The case of “where did the money go” is beginning to unravel for crypto exchange FTX.
On November 11, the exchange’s founder, Sam Bankman-Fried filed for Chapter 11 bankruptcy protection for FTX and about 130 of its affiliated companies. The decision came after a scurry of withdrawals left the exchange illiquid.
On Wednesday, Bankman-Fried arrived on US soil after he was extradited from the Bahamas. On Friday the Associated Press reported that a US judge had kept secret that two of his former associates, Caroline Ellison, CEO of Alameda and Gary Wang, co-founder of FTX, pleaded guilty to fraud charges and were cooperating with the feds. Prosecutors feared Bankman-Fried would fight extradition if he knew his partners had turned on him.
Alameda Research, a trading and investment fund started by Bankman-Fried, had borrowed billions of dollars from the exchange, losing it to a series of bad deals and trades. It was later revealed that that money came from customer deposits.
A lawsuit filed by the Commodity Futures Trading Commission on December 13 states that Bankman-Fried directed FTX executives to move Alameda’s approximately $8 billion in liabilities to an unknown customer account on FTX’s systems.
The lawsuit also claimed that Bankman-Fried would later refer to that account as “our Korean friend’s account” and/or “the weird Korean account.” It added that although it was a sub-account of Alameda, it did not have the typical investment firm’s email identifier “@alameda-research.com.” Notes tied to the account labeled it as “FTX fiat old.”
The suit claims that this helped mask Alameda’s negative balance on FTX. However, the account had the same privileges as those of Alameda accounts, including exemption from liquidation characteristics.
A day later, on December 14, Bloomberg reported that a GitHub account under the name Nishad Singh, FTX’s former engineering director, created a code that would conceal Alameda’s ballooning liabilities on the exchange.
The implosion of FTX sent shockwaves throughout the crypto community. A few months before its downfall, Bankman-Fried had assured investors that the worst of the crypto market’s liquidity crunch had likely passed. He added that he still had a “few billion” on hand to shore up struggling firms that could further destabilize the digital asset industry.
On Thursday, Bankman-Fried walked out of a New York federal court after being released on a $250 million bail.
On December 18, Ellison pleaded guilty to seven counts of federal fraud charges including conspiracy to commit wire fraud on FTX customers and money laundering. She could be facing up to 110 years in prison but has agreed to fully cooperate in exchange for a lesser sentence.
Wang pleaded guilty to four counts of similar charges. He could face up to 50 years in prison and has also agreed to cooperate with the feds.
