DOJ to Seize $465 Million of Robinhood Shares Linked to FTX Founder Bankman-Fried

The FTX logo is seen on a computer in Atlanta, Ga., on Nov. 10, 2022. Michael M. Santiago/Getty Images

Department of Justice prosecutors plan to seize $465 million of Robinhood shares tied to FTX founder and former CEO Sam Bankman-Fried, who has been charged with fraud in the collapse of the FTX cryptocurrency exchange.

In May, Bankman-Fried purchased a 7.6 percent stake in Robinhood, worth about $648 million at the time, according to a Securities and Exchange Commission filing. The shares of the stock-trading app soared by more than 20 percent on the revelation.

Court documents revealed that Bankman-Fried and FTX co-founder Gary Wang borrowed $546 million from Alameda Research through promissory notes in April 2022 and May 2022. They then used those funds to capitalize Emergent Fidelity Technologies, which had purchased a sizable stake in the mobile trading app.

According to The Wall Street Journal, U.S. Attorney Seth Shapiro told U.S. Bankruptcy Judge John Dorsey, who’s responsible for overseeing the FTX bankruptcy, that the 56 million shares weren’t the property of a bankruptcy estate. Instead, Shapiro argued that competing claims from FTX, bankrupt crypto firm BlockFi, and Emergent liquidators in Antigua could be resolved in a forfeiture proceeding.

“We believe that these assets are not property of the bankruptcy estate or that they fall within the exceptions ... of bankruptcy code,” Shapiro said.

However, FTX attorney James Bromley asserted that the Robinhood shares were an “open question” about who controls them and might be subject to litigation.

Robinhood's logo is seen on a smartphone in this illustration taken on July 2, 2021. Dado Ruvic/Illustration/Reuters

“The fact that multiple prepetition creditors of different debtors and Mr. Bankman-Fried are all seeking to obtain possession of the Robinhood shares demonstrates that the asset should be frozen until this court can resolve the issues in a manner that is fair to all creditors of the debtors,” an FTX court filing submitted on Dec. 22 reads. “The full evidentiary record, once completely developed, will show the Robinhood shares are conclusively estate property.”

In addition, last month’s court filing alleged that former Alameda CEO Caroline Ellison nearly sold Robinhood shares in an over-the-counter agreement. Ellison would later pledge the shares to BlockFi to complete an agreement that would have prevented the lender from defaulting and filing for bankruptcy.

Shapiro also informed the judge that prosecutors had seized U.S. bank accounts associated with FTX Digital Markets, the company’s other business based in the Bahamas. These accounts were held at Farmington State Bank and Silvergate Bank and maintained about $143 million.

Bankman-Fried pleaded not guilty to federal fraud charges on Jan. 3. If convicted, he could face up to 115 years in prison.

While speaking in an interview with CNBC last month, Robinhood CEO Vlad Tenev said it’s unclear what will happen with Bankman-Fried’s 7.6 percent position.

“I’m not surprised that it’s one of the more valuable assets they have on their balance sheet because it is a public company’s stock,” Tenev told the business news network. “We don’t have a lot of information that you guys don’t have. We’re just watching this unfold and ... it’s going to be locked up in bankruptcy proceedings, most likely for some time. And so, we’re just kind of seeing how that plays out.”

Robinhood shares slipped by about 3 percent on Jan. 5 to $8.11. Last year, the popular trading app plummeted by 45 percent.

A Crisis at Silvergate?

Silvergate Bank shares tumbled by more than 40 percent on Jan. 4 after the financial institution revealed that the crypto sector’s collapse led to a run on deposits, forcing the bank to sell assets at a loss and eliminate 40 percent of its personnel.

According to a statement from the bank, clients withdrew an estimated $8.1 billion of digital-asset deposits in the fourth quarter. Executives sold securities and related derivatives at a loss of $718 million. In total, the company’s total deposits plummeted to $3.8 billion by the end of the fourth quarter.

“In response to the rapid changes in the digital asset industry during the fourth quarter, we took commensurate steps to ensure that we were maintaining cash liquidity in order to satisfy potential deposit outflows, and we currently maintain a cash position in excess of our digital asset related deposits,” Silvergate CEO Alan Lane said in the statement.

About 200 positions will be lost “in order to account for the economic realities facing the business and industry today.”

“Reducing headcount will enable Silvergate to continue to offer a tailored customer experience, while prudently managing expenses in a more challenging macro-environment,” Silvergate said in the statement.

Because of Silvergate’s focus on the crypto space, executives noted that the company might become a takeover target by larger firms that want to maintain a more significant presence in the industry.

A Recovery Task Force

The U.S. Attorney’s Office for the Southern District of New York (SDNY) announced that it has established an FTX task force. The objective behind the group is to “trace and recover” missing customer funds and manage probes and prosecutions related to the crypto exchange’s downfall.

“The Southern District of New York is working around the clock to respond to the implosion of FTX,” said U.S. Attorney Damian Williams. “It’s an all-hands-on-deck moment. We are launching the SDNY FTX Task Force to ensure that this urgent work continues, powered by all of SDNY’s resources and expertise until justice is done.”

FTX’s new management began a similar initiative, hiring financial advisory firm AlixPartners to perform “asset tracing” to locate the exchange’s missing digital assets.