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The FTX Mess - I Hope My Story Helps

Author

Howard Lindzon
November 09, 2022

Yesterday was a blur.

I get up between 5 and 6 am everyday to read and write and check markets (old habit) and yesterday was no different.

I wrote my post and was reading and making some calls and I started to get messages about the problems at FTX. There had been rumors for a few days about leverage and their balance sheet.

I pulled up CZ's, the Binance founder, tweets and saw this:

Needless to say, I spent the rest of the day on the phone talking to friends who directly invested in FTX and companies in my portfolio that rely on FTX. Stocktwits for example uses FTX to process crypto trades. Rishi and team did all the right things fast and shared this update with customers:

Next I called Yoshi at Alpaca to discuss same. On and on the day went. Really great traders/investors/friends were calling me and asking for an explanation of what was going on. Articles were getting shared. I thought Milk Road laid it out pretty well.

Personally, I have very little direct exposure to FTX and was dealing with it, but I have a lot of indirect exposure through Multicoin Capital and possibly other funds so I was waiting patiently for some detailed explanations from them. By about 10 pm PST last night I did get some detailed explanations and to be honest, I felt sick reading them. Nobody wants to write letters like that or receive them.

I think I can safely say there was a lot of fraud and leverage involved inside and around FTX. There will be a lot of collateral damage in the coming months.

This is one of those sadly historic days in markets, even though it is happening in the unregulated digital world.

Hopefully , this story I will share below will help some people in stress or fear today...

Way way way back in 2001, I discovered a fraud that was being perpetrated at a brokerage firm I was a partner at. The gist:

In 2000, 2001, Scott Tominaga went on a rampage of trading using the error account for losing trades and his personal account for winning trades. Our first clearing firm, who are supposed to catch these things, decided not to. By keeping it a secret from me I am convinced they were a part of the crime. When Scott to me to add us to Bear Stearns as a second clearing firm I wondered why we needed a second clearing firm, but was happy to have Bear Stearns for sure. When I got the call from Bear Stearns a few months later that our error account was at $40,000, let’s just say I was shocked. I am sure they could have called just Scott, but someone at Bear decided to call ALL the partners. That account should be flat every night. It is for customer errors (trade prices etc…). I hated making the call to our main clearing firm because I knew it would be bad. They were obviously hiding it from me too. The numbers had gotten so big.

I was taken, but I take responsibility for that. He got mostly me thank goodness so the right dummy was hit :) .

I remember calling Ace Greenberg and him taking the call and explaining many things to me. I was very fortunate that we had fraud insurance – a rule in the business – and even luckier to get paid on it (insurance companies are not supposed to pay out :) ). The good people under Ace Greenberg in the clearing department stopped the crime from continuing. I lost my business and made the hardest calls of my life – FIRST to the NASD (shaking in my boots) than to my partners and wife and friends that trusted me. It should not have to happen to anybody.

Days like yesterday bring back all the horrific feelings and memories. I feel terrible for the many innocent bystanders that have been dragged into the fraud and now cleanup.

Some of the biggest firms/brands in venture capital had been investing in FTX along the way...

Good luck out there today.

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