by Pam Martens and Russ Martens, Wall St On Parade:
To grasp the severity of the miscarriage of justice that occurred yesterday at the hands of Judge John Dorsey in the bankruptcy hearing for collapsed crypto exchange, FTX, one first needs a brief bit of background.
The FTX companies that the bankruptcy lawyers are attempting to resuscitate or sell off to other crypto outfits (while the law firms collect millions of dollars in billable hours for their work) are peddling a product – crypto – that is created out of thin air and has no legitimate productive purpose. (See Over 1,600 of the Brightest Scientific Minds in Technology Have Signed a Letter Calling Both Crypto and Blockchain a Sham.)
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The hundreds of billions of dollars that American investors have been dumped into crypto exchanges, crypto lenders, crypto miners, and crypto banks are not only threatening the safety and soundness of the U.S. financial system, they are threatening the global competitiveness of U.S. innovation. These failing enterprises raise capital in public markets, crowding out real companies with real innovations.
In July 2019, NYU Professor and economist Nouriel Roubini said this in a Bloomberg News interview:
“Crypto currencies are not even currencies. They’re a joke…The price of Bitcoin has fallen in a week by how much – 30 percent. It goes up 20 percent one day, collapses the next. It is not a means of payment, nobody, not even this blockchain conference, accepts Bitcoin for paying for conference fees cause you can do only five transactions per second with Bitcoin. With the Visa system you can do 25,000 transactions per second…Crypto’s nonsense. It’s a failure. Nobody’s using it for any transactions. It’s trading one sh*tcoin for another sh*tcoin. That’s the entire trading or currency in the space where’s there’s price manipulation, spoofing, wash trading, pump and dumping, frontrunning. It’s just a big criminal scam and nothing else.”
The law firm that Judge Dorsey is allowing to pull a coup d’etat in his courtroom is Sullivan & Cromwell – the go-to law firm for Wall Street for more than a century — which has bestowed on itself the role of lead law firm in the FTX bankruptcy. For reasons that appear to rest firmly on just two words – “billable hours” – Sullivan & Cromwell has immersed itself in all things crypto. In a recent FTX bankruptcy court filing, Sullivan & Cromwell acknowledged that not only has it collected legal fees and expenses of $8,564,487.50 from FTX and its related companies over the prior 16 months, plus a $12 million retainer for bankruptcy work, but it is simultaneously outside counsel to four of FTX’s major competitors: BlockFi, Coinbase, Gemini, and Kraken.
The quick take on the status of those five clients of Sullivan & Cromwell is as follows: the FTX group of companies has been described by federal prosecutor Damian Williams as “one of the biggest financial frauds in American history” with three of its top executives now indicted on a combined 19 criminal counts; BlockFi is also in bankruptcy; Coinbase, a publicly-traded crypto exchange, has lost more than 80 percent of its market value over the past 12 months; Gemini has had more than $900 million of client funds frozen at another crypto firm, Genesis; and Kraken has fired 30 percent of its staff.
But instead of bringing some sunshine to this murky mess that exists between Sullivan & Cromwell and the crypto cabal, Judge Dorsey has opted for more darkness. FTX filed for Chapter 11 bankruptcy on November 11 – two months ago. The U.S. Trustee, which represents the Department of Justice in bankruptcy cases, together with major media outlets (Bloomberg News, Dow Jones, New York Times and Financial Times), had filed motions asking the court to release the names of the customers and creditors so that the public and the press could have transparency in the matter.
There have been multiple academic studies showing that the vast majority of trading on unregulated crypto exchanges is fake with an unsavory agenda of attempting to legitimize an otherwise illegitimate enterprise. Just last month, a paper released by the National Bureau of Economic Research found that “wash trading volume, on average, is as high as 77.5% of the total trading volume on unregulated exchanges, with a median of 79.1%….” The researchers define wash trading as “investors simultaneously selling and buying the same financial assets to create artificial activity in the marketplace….”
Judge Dorsey releasing the names of the customers would allow the academic community and the press to conduct an analysis into the nature of traders that used FTX as well as its interrelationships with the megabanks and hedge funds on Wall Street. A document filed with the bankruptcy court by Sullivan & Cromwell has indicated that megabanks JPMorgan Chase, Bank of America, Morgan Stanley and Wells Fargo had existing relationships with FTX and/or its affiliated companies. Details of these relationships have yet to find their way into the sunshine.
Attorneys for FTX argue that the customer lists have resale value and that the customers might be poached by crypto competitors if their names are released.
The reality is that any real FTX customers (outside of the potential bots, algorithms and fake traders that might be doing the trading) are very angry customers. Their accounts at FTX have been frozen for more than two months with no ability to access their cash or securities. New FTX management has testified that $8 billion of customers’ money is missing. And as each day of financial distress grows among FTX customers, there is a new breaking story about the opulent life that the alleged fraudsters were living with the looted funds from customer accounts.
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