A damning civil complaint filed by the Securities and Exchange Commission (SEC) this week against Caroline Ellison and FTX co-founder Gary Wang includes elaborate details of disgraced crypto bro Sam Bankman-Fried’s “massive, years-long fraud” that allegedly saw him diverting customer funds to maintain his hedge fund.
In the complaint dated Dec. 21, the SEC claimed Ellison and Wang– both of whom pleaded guilty to federal fraud charges related to the ongoing scandal this week – knew Bankman-Fried was misleading customers about FTX’s risk profile.
In addition to using customer funds to “make undisclosed venture investments, lavish real estate purchases, and large political donations,” Bankman-Fried also owned 90% of Alameda Research, the crypto hedge fund where Ellison, his former girlfriend, served as co-CEO from 2021 through last month.
Wang, who co-founded FTX in 2019 with Bankman-Fried and Nishad Singh, owned the other 10 percent of the company.
According to Bloomberg, testimony from Wang, who was FTX’s Chief Technology Officer, could be particularly damaging to Bankman-Fried’s claims he was tricked into running the scheme by his associates.
“I expect it will be more difficult for him to claim he had no knowledge of what Wang was up to,” Sarah Paul, a former federal prosecutor in New York, told the outlet.
Per the SEC’s complaint, Bankman-Fried gave Alameda special privileges on the FTX platform, including a “virtually unlimited ‘line of credit’” funded by the latter’s customers.
Thus, when Alameda was unable to meet loan obligations following a downturn in crypto asset prices in May 2022, Bankman-Fried allegedly directed Ellison to divert FTX customer assets to pay off the hedge fund’s debts.
Meanwhile, both Bankman-Fried and Ellison publicly denied Alameda received special treatment from FTX. “‘We’re at arm’s length and don’t get any different treatment from other market makers,’” Ellison is quoted telling Bloomberg in Sept. 2022.
Bankman-Fried’s “house of cards” also entailed securities fraud regarding FTT, the exchange token issued by FTX in 2019.
Despite Bankman-Fried’s assurances to investors the exchange was not exposed to the tokens, he allowed Ellison to manipulate FTT’s prices, thereby inflating the value of Alameda’s collateral in order to secure billions of dollars from third-party lenders.
Bankman-Fried, Ellison, and Wang were all aware that FTX investors became more vulnerable to crypto markets as Alameda increased its borrowing backed by FTT collateral.
Throughout 2020, 2021, and into 2022, Bankman-Fried also reportedly commingled funds from Alameda to make political donations and purchase “tens of millions of dollars” in Bahamian real estate.
The fraud allegedly continued through the final days before FTX and Alameda filed for Chapter 11 bankruptcy on Nov. 11.
“Even…faced with billions of dollars in customer withdrawal demands that FTX could not fulfill, Bankman-Fried and Ellison, with Wang’s knowledge, misled investors from whom they needed money to plug a multi-billion-dollar hole,” the complaint reads.
The system finally caved in on Nov. 9, after crypto exchange Binance backed out of a bid to acquire FTX and customers withdrew $5 billion from the platform. Bankman-Fried briefly sought emergency funding to cover FTX’s $8 billion shortfall before resigning from his position the following day.
The blistering content of the SEC filing is merely the latest twist in the FTX saga. After his arrest in the Bahamas earlier this month, Bankman-Fried was extradited to the U.S. this week and was subsequently released on a record-breaking $250 million bond.
The MIT grad is currently holed up at his parents’ Palo Alto home and is due back in court in January. If convicted on all charges, he faces over 115 years behind bars.
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