Happy Sunday, welcome back to Dry Powder.

Thanks to a possible technicality, the feds have dropped one of the biggest charges against Sam Bankman-Fried. But will that affect his legal fortunes, if at all? Today, news and notes on the next chapter.

Meanwhile, the feds have asked Lewis Kaplan, the federal judge in Manhattan overseeing his criminal case, to end his home confinement in Palo Alto and jail S.B.F. right now, prior to the start of the October trial, because the prosecutors alleged that he engaged in witness tampering by working with a New York Times reporter to discredit his former girlfriend, Caroline Ellison, who is slated to testify against him at the trial, by sharing her awkward personal emails with the newspaper. Ellison, of course, ran Alameda Research, S.B.F.’s hedge fund, and has since pleaded guilty to a host of crimes and agreed to cooperate with the prosecution against S.B.F., as has most of the rest of the FTX management team. Judge Kaplan decided to take the government’s request to jail S.B.F. under advisement. “I am very mindful of the government’s interest in this issue which I take seriously and I say… Mr. Bankman-Fried, you better take it seriously too,” the judge allowed. He also imposed a gag order on all parties in the case to prevent any further conversations with the media. The prosecutors also noted that S.B.F. had made more than 1,000 phone calls to journalists.

But S.B.F.’s biggest problem continues to emanate from John J. Ray III, the new FTX C.E.O., who has made it his mission to recover as many assets as possible for the bankrupt estate and its forlorn creditors and customers. His latest salvo against S.B.F. came in the form of a July 20 lawsuit against him and three of his former compatriots, including Ellison, in the Delaware bankruptcy court to try to recover from them more than $1 billion in “loans” and other payments they made to themselves for a variety of purposes and never paid back. The “loans” ended up as executive bonuses, squirrelly investments, and luxury real estate in the Bahamas, as well as the aforementioned political and charitable donations, and the big kahuna, according to Ray: The nearly $550 million allegedly siphoned out of Alameda, in May 2022, for S.B.F. and Gary Wang to use to buy shares in Robinhood, the digital brokerage firm.

In the filing, Ray described the loans to S.B.F. and Wang as “illusory” and “fraudulent” and is seeking, through the lawsuit, to have the money used to buy the Robinhood shares returned to the FTX estate. (The Feds seized those shares, worth around $715 million these days, earlier this year, presumably as evidence to be shared at the trial.) Ray alleges that S.B.F. and Wang bought the Robinhood shares using money from Alameda and then put the shares into their personal accounts. “[I]t is just a round trip—from [Alameda Research] to Sam/Gary…” is the way Daniel Friedberg, the senior FTX counsel, described the transaction, according to Ray’s complaint. (S.B.F. has long maintained his innocence.)

Ray argued that S.B.F. and Wang put up no collateral for the loans, paid interest at the below-market rate of one percent on them, and did not have to repay the loans until 2027 at the earliest, and that the “sole” authorization for the loans to them came from Ellison, who has “pled guilty” to “looting” FTX as part of the “massive fraud.” Ray wants the money back. “Because Alameda transferred the $546,087,587.10 directly to Bankman-Fried and Wang while receiving only a sham IOU in return, the transfer of funds from Alameda to Bankman-Fried and Wang should be avoided,” Ray argued.

Ray continues: “They created an environment in which a handful of employees had virtually limitless power to direct transfers of fiat currency and cryptocurrency and to hire and fire employees, with no effective oversight and no checks on how they exercised those broad powers.” S.B.F. and his colleagues “rejected advice” to put appropriate controls in place, “commingled and misused corporate and customer funds,” “lied to third parties” about FTX, “joked internally” about “losing track” of millions of dollars of assets and bought companies with “misappropriated funds” without conducting any due diligence. Ray and the FTX attorneys argued that these actions, taken together, forced FTX to “collapse,” to the detriment of creditors, customers and employees.

One stunning revelation is that, according to Ray, FTX under S.B.F. did not have an “adequate accounting system,” and that a “majority” of the FTX entities did not prepare “financial statements of any kind.” How this is possible, given the amount of capital that FTX raised in the private markets, is a mystery. Wouldn’t investors have demanded to see audited financial statements before giving S.B.F. billions? But it appears to be true, a fact that S.B.F. himself seemed to acknowledge, at least if the complaint is to be believed. “Those entities that did prepare financial statements used QuickBooks accounting software and relied on a hodgepodge of Google documents, Slack communications, shared drives, Excel spreadsheets and other non-enterprise solutions to manage their assets and liabilities,” according to the complaint. “QuickBooks was designed for use by small and mid-sized businesses, new businesses and freelancers. QuickBooks was not designed to meet the needs of a large and complex business like the FTX Group, which handled billions of dollars of securities, fiat currency and cryptocurrency transactions across multiple continents and platforms.”

In an “internal memorandum” found by Ray and shared in the complaint, S.B.F. “boasted” that Alameda was “hilariously beyond any threshold of any auditor being able to get even partially through an audit.” He continued, “Alameda is unauditable. I don’t mean this in the sense of ‘a major accounting firm will have reservations about auditing it’; I mean this in the sense of ‘we are only able to ballpark what its balances are, let alone something like a comprehensive transaction history.[‘] We sometimes find $50m of assets lying around that we lost track of; such is life.”

Making matters worse, Ray continued, was the fact that S.B.F. and his colleagues would use texting services such as Slack and Telegram with the “disappearing messages” function enabled, “rendering later review of the communications impossible.” Ray continued, “These ephemeral messaging systems were used to procure approvals for tens of millions of dollars of transfers, leaving only informal and unreliable records of such transfers, or no records at all.”

According to Ray’s latest complaint, on January 24, 2022, the payment to Joe and Barbara from their son seems to have been structured more like a gift to them than a loan. S.B.F. “caused” a FTX account to transfer $10 million to an account in S.B.F.’s name, according to Ray. A minute later, S.B.F. transferred the $10 million to his father’s personal account. Then, minutes later, Joe Bankman made a bunch of transfers, totalling $6.775 million, to his personal accounts at Morgan Stanley and at TD Ameritrade, leaving the balance in his FTX account. “In an email exchange, Bankman-Fried and his father discussed structuring the $10 million gift as a loan from Alameda to Bankman-Fried,” the Ray complaint alleged. “The [FTX debtors] have been unable, however, to identify any promissory note, loan agreement, or other indication that the funds were not simply taken from Alameda by Bankman-Fried to enrich his family.”

Ray continued: “On information and belief, Bankman-Fried’s father has been using this ‘gift’ to finance Bankman-Fried’s criminal defense.” So: a gift, and one that Ray also believed ended up, ironically or tragically, being used to support the family’s growing legal bills. (Heller declined to comment on Ray’s lawsuit against S.B.F. and his fellow defendants.)

How this all plays out for S.B.F. remains to be seen, of course. There has been no recent indication that he plans to change his not-guilty plea prior to the October trial, rendering the trial moot. Instead, he seems to be gearing up for the fight of his life, and it certainly will be.

My partner Teddy Schleifer, who is one of the few journalists to have met personally with the arrested S.B.F. at his parents’ Palo Alto home, told me last week that he thinks S.B.F. believes, somehow, he is going to walk away scot-free from this mess by arguing that he was simply an overextended “fuck up” who was trying to build something revolutionary and unique, and didn’t have the time or the inclination to build in the proper controls along the way. So was one of the greatest financial catastrophes in history the result of willing mistakes, or unintentional mistakes? I, for one, am hoping some of the answers to those questions are contained in Michael Lewis’s forthcoming book about S.B.F., Going Infinite. It’s scheduled for release on October 3, the day after the start of S.B.F.’s trial.