video and podcast, Caroline discussed her background and upbringing in an FTX public relations-type interview dated July 2020.
The 28-year-old Ellison grew up outside of Boston in a town called Newton. Her parents are professors, Glenn Ellison, her father, is a professor of economics at the Massachusetts Institute of Technology (MIT), and Sara Fischer Ellison lectures at the prestigious school.
Ellison said in the podcast that she inherited a natural aptitude for math and entered math competitions at a young age. She further would demonstrate that she was some kind of prodigy by telling people that by age five, she read a Harry Potter book by herself. “I refused to wait for my parents to read it [to me],” she said.
She went on to major in math at Stanford. After applying for trading internships, a field that is very competitive for new graduates, she landed at Jane Street Capital, a well-respected firm on Wall Street. After her internship, she worked there for a year and a half.
Is Caroline Elliman or was Caroline Elliman Sam Bankman Fried’s girlfriend? There are sources that say that Ellison met Bankman-Fried at Jane Street. He worked there from June 2014 to September 2017, according to his LinkedIn, which is still live and has 28,250 followers.
Ellison said she learned about Alameda over coffee with then-CEO Bankman-Fried while visiting the Bay Area and decided “it seemed like too cool of an opportunity to pass up.” She joined the company in 2018.
Bankman-Fried would then resign as CEO of Alameda but retained his role as CEO of FTX. In October 2021, Ellison became co-CEO with Sam Trabucco, a former trader at Susquehanna International Group.
Trabucco resigned in August 2022 to “spend a lot of time traveling,” according to one of his tweets, saying he “bought a boat.”
Was There Romance Between Ellison and SBF?
When a book about this is written, and the movie is out, it will include sex.
There have been rumors of polyamory. This is a relationship behavior that involves connections with more than one person. According to a Coindesk article from November, among the FTX executives, in the Bahamas, “All 10 are, or used to be, paired up in romantic relationships with each other.” There have also been suggestions that FTX employees and Bankman-Fried spent lavishly on the island, from yachts to thousands of dollars a day on catering.
Take Away
Financial fraud comes in many forms. Often it starts out innocently when a bad trade happens, someone tries to cover it up, and the markets don’t cooperate to bail out the bad trade, then more illegal actions are taken to cover that up. There have also been situations where unqualified, not experienced persons are in charge and either unaware of the magnitude of their deceptive actions or are following orders, perhaps just going along because others are doing it too. Then there are those that enjoy the attention they get by being out front and sharing wealth and buying fame. Another more common deceit is someone who is just plain old greedy. All are criminal.
I am not sure what the driver was in the Alameda/FTX, SBF Caroline Ellison (and others) case, but I am sure we will hear much more about this. As we do, remember the importance of trusting those you conduct business with and questioning them anyway.
Social Media and Stock Message Boards Again Help Amplify Market Manipulators
There is an ongoing government investigation after the Securities and Exchange Commission (SEC) charged seven podcasters and social media influencers with stock market manipulation. The benefit to those charged totals near $114 million as they allegedly ran a pump while they were dumping scheme. According to the SEC, the charges are against eight Twitter users that also used stock trading message boards on Discord, and a podcast to promote specific stocks to “hundreds of thousands of followers.” Meanwhile, they are said to have quietly sold into the run-up they helped create in the stocks’ prices.
The fraud they are being charged with began at the dawn of the pandemic in January 2020 and involved participants from various locations, including defendants from Texas, California, New Jersey, and Florida.
The main podcaster named in the case (Knight) is suspected of and also charged in the illicit trading scheme as having used influence to promote the others as expert traders, according to the SEC. Among the most called upon stocks used in the alleged scheme were Gamestop (GME), and AMC Theaters (AMC) – two darlings of newer investors that saw a rise in popularity beginning during the stimulus check, lockdown period in 2020. This period in market history helped usher in many brand new investors with time to listen to podcasts, follow social media posts, enjoy market-related memes, and benefit from a rising overall market.
Source: SEC.gov
The criminal charges include conspiracy to commit securities fraud and, for several of the defendants, multiple counts of securities fraud. Each of the charges carries a maximum possible sentence of 25 years in prison. The Justice Department simultaneously filed separate criminal fraud charges against the defendants, the SEC said.
The SEC’s complaint calls for the US District Court for the Southern District of Texas to impose fines and to require that the defendants give up their allegedly ill-gotten gains, along with a ban on future misconduct.
The SEC’s Summary of the Scheme
From the SECs court filing:
The Defendants engaged in a long-running fraudulent scheme to manipulate
securities by publishing false and misleading information in online stock-trading forums, on
podcasts, and through their Twitter accounts. The Primary Defendants, aided and abetted by
Knight, engaged in a pattern of conduct, sometimes referred to as “scalping,” in which they
recommended the purchase of a particular stock without disclosing their intent to sell that stock.
They generally executed their scheme in three phases. First, one or more of the Primary
Defendants identified a security to manipulate (the “Selected Stock”) and purchased shares of
that particular security. By sharing the name of the Selected Stock among some or all of the
group, the Defendants provided each other with the opportunity to purchase shares at lower
prices prior to the manipulation. Next, they promoted the stock to their followers on podcasts
and/or social media platforms in order to generate demand and inflate the share price. Typically,
the Primary Defendants announced price targets, teased upcoming news about the company,
and/or stated their intention to buy shares or hold their current positions for longer periods.
Finally, after promoting the stock to their followers in these ways, the Primary Defendants sold
their shares into the demand generated by their recommendations. When the scheme succeeded,
the Primary Defendants were able to sell their shares at higher prices and make profits. In order
to cover up their scheme and continue perpetrating it, the Primary Defendants at various points
deleted old tweets and Discord chats, and lied to their followers about the reasons why particular
stock picks were followed by declines in the prices of those stocks, obscuring their own roles in
causing losses among their followers and other retail investors.
None of the Primary Defendants disclosed that they were either planning to sell,
or were actively selling, a Selected Stock while recommending that their followers buy it. Nor
did any of the Primary Defendants disclose that they were coordinating with each other to
manipulate the price and volume of trading in the stocks they were promoting. Moreover, the
Primary Defendants’ deception extended beyond their omissions and outright lies about their
intentions regarding, and views about, the securities they were promoting. For instance,
sometimes they peddled false or misleading news about particular stocks through social media or
podcast interviews. On some occasions, the Primary Defendants lied about losing money on a
particular stock when in reality they had profited handsomely, in order to generate trust among
their followers—trust that was necessary to perpetuate the scheme and ensure that their followers
would continue to purchase shares based on their future recommendations. Indeed, in private
chats and surreptitiously recorded conversations, they bragged and laughed about making profits
at the expense of their followers.
Defendants’ specific roles in the fraudulent scheme varied depending on the
timeframe and the specific security at issue. Typically, only a subset of the Primary Defendants
participated in the manipulation of a particular stock. Those Primary Defendants would agree on
a Selected Stock in which they would each establish a position (i.e., “load” or “load up” on the
stock). After loading up on the Selected Stock, most, if not all, of the Primary Defendants who
had established positions in that stock would recommend it to their followers. The Primary
Defendants often referred to “swinging” or taking a “swing” position in the stock, by which they
conveyed to their followers that they intended to hold onto the stock for at least a day and likely
longer. As the primary defendants involved in the deceptive heralding of a particular stock
often informed other defendants of their plans, those not directly promoting the stock could,
and many times did, take advantage of the advanced knowledge by purchasing the Selected Security, in
advance of the promotion, and selling the Selected Security at inflated prices that resulted from
the promotion. Over the course of the ongoing scheme, all of the primary defendants, aided and
abetted by Knight, engaged in this conduct, participating directly in scalping and other deceptive
conduct, and all of the Defendants profited from the knowledge that others were doing so.
The Primary Defendants deceptively promoted stocks through three channels:
stock-trading forums on Discord; podcasts; and Twitter.
Take Away
Fraud in the securities market is almost as old as the markets themselves. While the SEC exists to protect investors, the best person to protect oneself is yourself. When consuming investment advice, ask yourself how well you know where the advice is coming from. What is the persons background, for example, are they credentialed with a CFA or guided by the responsibilities that FINRA registrations enforce. Are they ranked by a third-party entity as to their stature?
The alleged pump and dump scheme being investigated and prosecuted by the SEC only exists because people tend to follow the crowd, after-all crowds seem safe. Successful long-term investing often involves more thought than following others into a trade. There are true stock analysts that can help investors sort through all the opportunities, but in the end, the individual investor still needs top ask if it makes sense, does it feel right, and it is likely to match investment goals.
On December 15, Channelchek along with veteran stock analysts, provided registered users of Channelchek their thoughts on a select few companies they cover. If you were not able to attend live, register for Channelchek emails (no cost) now to learn when these extremely insightful presentations will be available online. At a minimum, I promise one will immediately see the difference between a stock market social media influencer and how they make recommendations (tout stocks), and professional equity analysts that ignores hype and instead drills down to best assess the future prospects of a company. Sign up for Channelchek notifications here.
