Former friends of Sam Bankman-Fried are now cooperating in the FTX fraud case

Caroline Ellison and Zixiao “Gary” Wang, two executives from Sam Bankman-Fried’s fallen crypto empire, have pleaded guilty to federal charges and are cooperating with prosecutors. the news was announced Wednesday night by Damian Williams, United States Attorney for the Southern District of New York.

Williams did not specify the charges to which they pleaded guilty, but said the guilty pleas were related to their reporting duties at FTX and its sister company Alameda Research. Wang was a co-founder of the FTX cryptocurrency exchange and owned 10 percent of Alameda Research. (Bankman-Fried owned the other 90 percent.) Ellison served as CEO of Bankman-Fried’s trading company, Alameda Research.

Ellison pleaded guilty to seven counts, according to the washington post. He faces up to 110 years in prison, wapo He says. Wang has pleaded guilty to four counts and faces up to 50 years in prison.

Bankman-Fried and Wang allegedly gave Alameda and Ellison “carte blanche” to use funds deposited by FTX clients

At its peak, FTX moved $20 billion in trades daily, according to the CFTC. Bankman-Fried and a select group of insiders, including Ellison and Wang, are alleged to be the only people who knew that FTX was committing fraud. The cases against Bankman-Fried are both criminal and civil and have been brought by the SDNY, the CFTC and the SEC. Funds from FTX clients were allegedly used for executive loans, risky transactions by Alameda Research, political donations, and lavish spending on everything from beachfront homes to private jet flights.

The US Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) have already filed updated civil complaints, including details about the roles of Wang and Ellison. “Wang, with Ellison’s knowledge and consent, exempted Alameda from the risk mitigation measures” used by FTX, providing Alameda Research with a “virtually unlimited ‘credit facility,’” according to the SEC’s updated complaint.

The SEC’s complaint describes how “Bankman-Fried and Wang gave Alameda and Ellison carte blanche to use FTX client assets for Alameda’s business operations and for any other purpose Bankman-Fried and Ellison deem fit.” .

Ellison, following orders from Bankman-Fried, borrowed billions of dollars from lenders, according to the SEC’s complaint. Those loans were backed “in a significant part” by the FTT token, which was issued by FTX and given to Alameda for free, the SEC wrote. Ellison’s job was to buy FTT tokens on various platforms to increase the price, making the FTT that was the collateral for Alameda’s loans more valuable. That, in turn, made it possible for Alameda to borrow even more.

“As part of their deception, we allege that Caroline Ellison and Sam Bankman-Fried planned to manipulate the price of FTT, a cryptosecurity token exchange that was an integral part of FTX, to prop up the value of their house of cards.” SEC Chairman Gary Gensler said in a statement..

The fraud came to light after a blockbuster article on CoinDesk reported that Alameda Research’s balance sheet consisted primarily of the FTT token, starting a series of events that ended in FTX’s bankruptcy. During that time, Binance CEO Changpeng Zhao said that he would sell his FTT holdings; Ellison tweeted that Alameda would buy at $22 a token.

In an attempt to prevent the FTT token price collapse, Ellison and Bankman-Fried began liquidating Alameda Research’s investments, freeing up cash for buybacks, according to the CFTC complaint. It was not enough. During that period, Bankman-Fried, Ellison, and a third unnamed FTX executive expressed surprise that the Bitcoin price had not fallen further.

“Ellison also acknowledged that his Nov. 6 tweet to the Binance CEO offering to buy his FTT holdings at $22 per token was ‘kind of misleading to tweet.’”

When panicked FTX clients began withdrawing their money from the exchange, Ellison and Bankman-Fried directed the Alameda investigators to “generally do everything possible to quickly get billions of dollars of capital to send to FTX.” according to the CFTC complaint. It was not enough.

In a meeting on November 9, Ellison told staff the truth about Alameda’s misappropriation of FTX client funds, the CFTC says.

In response to a staff question, “Ellison also acknowledged that his November 6th tweet to the Binance CEO, the offer to buy his FTT holdings at $22 per token was ‘something misleading to tweet’ and he expressed remorse,” according to the CFTC complaint. Most of the staff quit after that.

In the bankruptcy filing, FTX’s new CEO, John J. Ray, said the company was worse than Enron, and that he would know it, since he was tasked with cleaning up the place after the fraud.

In May, when the price of cryptocurrency began to plummet, lenders wanted their money back. To keep them happy, Bankman-Fried ordered customer deposits sent to lenders. Ellison used that money to pay off Alameda’s debts.

“Even in November 2022, faced with billions of dollars in customer pull demands that FTX was unable to meet, Bankman-Fried and Ellison, with Wang’s knowledge, misled investors that they needed money to plug a hole. billions of dollars,” the SEC wrote in its complaint.

But client funds had also been siphoned off from the beginning, the SEC wrote in its lawsuit. This was echoed by the CFTC’s lawsuit.

Alameda obtained the funds from FTX clients in two ways: first, through the “line of credit,” but also by instructing clients to deposit fiat currency into accounts controlled by Alameda. “As a result, there was no meaningful distinction between FTX’s client funds and Alameda’s own funds,” the SEC’s complaint states. “Bankman-Fried and Wang gave Alameda and Ellison White card to use FTX client assets for Alameda’s business operations and for any other purpose Bankman-Fried and Ellison deem fit.”

These uses were not authorized by customers, as the CFTC’s complaint makes clear. (It echoes the SEC’s complaint’s allegations about how Alameda misused customer funds.) In fact, FTX’s terms of service explicitly prohibit this sort of thing, the CFTC’s lawsuit says. That means the executives were aware that it was important to keep client assets safe and separate from other funds, important in establishing intent, which is crucial in proving fraud charges.

That made Alameda Bankman-Fried a “personal piggy bank to buy luxury condominiums, support political campaigns and make private investments, among other uses.”

Earlier on Wednesday, the Bahamas extradited Sam Bankman-Fried and sent him back to the United States. Williams confirmed that Bankman-Fried is now in FBI custody and said he would be transported directly to New York to appear before a judge “as soon as possible.”

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