Sam Bankman-Fried Quietly Bought an SEC-Registered Stock Trading Operation; There Are Big Questions as to What’s Happening with Customer Accounts

Gunnar Larson g at xny.io
Tue Dec 13 13:29:33 PST 2022


https://wallstreetonparade.com/2022/12/sam-bankman-fried-quietly-bought-an-sec-registered-stock-trading-operation-there-are-big-questions-as-to-whats-happening-with-customer-accounts/


Yesterday, just hours before Sam Bankman-Fried was arrested
<https://twitter.com/SDNYnews/status/1602451395910803457?ref_src=twsrc%5Egoogle%7Ctwcamp%5Eserp%7Ctwgr%5Etweet>
in
the Bahamas at the request of Damian Williams, the U.S. Attorney for the
Southern District of New York, *Wall Street On Parade* learned that
Bankman-Fried had been allowed to purchase an SEC-registered retail
brokerage firm in August of last year.

The brokerage firm at that time was called RJL Capital Group and was based
in Staten Island, New York. Bankman-Fried changed the firm’s name to FTX
Capital Markets LLC and moved its headquarters to Broad Street in the
financial district in lower Manhattan.

According to Wall Street’s self-regulator, FINRA, FTX Capital Markets was
licensed to conduct retail stock trading in 32 states
<https://brokercheck.finra.org/firm/summary/158816>. FINRA further notes
that the firm’s SEC registration is “pending withdrawal” as of December 5
and all 32 state licenses are listed as “Termination Requested.” It is not
clear if the firm has requested the withdrawal of its licenses and
registration or if a regulator has initiated the action. (The SEC filed a
broad range of charges this morning against Sam Bankman-Fried
<https://www.sec.gov/litigation/complaints/2022/comp-pr2022-219.pdf> but it
makes no mention of his ownership of a retail brokerage firm. The U.S.
Attorney’s office is expected to unseal its indictment against
Bankman-Fried later this morning.)

*Wall Street On Parade* reached out to FINRA to learn if the brokerage
accounts are moving to another firm and how many customer accounts were
held at FTX Capital Markets. We have not yet heard back.

We also contacted the Securities Investor Protection Corporation (SIPC),
the organization that in case of a brokerage firm failure protects
securities in the account up to $500,000, including up to $250,000
protection for cash that is held in the account for the purpose of trading
securities. SIPC lists FTX Capital Markets as a “Member Firm.” SIPC advised
via email that they were looking into the matter and would get back to us.

FTX Capital Markets is *not* listed as one of the more than 100 FTX group
entities that filed for bankruptcy on November 11. The byzantine terms of
its customer agreement
<https://assets.website-files.com/625f3cf193eb0bdbf6469cba/62a64865d7b50c4629bc3763_FTX%20Capital%20Markets%20Customer%20Agreement.pdf>,
which spells out that neither cash nor securities will be held in the
broker-dealer customer account but farmed out to other entities, raises
further questions.

In June of this year, the parent of FTX US, West Realm Shires, Inc., announced
it had purchased Embed Financial Technologies
<https://www.prnewswire.com/news-releases/ftx-us-acquires-clearing-firm-embed-to-enhance-ftx-stocks-301572039.html>
along
with its subsidiary, Embed Clearing LLC. FTX Capital Markets indicates in
its regulatory filings that it is Embed Clearing LLC that will provide its
brokerage customers with “custody, execution and clearing services” for
stock trades. Fortunately, SIPC also shows Embed Clearing as a member firm.

But when it comes to cash held for brokerage customers of FTX Capital
Markets, things get a lot more troubling. The firm’s customer agreement
contains this language:

“The MSB [Money Services Business] maintains Customer MSB Accounts at a
bank which is a member of the Federal Deposit Insurance Corporation (FDIC).
Customer holdings in their Customer MSB Accounts are insured up to $250,000
per depositor against the failure of the FDIC member bank. FDIC insurance
does not protect against the failure of the MSB or malfeasance by any MSB
employee. MSB and the bank at which Customer Accounts are held are not
members of FINRA or SIPC and therefore your funds held in the Customer MSB
Account are not SIPC protected.”

Sam Bankman-Fried does not exactly have a good track record with handling
customers’ cash. The SEC complaint against him that was released this
morning contains this insightful paragraph:

“Bankman-Fried thus gave Alameda [his hedge fund] carte blanche to use FTX
customer assets for its own trading operations and for whatever other
purposes Bankman-Fried saw fit. In essence, Bankman-Fried placed billions
of dollars of FTX customer funds into Alameda. He then used Alameda as his
personal piggy bank to buy luxury condominiums, support political
campaigns, and make private investments, among other uses. None of this was
disclosed to FTX equity investors or to the platform’s trading customers.”

One of the questions we posed to federal regulators related to a press
release from the brokerage firm on May 19
<https://www.prnewswire.com/news-releases/ftx-us-launches-ftx-stocks-offering-trading-on-us-listed-equities--etfs-301550852.html>
of
this year. The press release indicated that FTX Capital Markets (now dubbed
“FTX Stocks”) was going further down the rabbit hole of mixing crypto with
stock trading. It stated:

“The release of FTX Stocks marks the first time in industry history that
retail brokerage accounts can be funded with fiat-backed stablecoins such
as USDC via a partnership with the FTX US crypto exchange, in addition to
the standard USD [U.S. dollar] deposit methods of wire transfers, ACH
transfers, and credit card deposits.”

It came as news to us – and apparently regulators as well – that an SEC
registered broker-dealer was allowed to accept crypto as deposits to trade
stocks. (Laws and rules are apparently so yesterday to Sam Bankman-Fried.)

It’s also notable that Bankman-Fried picked a brokerage firm with a jaded
history for acquisition. According to FINRA records, in 2016 RJL Capital
Group was fined $75,000 and censured by FINRA. The regulator wrote:

“The findings stated that the firm failed to identify and investigate red
flags associated with a customer’s trading in penny stocks. Consequently,
the firm did not report the customer’s liquidations as potentially
suspicious. The findings also stated that the firm failed to specifically
tailor its supervisory systems to address customer trading in secondary
public offerings (SPOs), and failed to identify and investigate potential
Rule 105 violations by its customers. The firm’s AML [Anti Money
Laundering] system also failed to consider its customers’ trading in
connection with SPOs [Secondary Public Offerings] and the associated risks
of potential violations of Rule 105, and therefore failed to detect and
report those suspicious activities. The firm also failed to implement AML
procedures that could be reasonably expected to detect and report potential
violations of Section 5 and Rule 105. (FINRA Case #2013035864201)”
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