The FTX collapse has links to online-poker cheating scandals
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The FTX collapse has links to online-poker cheating scandals

Categories: crime, illegal, online poker, other 11 Nov 2022 308 0

FTX's Chief Regulatory Officer Daniel Friedberg was involved in the coverup of the UltimateBet cheating scandal. Friedberg, who served as FTX's General Counsel before taking on the company's regulatory role, was recently described by Steven Stradbrooke as being "almost comically inappropriate" for the job.

The collapse of 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. The collapse of FTX was caused by a failed corporate takeover/merger deal between FTX and a rival firm, which resulted in a trading firm owned and controlled by FTX being discovered to be highly leveraged and largely funded by FTX.

Many mainstream reports on FTX's collapse focus on the failed deals between the billionaire owner-founders of FTX, Sam Bankman- Fried, and Binance, Changpeng "CZ" Zhao, but the story also includes the involvement of at least one dark figure in online poker history Friedberg is positioned in a central role in assuring that FTX remains in compliance with financial exchanges and licensing regimes around the globe.

Friedberg helped organize some of the questionable legal moves that allowed the Portland, Oregon-based site to evade U.S. law enforcement efforts throughout its existence, and he played a prominent role in the coverup of the insider-cheating scandal at UltimateBet in the mid-2000s. The creation of a false-front office in Canada allowed for an IPO on the London Stock Exchange, as well as a faked sale of the company to Tokwiro Enterprises, which was created by the former chief of the Kahnawake nation.

Friedberg, who served as FTX's general counsel before taking on the company's regulatory role, was recently described by Steven Stradbrooke as being "almost comically inappropriate" for the job. Friedberg has a long history of evading regulations and the description appears to be apt.

Friedberg is not the only former lawyer from the University of Buffalo who has found a home with a major firm. One of the trading exchanges that suffered a hit this week due to FTX's ongoing "Alameda" problem is the one with a similar regulatory-compliance post held by Stuart Hoegner. Sandy Millar is a former lawyer for the University of Buffalo and operates a boutique law firm in California.

One of the darker realities of the space is the fact that the lightly regulated industry was a magnet for business types who already played at the edges of legality. Friedberg, stained in an industry sense by the UB and AP scandals, 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 spells over the past decade, he ended up in crypto.

Ultimatebeat - too much to lose

Friedberg is a part of the UltimateBet cheating coverup

Friedberg sought to minimize UltimateBet's financial exposure in the wake of the "God Mode" insider-cheating scandal, which involved Russ Hamilton as the most significant of several internal cheaters at the online tables. As the scope of Hamilton's thefts became known, Friedberg and others met to decide how best to deal with the scandal and how much they would have to give back to cheated players.

Hamilton, who admitted to his thefts, part of the money from which went to support his own pet project, the Ultimate Blackjack Tour, was included in the meetings. In order to protect himself from too much recrimination, Hamilton secretly taped important conversations involving Friedberg, Excapsa, and others.

After certain statutes of limitation had passed, Friedberg could be heard telling Hamilton that the best strategy for dealing with the scandal was to declare that a former consultant to the company.

The lie mirrored the strategy of the other major online site trying to control the aftermath of its own insider-cheating scandal, Absolute Poker, though in both cases data trails eventually stripped the cover off the lies. Friedberg told Hamilton that he was one of the victims and that it was not going to fly.

Friedberg told the assembled group that he wanted to limit the financial impact of the refunds to be issued to the players. Friedberg knew that the university had to issue refunds to some of the biggest victims, such as Prahlad Friedman. Friedberg can be heard on the secret tape saying that he would be happy if we could get the refunds down to five million dollars.

Friedberg was a part of UltimateBet from the beginning

The company's startup was the culmination of Daniel Friedberg's long history with UltimateBet. Some of the first online poker sites, including Planet Poker, PartyPoker, Paradise Poker and others, were created by Greg Pierson, who was a traveling lumber company rep. A chance meeting with a friend of Phil Hellmuth at a poker table at a casino in Iowa led to Pierson making investment pitches to two Wisconsin-based pros, Hellmuth and datememe Weum.

The first poker pro to invest in a startup was Weum, who signed the deal at a restaurant in Wisconsin. Friedberg entered the UB tale when Hellmuth signed up as an investor soon after. Friedberg was a business attorney at the University of Wisconsin-Madison when Hellmuth was there.

The company nearly failed at least two times early on. In the first instance, the initial investment money ran out. Many other pro players, including Hamilton and his business partner, were brought on by the poker-world connections of Hellmuth and Weum.

During its first year or so of operations, the site was plagued by extensive credit-card fraud, which resulted in the second near-failure of UB. The antifraud software suite called ieSnare was so effective that the company was able to license it to other online concerns. Friedberg, along with Hoegner and others, was involved in all of it, including the Canada-registered Excapsa Friedberg created as the shell company in 2004.

The credit-card fraud problems almost killed the university, but the worst part of the story was the relationship between Pierson and Hamilton. There was a year-long affair between a 16-year-old student and a teacher at the school where she taught. After vanishing from the ieLogic offices, Pierson turned up in Costa Rica, but could not be reached for over a week. Around this time, it was discovered that 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.

In 2003 the cheating began at the University of Buffalo. Russ Hamilton had no programming experience or knowledge, and his tech guru had no access to UltimateBet's internal programming process, which is what casual observers of the cheating scandal may never have realized. The ongoing cheating was done via a software testing module ordered to be reenabled by Pierson and other executives and maintained through multiple client-software updates. When the standard user client was updated, a parallel version of God Mode was updated as well. The official statements made about the cheating to Hamilton were false.

Friedberg doesn't get along with investors once or twice

Two separate instances where core executives enriched themselves at common shareholders' expense were the subject of Friedberg's role in navigating UltimateBet's corporate concerns through murky legal waters. When the U.S.'s Unlawful Internet Gambling Enforcement Act (UIGEA) went into effect in late 2006 it led to the sale of the first shareholders on the UltimateBet to rival Absolute Poker. The final part of the deal that saw Excapsa leave the online-poker business was the merging of player pools by the two companies.

The site's core owners had already cash out from the launch when Excapsa was forced to pull back its London IPO. After the sale to Absolute Poker, the funds went into a complicated bankruptcy 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.

Friedberg kept himself attached to the money train. Friedberg moved from UB to AP in roughly the same role as part of the complicated deal that included the faked Tokwiro Enterprises operational claims. The company's founders and primary investors had shares in a second, more secretive ownership group, which may have been used to snatch revenue from the company.

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

It was just a game of shells. Over the years, the revenue streams of Absolute Poker have been diverted into investments scattered around the globe. The common shareholders were left with an empty bag because they were only paid pennies on the dollar for what should have been lucrative returns for at least a few years. The disgruntled 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.

Mark Seif was granted a small ownership share in addition to his payments to front the brand and Friedberg was alleged to have voided the stock option granted to him. The revocation was symbolic, but it was still another indicator of Friedberg's methods of operation.

The FTX is reportedly under investigation

The United States Department of Justice and Securities and Exchange Commission launched an investigation into FTX's operations and finances. FTX founder Bankman-Fried has issued public apologies for his company's dire situation in the form of a lengthy Twitter thread, admitting that he fucked up and should have done better.

Bankman-Fried talked about how he misestimated FTX's leverage and potential exposure in the thread. Bankman-Fried stated that FTX was safe and only its global dot-com platform, FTX International, licensed in Antigua, Gibraltar, and elsewhere, was affected, though that was not comforting to customers of the larger global operation.

Bankman-Fried said that Alameda Research, the FTX-controlled entity that held large quantities of self-created crypto currencies, would be winding down trading. The besieged FTX head declared that all available liquid assets would be used to pay users' claims for balances on the site.

The true nature of the platform issued and monetized, as well as the misrepresentations made by FTX regarding its and Alameda's operations, are sure to be the focus of any investigations conducted in the U.S. or other jurisdiction. The role Friedberg and Bankman-Fried played in the creation of FTX's global platforms will be explored in these investigations.

The hiring of Friedberg by Bankman-Fried was a huge red flag for a growing number of users and industry watchers. The presence of Friedberg on FTX's payroll means that Sam Bankman-Fried either didn't do his due diligence before hiring or he knew of Friedberg's past sins and didn't care. Sam Bankman- Fried is not painted in an overly flattering light.

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