Here Are Some of the Allegations Against Ellison, Wang

(Bloomberg) — US authorities have alleged that fallen crypto titan Sam Bankman-Fried defrauded investors in his FTX empire, stealing billions of dollars over years for his own benefit.

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Now, top Bankman-Fried associates Caroline Ellison, former CEO of Alameda Research, and Gary Wang, co-founder of FTX, are accused of helping him. They’ve pleaded guilty to federal criminal fraud charges and are cooperating with prosecutors. The US Securities and Exchange Commission and Commodity Futures Trading Commission also announced separate lawsuits on Wednesday.

The SEC wrote in a 38-page filing that Ellison and Wang worked alongside Bankman-Fried to defraud equity investors in FTX from at least May 2019 through Nov. 2022. Here’s what the agency alleges happened:

Bankman-Fried and Wang improperly diverted customer assets to Alameda Research LLC and its subsidiaries (“Alameda”), the crypto asset hedge fund that they had founded and co-owned and that Ellison ran. Wang created and participated in the creation of the software code that allowed Alameda to divert FTX customer funds. Ellison, in turn, used the misappropriated FTX customer funds for Alameda’s trading activity.

Working with Bankman-Fried, Defendants hid the scheme from FTX’s equity investors, including U.S. investors, from whom FTX sought to raise billions of dollars in additional funds.

Here’s more:

Beyond its “line of credit” with FTX, Ellison, at Bankman-Fried’s direction, caused Alameda to borrow billions of dollars from third party lenders. Those loans were backed in significant part by Alameda’s holdings of FTT—an illiquid crypto asset security that was issued by FTX and provided to Alameda at no cost. Ellison, acting at the direction of Bankman-Fried, engaged in automated purchases of FTT tokens on various platforms in order to increase the price of those tokens and inflate the value of Alameda’s collateral, which allowed Alameda to borrow even more money from external lenders at increased risk to the lenders and to FTX’s investors and customers, all in furtherance of the scheme.

The SEC also raised the question of which cryptocurrencies are securities, writing in the filing that “from the time of its offering, FTT was offered and sold as an investment contract.” The agency was critical of a tweet from Ellison defending Alameda’s balance sheet after a November article from crypto publication CoinDesk publicized discrepancies with the company’s numbers.

Ellison tweeted “that the balance sheet referenced in the CoinDesk article is for a subset of our corporate entities, we have > $10 billion of assets that aren’t reflected there.” She wrote that “given the tightening in the crypto credit space this year we’ve returned most of our loans by now.”

That tweet was designed to provide false reassurance to customers, according to the SEC. “In contrast to the positive message in her tweet, at that point, Ellison knew, or was reckless in not knowing, that Alameda was insolvent.”

The SEC says things really started getting bad in May, when prices of crypto assets plummeted and Alameda’s lenders demanded repayment of billions of dollars of loans. The agency alleges that Ellison and Wang helped Bankman-Fried “continually” divert FTX customer funds to Alameda. That money was then used to “make undisclosed private venture investments, political contributions, and real estate purchases”:

All the while, Bankman-Fried continued to make misleading statements to investors about FTX’s financial condition and risk management. Defendants were aware that Bankman-Fried was making these statements, and knew or were reckless in not knowing that they were false and misleading.

The CFTC amended its Dec. 13 complaint against FTX to include Ellison and Wang. The agency has charged Ellison with fraud and material misrepresentations in connection with the sale of digital asset commodities in interstate commerce. Wang faces charges of fraud in connection to the sale of digital asset commodities in interstate commerce, according to a release.

Here are snippets from the amended complaint. These are on Ellison (emphasis ours):

At the direction and/or under the control of Bankman-Fried and Ellison, Alameda used large amounts of capital, including capital derived from FTX customer assets, to undertake significant illiquid investments and transactions, including long-term equity holdings in a variety of digital asset companies and large acquisitions of relatively illiquid digital assets.

In approximately May and/or June 2022, Alameda was subject to a large number of such margin calls and loan recalls. It did not have sufficient liquid assets to service its loans. Instead, at the direction and/or under the supervision of Bankman-Fried and Ellison, Alameda greatly increased its usage of FTX customer assets to meet its external debt obligations. Alameda was able to rely on its undisclosed ordinary-course access to FTX credit and customer assets to facilitate these large withdrawals, which were several billion dollars in notional value. Defendants were aware of and/or responsible for this misappropriation of FTX customer assets.

By approximately mid-2022, FTX’s internal ledgers reflected that the balance of Alameda’s fiat liability to FTX totaled approximately $8 billion, a staggering amount that exceeded FTX total lifetime revenue.

Later that same day on November 8, Ellison stated in a chat message that “apparently part of what’s going on is that alameda actually has a long USDT/short USD margin position on FTX US that we aren’t tracking?” and said “which is why FTX US has less USD than we thought it should.”

And here’s what the CFTC said about Wang:

At Bankman-Fried’s direction, FTX executives including Wang created features in the underlying code for FTX that allowed Alameda to maintain an essentially unlimited line of credit on FTX. At Bankman-Fried’s direction, FTX executives including Wang also created other exceptions to FTX’s standard processes that allowed Alameda to have an unfair advantage when transacting on the platform, such as quicker execution times and an exemption from the platform’s publicly-touted auto-liquidation risk management process.

Alameda’s account on FTX also had a special designation in the FTX code throughout the Relevant Period, labeled as an “allow negative flag,” which allowed Alameda to execute a transaction even if it did not have the assets available in its account to do so. This flag was implemented by an FTX executive at the direction of Bankman-Fried and with Wang’s knowledge. At Bankman-Fried’s direction, Alameda also had an essentially unbounded credit limit in the FTX database. On at least one occasion during the Relevant Period, Alameda had reached a previously-set borrowing limit for its FTX account. In response, Bankman-Fried directed Wang and/or other FTX executives to raise the borrowing limit to a level that would be unlikely to ever be exceeded.

(Updates with details from SEC complaint)