FTX's European subsidiary was built on top of a binary options scam
FTX's European subsidiary was built on top of a binary options scam
FTX used firm tied to fraud and questionable investment products to conduct business
Bucket shop: An illegal brokerage firm that accepts customer orders but does not attain immediate executions… Alternatively, the broker may never fill the customer's order but keep the money. (Nasdaq glossary)
In March 2022, the FTX Exchange announced that it was expanding its operations into the European market. FTX obtained a license to operate in Europe by partnering with a Cyprus-licensed financial company called K-DNA Financial Services, LTD. According to FTX’s regulatory disclosures page:
FTX Europe's domain is approved through K-DNA Financial Services Ltd., a duly incorporated Investment Firm in Cyprus that is passported to the European Economic Area. FTX is a brand operated by K-DNA Financial Services Ltd. and regulated by the Cyprus Securities and Exchange Commission, with license number 273/15.
At first glance, this might seem to be an ordinary transaction. After all, it would make sense to team up with an already-licensed firm rather than creating a new company and going through the entire regulatory process from scratch. However, it turns out that K-DNA Financial Services was no ordinary financial firm. Prior to its purchase by FTX, K-DNA was one of many companies involved in one of the largest financial fraud schemes in recent history: the binary options industry.
What are binary options, and how are they tied to fraud?
Binary options are an investment product that enable traders to bet on yes-or-no outcomes. For example, a trader could buy a binary option stating that the price of a certain stock will go up 5% or more in a day. The option has pre-determined payout odds and does not involve the trader taking a direct position in the underlying assets, unlike traditional options contracts. Binary options have no connection to the underlying asset or event.
A slightly more complex version of a binary option is the “contract for differences” (CFD). Like binary options, CFDs are cash-settled and never result in any delivery of the underlying security. Unlike binary options, the payout or loss on a CFD tracks the price movement of whatever the underlying asset might be. Consequently, the payout or loss on a CFD is uncapped.
Both binary options and CFDs are generally illegal in the United States due to the obvious potential for abuse. However, a massive binary options industry operating in Europe has flourished for well over a decade. Many of the firms in the binary options space originated in Israel. By the mid-2010s, the binary options industry employed thousands of people multiple countries and generated annual revenues in the hundreds of millions of dollars.
In 2016, a bombshell exposé by The Times of Israel revealed that many binary options firms were engaging in consumer fraud. Operating massive call centers reminiscent of a scene from The Wolf of Wall Street, the firms would cold-call people across Europe and use high-pressure tactics to convince their marks to try trading binary options products. If investors later tried to withdraw their deposited funds, the firms would stall them or, in some cases, simply abscond with the money.
The binary options industry also has ties to one of the biggest corporate scandals in Europe. Wirecard, a payment processing company that became the darling of the German stock market, collapsed after the company’s frauds were exposed. Wirecard functioned as a money laundering service for a number of different criminal enterprises, including the binary options industry.
After a series of reports by The Times and other outlets, in 2017 the Knesset responded by outlawing the entire binary options industry in Israel. However, binary options-style scams have continued to flourish throughout Europe, frequently operating out of Eastern European nations with limited regulatory capabilities.
K-DNA Financial Services was tied to a massive fraud case and operated a binary options firm
After banning the binary options industry, Israel began prosecuting many of the perpetrators of these scams. The first indictments were handed down against two former executives of a company called UTrade. According to The Times of Israel:
…Utrade Premium Services Ltd. that purportedly offered Israeli investors the ability to carry out algorithmic trading on contracts for differences. He is charged with embezzlement, fraud, money laundering, investment advising without a license, and obstruction of justice.
Shortly thereafter, the companies entered bankruptcy proceedings. The administrator in charge of these proceedings issued multiple court filings alleging Utrade’s executives had illegally transferred ownership of multiple subsidiary firms:
Talmor was illegally transferring assets to a British company called Plustocks Ltd., a Cypriot company called K-DNA Financial Services Ltd., and an Israeli company known as Tracking Partners Ltd., all of them allegedly owned by Israeli businessman Daniel Azougy or his business partner attorney Asher Afriat.
These assets, the receiver claimed, were international forex and binary options companies, most of them operating from Israel but registered all over the world, that were still earning income that could be used to repay the Utrade creditors, he wrote.
K-DNA’s website no longer exists, but archived versions of the site are available. K-DNA billed itself as a regulated financial firm offering services to other trading companies. K-DNA also operated at least one trading service called “Finmarket.” Finmarket’s primarily advertised CFD products, in line with it being another binary options bucket shop. Their Instagram and Youtube pages are still available. Here are some examples of their Instagram content:
Note the nice little disclaimer at the bottom of every image:
66% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Their Youtube page features four videos offering trading advice on market psychology, technical analysis, and “fractals forex strategy,” all of which feature prominent disclaimers about the risk of trading CFDs:
Call us cynical, but Finmarket appears to have been a relatively amateurish binary options scheme designed to trick people into losing their money.
FTX Europe’s leadership included several veterans of the binary options industry
After its creation, FTX Europe hired several alumni of binary options/CFD companies. FTX retained the CEO of K-DNA, Martha Lambrianou, as the CEO of the new company. According to Lambrianou’s now-deleted LinkedIn page, she had served as CEO of K-DNA since 2017; prior to this, she worked for several other “FX brokers.” If she was working at K-DNA since 2017, this suggests she was running the company at the same time as the allegedly illicit transfers from UTrade.
FTX Europe also appointed Marios Athinodorou as an executive director. We have seen Mario before: He was the narrator of Finmarket’s Youtube videos and listed as their “expert analyst.” Marios’ resume includes a stint at another binary options firm called Alvexo. Alvexo was shown to have engaged in a blatant cryptocurrency-related fraud scheme. He also appears to have been an “analyst” for another FX firm called Teletrade, appearing in their Youtube promotional videos. Notably, Teletrade’s videos look identical to those from Finmarket, suggesting that these were in reality two firms controlled by the same individuals.
Marios’ LinkedIn page shows he current serves as CEO for a trading education firm called ManualFX. Strangely, ManualFx links to one of the same videos Marios’ supposedly recorded for Finmarket. It’s almost as if all of these different companies are really the same entity…
Marios and Martha are not the only binary options experts hired by FTX. Both FTX Europe’s “Head of Compliance” and “Senior AML Officer” were alumni of IronFX, another FX broker with ties to the Wirecard fraud.
At least they hired people with lots of experience!
Conclusion: When one bucket shop meets another…
It seems unlikely that this is all a coincidence. Prior to purchasing the K-DNA, a couple quick Google searches would have revealed K-DNA’s dark past and current involvement in the questionable binary options business. It appears FTX did not do very thorough background checks on the key executives they hired to run their European division, either.
Finally, it seems odd that FTX would end up buying such an obscure company at random; other than mentions in The Times of Israel article and a press release about the creation of Finmarket, there are few traces of K-DNA online. How did FTX even find this firm in the first place? And what other links between FTX and the binary options industry have yet to come to light?
NOTE: This article would not have been possible without guidance from the excellent investigators @braisincapital and @inteljakal (Twitter), as well as the work of the excellent investigators at Fintelegram. Many thanks for their expertise!
So a bunch of people came up with the idea of betting on the movement of an underlying asset they didn't have to own that was moving on exchanges that didn't have what they said they had in that same asset.
WHAT COULD POSSIBLY GO WRONG
Have a look at this tweet from a Spanish analyst. She is currently writing a huge article about that topic when she noticed that all podcasts and channel of FTX had been deleted. https://twitter.com/criptodaisy/status/1599733521177665537?s=20&t=GJuPi8ObbR2B1TM4AWLQig
Thx, as always.