- Alameda Research has borrowed billions of dollars in client funds from the FTX exchange.
- The company’s liabilities were then masked under a pseudonymous account with FTX.
- Caroline Ellison and Gary Wang have pleaded guilty to numerous counts of fraud.
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The “where did the money go” case is starting to unravel for crypto exchange FTX.
On Nov. 11, the exchange’s founder, Sam Bankman-Fried, filed for Chapter 11 bankruptcy protection for FTX and about 130 of its affiliates. The decision came after a spate of withdrawals rendered the exchange illiquid.
Bankman-Fried arrived on US soil on Wednesday following his extradition from the Bahamas. On Friday, the Associated Press reported that a US judge kept secret that two of his former employees, Alameda CEO Caroline Ellison and FTX co-founder Gary Wang, pleaded guilty to fraud and were cooperating with the FBI. Prosecutors feared Bankman-Fried would fight extradition if he knew his partners had turned against him.
Alameda Research, a trading and mutual fund founded by Bankman-Fried, had borrowed billions of dollars from the stock market and lost on a series of bad deals and trades. It was later revealed that this money came from customer deposits.
A lawsuit filed by the Commodity Futures Trading Commission on Dec. 13 says that Bankman-Fried ordered FTX executives to move approximately $8 billion of Alameda’s liabilities to an undisclosed customer account in FTX’s systems.
The lawsuit also alleged that Bankman-Fried would later refer to this account as “our Korean friend’s account” and/or “the weird Korean account.” It added that while it was a sub-account of Alameda, it didn’t have the investment firm’s typical email identifier “@alameda-research.com.” Notes tied to the account have it marked as “FTX fiat old”.
The lawsuit alleges that this helped obscure Alameda’s negative balance on FTX. However, the account had the same privileges as the Alameda accounts, including being exempt from liquidation features.
A day later, on Dec. 14, Bloomberg reported that a GitHub account under the name of Nishad Singh, former technical director of FTX, created code that would hide Alameda’s mounting liabilities on the exchange.
The FTX implosion sent shockwaves across the crypto community. A few months before his demise, Bankman-Fried had reassured investors that the crypto market’s worst liquidity crisis was probably over. He added that he still has “a few billion” on hand to prop up struggling companies that could further destabilize the digital asset industry.
On Thursday, Bankman-Fried exited a New York federal court after being released on $250 million bail.
On Dec. 18, Ellison pleaded guilty to seven counts of federal fraud charges, including conspiracy to wire fraud to FTX customers and money laundering. She could face up to 110 years in prison but has agreed to fully cooperate in exchange for a reduced sentence.
Wang pleaded guilty to four similar charges. He faces up to 50 years in prison and has also agreed to cooperate with the FBI.