Two associates of Sam Bankman-Fried have pleaded guilty to criminal charges related to the collapse of the cryptocurrency exchange FTX and are helping investigators with their inquiries.
News of the charges, guilty pleas and the pair’s cooperation with the investigation was only announced once the FTX co-founder was on a plane to the US from the Bahamas after he agreed to voluntary extradition to answer to charges tied to his role in the exchange’s failure. The aircraft touched down in New York at 10pm local time.
Carolyn Ellison, a former chief executive of Alameda Research, a trading firm started by Bankman-Fried, and Gary Wang, who co-founded FTX, pleaded guilty to charges “related to their roles in the fraud that contributed to FTX’s collapse”, US attorney Damian Williams said on Wednesday night.
The criminal charges were paired with civil charges from the US Securities and Exchange Commission, accusing Ellison and Wang, as well as Sam Bankman-Fried, of securities violations related to the group’s in-house “FTT” cryptocurrency.
According to the SEC’s complaint, between 2019 and 2022, Ellison, “at Bankman-Fried’s direction”, furthered the scheme by manipulating the price of FTT, an FTX-issued exchange crypto-security token, by purchasing large quantities on the open market to prop up its price. FTT served as collateral for undisclosed loans by FTX of its customers’ assets to Alameda, which is owned by Wang and Bankman-Fried.
The complaint underscores the picture given by multiple investigations of a tight link between Alameda, which had no outside investors, and FTX. The two companies shared bank accounts and key staff members, commingled funds and were both ultimately under the direct control of Bankman-Fried, according to the complaint, despite the nominal authority of Ellison, his sometime girlfriend.
FTX secretly advanced Alameda “a virtually unlimited ‘line of credit’ funded by the platform’s customers”, the SEC says, despite reassuring investors and depositors that it had “sophisticated automated risk measures” that would prevent any individual trade from losing customer funds. The unlimited line of credit ensured that when Alameda bets paid off, it profited, but when they failed, it was FTX customers who ultimately lost out.
The complaint also alleged that Wang created FTX’s software code that allowed Alameda to divert FTX customer funds, and Ellison used misappropriated FTX customer funds for Alameda’s trading activity. Bankman-Fried has previously dismissed allegations of a secret “backdoor” in FTX’s software by noting that he did not “even know how to code”.
If the SEC’s complaint is upheld in court, it is likely to have ramifications for the crypto-industry beyond FTX. As part of its legal case, the SEC is arguing that FTT, created by FTX with the promise the holders would share in the company’s profits, “was offered and sold as an investment contract and therefore a security”.
“The publicly available information led FTT holders to reasonably expect to share in FTX’s growth and future earnings, and from appreciation in the value of FTT,” the SEC says, arguing that the cryptocurrency thus violated US laws around the issuance of unlicensed securities. If the argument is accepted in court, it could have a significant impact on other cryptocurrencies, which thrive in the regulatory uncertainty around their legal status.