The situation is getting worse for Sam Bankman-Fried, whose crypto empire went bankrupt just days after being at the center of the crypto sphere.
The regulators, who are trying to piece together what happened, and especially how the FTX cryptocurrency exchange, which was valued at $32 billion in February, could implode overnight.
In addition to FTX, Bankman-Fried, known by the initials SBF, also founded Alameda Research, a hedge fund that also served as a trading platform for cryptocurrencies and other crypto-related financial products for institutional investors.
The regulators filed a series of criminal and civil charges against Bankman-Fried, whom they accuse of alleged fraud. They now have the testimonies of two lieutenants of the former crypto king, who agreed to cooperate in exchange for the leniency from the regulators.
Zixiao (Gary) Wang, 29, FTX co-founder and former Chief Technology Officer, and Caroline Ellison, 28, the former CEO of Alameda Research, pled guilty, on Dec. 19, to multiple federal fraud charges and agreed to cooperate with prosecutors.
'I Knew That It Was Wrong'
The first testimonies of Ellison to the investigators are real bombs launched against Bankman-Fried. She states, in particular, that she and her former boss and boyfriend knowingly enabled and concealed Alameda's level of borrowing from FTX.
"I knew that it was wrong," Ellison said about her actions, according to a transcript of her plea hearing released on Dec. 23. This is what she told a federal judge in Manhattan on Monday in entering her guilty plea, according to a transcript of the hearing that was unsealed on Friday.
"From 2019 through 2022, I was aware that Alameda was provided access to a borrowing facility on FTX.com, the cryptocurrency exchange run by Mr. Bankman-Fried," she added. "In practical terms, this arrangement permitted Alameda access to an unlimited line of credit without being required to post collateral, without having negative balances and without being subject to margin calls on FTX.com's liquidation protocols."
Ellison also said 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 on the exchange."
Ellison, who appears to be a formidable witness for investigators to build and solidify their case against Bankman-Fried, said she was fine with hiding the close relationship between Alameda and FTX from investors. She also went along with Bankman-Fried's decision to divert FTX clients' funds to pay off Alameda loans.
'I Agreed With Others'
"I agreed with others to borrow several billion dollars from FTX to repay those loans,” Ellison said.
Ellison's testimony completely sweeps away SBF's defense line, who had asserted in several media interviews that he had no intention of defrauding FTX customers.
"I made a lot of mistakes," Bankman-Fried said during his first interview with the New York Times/DealBook on Nov. 30. "There are things I would give anything to be able to do over again. I didn't ever try to commit fraud on anyone."
SBF was extradited to the United States on Dec. 21 by the authorities of the Bahamas, where he lived and where FTX is headquartered. He was released after his parents, both law professors at Stanford, signed a $250 million recognizance bond pledging their California home as collateral. Two other friends with significant assets also signed, according to news reports.
Such a bond doesn't require full payment up front, but comes into effect if a defendant misses a court hearing, or skips town.
Bankman-Fried will live at his parents' house and will be required to wear an ankle bracelet to monitor his whereabouts during the pre-trial period, which could be lengthy, given the size and scope of the FTX collapse.
Justice Department prosecutors filed eight criminal counts against Bankman-Fried, according to the indictment unsealed on Dec. 13. Four of the charges, including conspiracy to commit wire fraud on customers and lenders and wire fraud, indicate that the alleged acts began as early as 2019. This is the year FTX was founded.
"Bankman-Fried was orchestrating a massive, yearslong fraud, diverting billions of dollars of the trading platform’s customer funds for his own personal benefit and to help grow his crypto empire,” the SEC alleges in its civil complaint.
Gary Wang
Gary Wang, the co-founder of FTX, said, during his plea hearing, that he was "directed" to make changes to FTX's platform code in order to benefit Alameda. He also claimed that he was aware of misrepresentations being made to clients and investors.
"I knew what I was doing was wrong,” Wang said, according to the transcript.
As a crypto exchange, FTX executed orders for clients, taking their cash and buying cryptocurrencies on their behalf. FTX acted as a custodian, holding the clients’ crypto.
FTX then used its clients’ crypto assets, through its sister company’s Alameda Research trading arm, to generate cash through borrowing or market-making. The cash FTX borrowed was used to bail out other crypto institutions in summer 2022.
At the same time, FTX was using the cryptocurrency it was issuing, FTT, as collateral on its balance sheet. This was a significant exposure, due to the concentration risk and the volatility of FTT.
The insolvency of FTX stemmed from a liquidity shortfall when clients attempted to withdraw funds from the platform. The shortfall appears to have been the result of Bankman-Fried allegedly transferring $10 billion of customer funds from FTX to Alameda Research.
John Ray, FTX's new CEO in charge of the restructuring, said there was a software which allegedly allowed the company to hide these transfers from third parties.
