The collapse of crypto exchange FTX is becoming clearer.
Complaints from the Securities and Exchange Commission and the Commodities Futures Trading Commission released Wednesday night provide the most comprehensive look yet at how Sam Bankman-Fried’s operation came crashing down.
The new documents, totalling 81 pages, allege how FTX sent customer funds to Bankman-Fried’s hedge fund, Alameda Research, directed high-level executives to create special software code to make such transfers easier, hid losses, and even continued to secretly siphon funds to Alameda as the company was headed toward insolvency.
Two top business associates of Bankman-Fried, former Alameda CEO Caroline Ellison and FTX co-founder Gary Wang, are defendants in the civil cases brought by the SEC and CFTC and have pleaded guilty to criminal fraud charges, a federal prosecutor in New York said Wednesday. They are now cooperating with authorities.
Here are the 14 most notable passages in the complaints, with the full documents embedded below:
- Allegations of fraud start early. The SEC complaint states: “From the inception of FTX, Defendants and Bankman-Fried diverted FTX customer funds to Alameda, and continued to do so until FTX’s collapse in November 2022.”
- Though he publicly claimed otherwise, Bankman-Fried was the ultimate authority of Alameda. From the CFTC complaint: “Even after stepping down as CEO of Alameda, Bankman-Fried continued to maintain control over Alameda.”
- Millions of dollars sent to Alameda from FTX were loaned to Bankman-Fried. From the SEC complaint: “Bankman-Fried also used commingled funds from Alameda to make large political donations and to purchase tens of millions of dollars in Bahamian real estate for himself, his parents, and other FTX executives... The loans to Bankman-Fried, Wang, and other individuals were poorly documented, and at times not documented at all.”
- FTX customer funds went to Alameda in two ways. From the SEC complaint: "by directing FTX customers to deposit fiat currency (e.g., U.S. Dollars) into bank accounts controlled by Alameda; and (2) by enabling Alameda to draw down from a virtually limitless 'line of credit' at FTX, which was funded by FTX customer assets."
- The collateral Alameda held for its loans was mostly FTT, a crypto token FTX made and gave to Alameda, which the hedge fund then tried to prop up. From the SEC complaint: "On more than one occasion, Alameda and Ellison, at Bankman-Fried’s direction, actively engaged in the trading of FTT with the goal of supporting the price of the token."
- FTX didn’t initially set up accounts for customer funds. From the CFTC complaint: "At the time Bankman-Fried, Wang and others launched FTX, FTX did not establish the requisite bank accounts to accept and hold customer assets. Instead, customers seeking to deposit “fiat” currency (i.e. traditional government-issued currency) into their FTX accounts were directed to wire their fiat deposits to bank accounts that were owned and controlled by Alameda."
- Some Alameda accounts were not kept in Alameda’s name. From the CFTC complaint: "Some or all of those bank accounts were opened in the name of an entity called North Dimension, a Delaware-registered wholly-owned subsidiary of Alameda that, on information and belief, deliberately did not have a name that was readily-identifiable with Alameda."
- That cash was used for all sorts of things. From the SEC complaint: "Bankman-Fried then used Alameda as his personal piggy bank to buy luxury condominiums, support political campaigns, and make private investments, among other uses. Ellison used these funds for Alameda’s operations, including speculative trading strategies and servicing Alameda’s debt to third-party lenders."
- Those transfers were tracked in an account not connected to Alameda. From the SEC complaint: "Characterizing the amount of customer funds sent to Alameda as an internal FTX account had the effect of concealing Alameda’s liability in FTX’s internal systems."
- Special software code was written to facilitate the transfer of funds from FTX to Alameda. From the SEC complaint: "Wang created and participated in the creation of the software code that allowed Alameda to divert FTX customer funds."
- As the crypto downturn worsened this year, FTX’s leaders began to understand the extent of their issues. From the CFTC complaint: "By approximately mid-2022, FTX’s internal ledgers reflected that the balance of Alameda’s fiat liability to FTX totaled approximately $8 billion, a staggering amount that exceeded FTX total lifetime revenue."
- Bankman-Fried tried to hide that $8 billion liability in a customer account. From the CFTC complaint: "At least in part to remediate the risk that Alameda’s large liability would be discovered, at Bankman-Fried’s direction, FTX executives reallocated Alameda’s approximately $8 billion in liabilities to a customer account on FTX’s systems that Bankman-Fried would later refer to as 'our Korean friend’s account' and/or ‘the weird Korean account.'"
- When the crypto market started to decline, Alameda continued to use customer funds, in this case paying off debts to outside companies. From the SEC complaint: "Billions of dollars of FTX customer funds were thus diverted to Alameda and used by Alameda to re-pay its third-party loan obligations."
- FTX built an advanced risk mitigation system for customers, but didn’t use it on the company’s riskiest customer. From the SEC complaint: "Wang and other FTX engineers—as part of Defendants’ and Bankman-Fried’s fraudulent scheme—had created a special feature in the software code to exempt Alameda from the rules of the “'risk engine.'"