FTX Fallout: How Deep Does the Fraud Run?

Written By: Zachary John Mazuzan

Who is FTX and Why Are They in Trouble?
FTX was a cryptocurrency exchange platform that was designed to allow everyday individuals who may not be well-versed in cryptocurrency and the inner workings of how it operates to buy and sell various coins and cryptocurrencies. The basic premise of the platform was that customers would upload funds and would be able to buy, sell, and exchange different cryptocurrencies all from one place. The general idea was to make the crypto space more accessible to the general public. FTX even invested top dollar for ad space in last year’s Super Bowl with high-profile celebrities like Steph Curry and Larry David giving their support for the ease the platform provided.

While the idea was appealing in theory, the FTX fun came screeching to a halt late last year when FTX collapsed in November due to leverage and liquidity concerns. After failed efforts to secure bailout funds, FTX filed for bankruptcy on November 11, 2022. Since the fall of FTX, former founder and CEO Sam Bankman-Fried has been indicted on charges of wire fraud, conspiracy to commit commodities and securities fraud, conspiracy to launder money, and others. It is important to note that Bankman-Fried has entered a not guilty plea on all charges and maintains his innocence.

Federal prosecutors allege that Bankman-Fried diverted customer funds uploaded to the FTX platform to a private hedge fund, Alameda Research, held in Bankman-Fried’s name. This money was allegedly then used for various investments, political campaign donations, and large-scale real estate purchases.

Ongoing Investigations and Fallout
After the initial indictment of Bankman-Fried and his non-guilty plea, subsequent suits have been brought against institutions associated with FTX in relation to FTX’s handling of customer funds. A lawsuit filed on Monday, February 6th, 2023, alleges that Signature Bank was aware of the alleged connection between FTX and Alameda Research but did nothing to alert regulators or prevent Signature Bank’s clients from contributing money to the alleged fraudulent cryptocurrency exchange platform.

This is the latest fallout from the collapse of FTX and shows just how far reaching the implications of this alleged scheme may be. The suit filed Monday alleges that Signature Bank allowed its customers funds which were intended to be used on the FTX platform to flow to the private hedge fund Alameda Research. Upon opening an account with FTX, customers were directed to wire money into accounts belonging to North Dimension Inc.; the suit claims that Signature Bank knew this institution was associated with Alameda Research.

The lawsuit claims that Signature Bank should have launched an investigation given the irregularities of how money was being directed through FTX’s platform and because of its knowledge of the relationship between North Dimension Inc., FTX, and Alameda’s accounts. The attorney for the party filing suit claims that Signature Bank was required by law not just to investigate the potential discrepancies in how FTX funds were used, but also to alert its clients about what Signature Bank knew about the Alameda accounts. The case was filed in the Southern District of New York earlier last week and will continue to unfold in the coming months.

Where Does Bankman-Fried and Crypto Go From Here?
As mentioned above, Bankman-Fried has plead not guilty to all the charges he faces. He stated publicly that he did not steal any funds and did not stash billions away as federal prosecutors have claimed. Bankman-Fried has publicly acknowledged and apologized for his poor management of FTX prior to its collapse, but maintains that he did not knowingly commit fraud. The criminal trial for Bankman-Fried is currently slated for October 2nd in New York Federal Court. While the optics of the entire situation are bad for Bankman-Fried, his defense case will likely contend that he did not commit these alleged acts with the requisite intent to be convicted of the crime. Federal prosecutors will bear the burden of proof to demonstrate to a jury beyond a reasonable doubt that Bankman-Fried did in fact knowingly commit fraud.

There also remains the issue of how this will affect the cryptocurrency arena on a larger scale. Supporters of crypto laud its decentralized nature that allows consumers to move currency freely without a watchful government or agency lurking overhead. Ironically, if cryptocurrency wants to continue to become a more prominent medium of exchange, it will likely have to yield to some increased regulations surrounding how crypto operates within the United States so that potential users of cryptocurrency feel more secure if they do decide to enter the space. As evidenced by the suit brought against Signature Bank, there are likely more parties potentially liable for the collapse of FTX. Additional parties may not have been directly involved or responsible, but they may not have done what they should have to investigate and potentially alert customers as to the dangers of using the crypto exchange platform.

While there is real world application and utility to crypto, its relatively new and unregulated nature seem to provide intriguing waters for grifters to swim in. The law is a slow evolving profession, but there likely needs to be some urgency in the crypto space for new users to feel more secure.


Ivan Moreno, Bankman-Fried Can’t Contact FTX Staff, Judge Orders, Law360, (Feb. 1, 2023).

Parker Quinlan, Signature Bank Aided FTX, Suit Says, Law360, (Feb. 7, 2023).

Phillip Bantz, Bankman-Fried Outlines Defense, Jabs at Sullivan & Cromwell, Law360, (Jan. 12, 2023).

Nathan Reiff, The Collapse of FTX: What Went Wrong With the Crypto Exchange?, Investopedia, (Jan. 4, 2023).