Sam Bankman-Fried’s problems keep unraveling and deepening following the collapse of FTX, the crypto exchange he cofounded and headed until recently.
Last week, the FTX former CEO was arrested in the Bahamas at the request of the US authorities, and he is facing criminal charges that may put him away for life.
The FTX’s implosion is the latest scandal to rock the crypto industry, stirring fresh calls for government’s regulation.
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Bankman-Fried, who has from the beginning denied any wrongdoing, is now being exposed for his role in the fraud that wrecked FTX as his allies turn on him. Last week, as he was being extradited to the US to face criminal charges, two of his associates pleaded guilty to multiple charges of fraud and conspiracy.
Caroline Ellison was the former CEO of the crypto hedge fund Alameda, a subsidiary of FTX. The 28-year-old was in a brief romantic relationship with Bankman-Fried. Gary Wang was FTX’s chief technology officer, a close friend of Bankman-Fried.
Wang pleaded guilty to conspiracy to commit wire fraud, wire fraud, conspiracy to commit commodities fraud and conspiracy to commit securities fraud. Ellison pleaded guilty to two counts of wire fraud, two counts of conspiracy to commit wire fraud, conspiracy to commit commodities fraud, conspiracy to commit securities fraud and conspiracy to commit money laundering.
In her testimony contained in court documents, Ellison said that she and her former associates knowingly stole billions of dollars from customers of Bankman-Fried’s FTX exchange and sought to cover it up.
She also said that Alameda had a virtually unlimited borrowing facility in FTX, and that she knew the exchange would need to use customer funds to finance loans to the hedge fund.
Bankman-Fried was accused of moving $10 billion of traders’ funds to Alameda, an accusation he denied, saying the companies operate separately. Ellison said she agreed to keep the two firms’ unusually close relationship hidden from investors and customers.
According to transcripts from plea hearings held on December 19, Ellison told the court that from July through October, she agreed with Bankman-Fried and others to provide “materially misleading financial statements to Alameda’s lenders,” and prepared balance sheets that concealed the extent of Alameda’s borrowing.
She also said that she knew that FTX executives created an arrangement that gave Alameda access to an unlimited line of credit without being required to post collateral or pay interest on negative balances, according to court documents.
“I understood that if Alameda’s FTX accounts had significant negative balances in any particular currency, it meant that Alameda was borrowing funds that FTX’s customers had deposited onto the exchange,” Ellison said in court.
In his testimony, Wang told the court that part of his role at FTX included making changes to the exchange’s code that would grant Alameda “special privileges” on FTX.
“Between 2019 and 2022, as part of my employment at FTX, I was directed to and agreed to make certain changes to the platform’s code,” Wang said in court. “I executed those changes, which I knew would give Alameda Research special privileges on the FTX platform. I did so knowing that others were representing to investors and customers that Alameda had no such special privileges and people were likely investing in and using FTX based in part on those misrepresentations.”
“I knew what I was doing was wrong,” he added.
With his associates’ guilty pleas, Bankman-Fried is facing a more severe case than before. Both Wang and Ellison standing as witnesses against Bankman-Fried will give prosecutors a swift path to his conviction.
Both Wang and Ellison, whose sentencing is billed for December 19, 2023, and face up to 50 and 110 years in prison respectively, according to federal sentencing guidelines, are cooperating with federal prosecutors.
“Gary has accepted responsibility for his actions and takes seriously his obligations as a cooperating witness,” Wang’s attorney said in a statement.