FTX collapse, Tether operations have links to infamous online-poker cheating scandals

The ongoing collapse at crypto firm FTX, which saw its market value crash earlier this week and which halted withdrawals following a $5 billion dollar run on deposited assets by its users, has sent shock waves throughout the crypto world and produced plunging valuations at most major exchanges. FTX’s collapse is directly attributable to a failed corporate takeover/merger deal involving rival firm Binance, through which a trading firm owned and controlled by FTX, Alameda Research, was discovered to be highly leveraged and largely funded, on paper, by FTX’s own FTT altcoin.

While many mainstream reports on FTX’s collapse have focused on the failed deals between the billionaire owner-founders of FTX, Sam Bankman-Fried, and Binance, Changpeng “CZ” Zhao, the story also includes the involvement of at least one dark figure in online poker history, Daniel S. Friedberg, who serves as FTX’s Chief Regulatory Officer. Friedberg is positioned in a central role in assuring that FTX remains in compliance with financial exchanges and licensing regimes around the globe.

Friedberg played a prominent and infamous role in the coverup of the insider-cheating scandal at UltimateBet in the mid-2000s, and he helped orchestrate some of the questionable legal moves that allowed the Portland, Oregon-based site evade U.S. law enforcement efforts throughout its existence. Those business and legal moves included the creation of a false-front office in Canada which in turn allowed for an IPO on the London Stock Exchange, a faked sale of the company to Tokwiro Enterprises (an entity created by the former chief of the Kahnawake nation, Joseph Tokwiro Norton), licensing in various offshore “rubber stamp” jurisdictions, and ultimately, a shadowy merger with another online-poker company, Absolute Poker, which was also riddled with insider fraud and crippled by its own cheating scandal.

Friedberg, who served as FTX’s general counsel before taking on the company’s regulatory role, was recently described by Coingeek’s Steven Stradbrooke as being “almost comically inappropriate” for the job. The description appears apt, given Friedberg’s long history of not complying with various jurisdictions’ regulations, but rather, evading them.

Friedberg isn’t even the only former UB lawyer to have found a home with a major crypto firm. Stuart Hoegner, another former UB lawyer, holds a similar regulatory-compliance post with rival crypto firm Tether, which is one of numerous trading exchanges that suffered a hit this week due to FTX’s ongoing “Alameda” problem. And a third former UB lawyer, Sanford “Sandy” Millar, operates a boutique California law firm specializing in crypto issues.

The current pastimes of the former UB lawyers represent one of the darker realities of the crypto space, in that the lightly regulated industry was a magnet to business types who already played at the edges of legality. Friedberg, too stained in an industry sense by the UB and AP scandals — not to mention online poker’s Black Friday — likely couldn’t find meaningful work within a more regulated online-gambling space. After bouncing between his own Seattle-based boutique practice and a couple of law-firm stints through most of the past decade, he ended up in crypto.

Friedberg part of UltimateBet cheating coverup

As part of UltimateBet, Friedberg actively sought to minimize UltimateBet’s financial exposure in the wake of the “God Mode” insider-cheating scandal, which involved UB part owner Russ Hamilton as the most significant of several internal cheaters at UB’s online tables. As the scope of Hamilton’s thefts via more than two dozen UB accounts became known, Friedberg and others met to decide how best the scandal and how they could limit how much they might have to refund to cheated players.

The meetings included Hamilton, who fully admitted to his thefts, part of the money from which went to support his own pet project, the Ultimate Blackjack Tour. Yet in an effort to protect himself from too much recrimination, Hamilton secretly taped important conversations involving Friedberg, Excapsa (originally ieLogic) president and UB founder Greg Pierson, and others.

Daniel S. Friedberg (Image source: Reddit)

During the taped conversation, which was released years later by Hamilton’s long-time computer guru, Travis Makar, after certain statutes of limitation had passed, Friedberg can be heard telling Hamilton that the best strategy for dealing with the explosive scandal was to declare that a “former consultant to the company took advantage of a server flaw by hacking into the [software] client.”

The lie mirrored the strategy involved by the other major online site trying to control the fallout from its own insider-cheating scandal, Absolute Poker (and primary AP cheater Scott Tom), though in both cases data trails eventually stripped the cover off the lies. Friedberg further told Hamilton to claim he was also one of the victims, in referring to UB’s big lie, or “otherwise it’s not going to fly.”

The full nature of Friedberg’s dishonest core, however, was revealed when he told the assembled group that he’d like to limit the financial impact of the refunds to be issued to UB players. Friedberg knew UB had to issue refunds to some of the biggest victims, such as Prahlad Friedman, and to the most diligent accusers, such as Mike “trambopoline” Fosco. However, Friedberg can be heard on the secret tape, saying about the refunds, “If we could get it down to five [million], I’d be happy,” when UB brass already knew the cheating may have amounted, over the span of several years, to perhaps five times as much.

Friedberg part of UltimateBet from the beginning

Daniel Friedberg’s long history with UltimateBet dates all the way to the company’s startup. At the time Greg Pierson was a traveling lumber-company rep with an idea for an online site similar to some of the first such sites ever launched, including Planet Poker, PartyPoker, Paradise Poker and others. Pierson played poker himself, and a chance meeting with a friend of Phil Hellmuth’s at a poker table at a riverboat casino in Dubuque, Iowa led to Pierson making investment pitches to two Wisconsin-based pros, Hellmuth and Duane “Dewey” Weum.

Weum actually became the first poker pro to invest in Pierson’s startup, signing the deal at a meeting with Pierson at a Stoughton, Wisconsin restaurant. Hellmuth signed up as an investor soon after, and that’s where Friedberg entered the UB tale. Friedberg, like Hellmuth, attended the University of Wisconsin-Madison, and he was, at the time, Hellmuth’s business attorney.

UltimateBet wasn’t an overnight success and the company nearly failed at least twice early on. In the first instance, the initial investment money ran out. Hellmuth and Weum used their poker-world connections to bring on many other pro players, including Hamilton and his business partner, Mansour Matloubi, as investors.

The second near-failure of UB occurred when the site was riddled by extensive credit-card fraud during its first year or so of operations. That led parent company ieLogic to develop an antifraud software suite called ieSnare that was so effective that the company was able to license it to other online concerns. ieLogic later split into two concerns, with iovation in charge of the software matters and Excapsa created to run the poker business. Friedberg (who had parlayed his Hellmuth connection into a full-time role with ieLogic, including an ownership slice) along with Hoegner and others, was involved in all of it, including the Canada-registered Excapsa Friedberg created as the shell company in 2004 to front the $100 million London Stock Exchange IPO.

The credit-card fraud problems nearly killed UB, but the darkest part of the story involved Pierson and Hamilton. In early 2003, Pierson’s wife, Janelle, was discovered to have been involved in a year-long affair with a 16-year-old student at the school where she taught. Pierson disappeared from the ieLogic offices and could not be reached for over a week, later turning up in Costa Rica. It emerged some time later that around this time, Hamilton made a sizeable personal loan to Pierson, who may have been facing legal expenses related to his wife’s affair, if not additional civil-settlement exposure.

Later in 2003, the insider cheating at UB began. What casual observers of the cheating scandal may never have fully recognized is that Russ Hamilton had no programming experience or knowledge, and that his tech guru, Makar, had no access to UltimateBet’s internal programming process. The ongoing “God Mode” cheating was done via a software testing module ordered to be reenabled by Pierson and other UB executives and maintained through multiple client-software updates. Each time the standard UB user client was updated, a parallel insider “God Mode” version was updated as well. The official statements assigning sole blame for the cheating to Hamilton were provably false.

Friedberg jilts investors not once, but twice

Friedberg’s role in navigating UltimateBet’s corporate concerns through murky legal waters involved two separate instances where core executives enriched themselves at common shareholders’ expense. The first involved shareholders on the UltimateBet was sold to rival Absolute Poker, a process that began in late 2006 when the U.S.’s Unlawful Internet Gambling Enforcement Act (UIGEA) went into effect. UB and AP eventually merged player pools and formed the short-lived Cereus Network as the final part of the deal that saw Excapsa leave the online-poker business.

Excapsa was forced by the UIGEA’s reach to pull back its London IPO, but the site’s core owners had already cashed out from the launch. The funds from the sale to Absolute Poker went into a complicated bankruptcy/liquidation process that took years to wind through a Canadian court. Prominent shareholders received pieces of the $20+ million derived from the sale to AP, in addition to shares of other liquid assets, but minority investors were frozen out of the process.

Meanwhile, Friedberg kept himself attached to the money train. As part of the complicated deal with UB, which included the faked Tokwiro Enterprises operational claims, Friedberg moved from UB to AP in roughly the same role. Absolute Poker had its own large class of unsecured stakeholders, while the company’s founders and primary investors also had shares in a second, more secretive ownership group, which may also have been used to siphon revenue from the company.

AP’s executives moved an important investment vehicle, called Madeira Fjord, into and out of several jurisdictions as it attempted to shield its assets and revenue streams. By the time online poker’s Black Friday arrived in 2011, AP was being targeted by Norwegian tax officials for what was claimed to be the largest tax fraud in that country’s history.

It was all a shell game, however. Absolute Poker’s revenue streams, estimated over its years to total hundreds of millions of dollars, had been diverted into unreachable investments scattered around the globe. The common shareholders were left holding an empty bag, having been paid only pennies on the dollar on what should have provided lucrative returns for at least a handful of years. The jilted shareholders included members of a Washington State firefighters union and a Florida medical practice that had been lured in by the promise of easy money from a growing online-poker site.

Friedberg was even alleged to have unilaterally voided a stock option granted to one of Absolute Poker’s brand representatives, Mark Seif, who had been granted a small ownership share in addition to his payments to front the brand. The revocation was largely symbolic at that point anyway, given AP’s global business troubles, but it was yet another indicator of Friedberg’s methods of operation.

FTX reportedly under investigation

Yesterday, the U.S. Department of Justice (DOJ) and Securities and Exchange Commission announced its launch of an investigation into FTX’s operations and finances. Separately, FTX founder Bankman-Fried has issued public apologies for his company’s desperate predicament in the form of a lengthy Twitter thread, admitting, “I fucked up, and should have done better.”

1) I’m sorry. That’s the biggest thing.

I fucked up, and should have done better.

— SBF (@SBF_FTX) November 10, 2022

Bankman-Fried disclosed several other items of interest in the thread, including how massively he mis-estimated FTX’s leveraging and potential exposure. Bankman-Fried also declared that FTX’s separate US crypto operation was safe, and only its global dot-com platform, FTX International, licensed in Antigua, Gibraltar, and elsewhere, was affected, though that was scant comfort to customers of the larger global operation.

Bankman-Fried also disclosed that Alameda Research, the FTX-controlled entity that held large quantities of self-created crypto assets, would be “winding down trading. [] One way or another, soon they won’t be trading on FTX anymore.” The besieged FTX head also declared that all available liquid assets would be used to pay users’ claims for balances on the site.

12) Every penny of that–and of the existing collateral–will go straight to users, unless or until we’ve done right by them.

After that, investors–old and new–and employees who have fought for what’s right for their career, and who weren’t responsible for any of the fuck ups.

— SBF (@SBF_FTX) November 10, 2022

Any investigations, whether conducted in the U.S. or other jurisdictions, are sure to focus on misrepresentations made by FTX regarding its and Alameda’s operations, as well as the true nature of the FTT altcoin the platform issued and monetized. Such investigations will naturally explore the role Friedberg and Bankman-Fried’s other legal and business advisors played in creating FTX’s global crypto platforms.

Coingeek’s Stradbrooke is among a growing number of crypto users and industry observers who assert that Bankman-Fried’s hiring of Friedberg was itself a massive red flag, given Friedberg’s past. “Friedberg’s presence on FTX’s payroll means Sam Bankman-Fried (SBF) either didn’t do his due diligence before hiring, or he knew of Friedberg’s past sins and didn’t care,” wrote Stradbrooke. “Neither of these options paints Sam Bankman-Fried in an overly flattering light.”

Featured image source: FTX

Author: Kyle Butler