Two of FTX founder Sam Bankman-Fried’s closest associates have pleaded guilty to fraud and agreed to co-operate with US authorities investigating the collapse of the bankrupt cryptocurrency exchange, a federal prosecutor in Manhattan said on Wednesday.
Damian Williams, the US attorney for the Southern District of New York, announced the guilty pleas and criminal charges against Caroline Ellison, former chief executive of FTX trading affiliate Alameda Research, and Zixiao “Gary” Wang, a co-founder of FTX, in a short video statement. His office had brought eight charges against Bankman-Fried last week.
The announcement from Mr Williams comes just after a plane carrying Mr Bankman-Fried took off from the Bahamas, where he waived his right to challenge extradition to the US. He is due to appear in a Manhattan court as soon as Thursday, where his bail request will be considered.
The trio of long-time friends were among the key members of a tight circle of associates who ran Mr Bankman-Fried’s crypto empire, which included the FTX cryptocurrency exchanges and Alameda Research, the private trading firm. All three had lived together with other senior executives in a luxury apartment in Nassau’s Albany complex.
Ms Ellison pleaded guilty to seven counts, including wire and securities fraud and conspiracy to commit money laundering, which carry a maximum sentence of 110 years in prison, while Wang pleaded guilty to four counts of fraud, with a maximum 50-year sentence, according to signed agreements seen by the Financial Times.
The documents said prosecutors would not oppose bail requests from both defendants under certain conditions, including posting a bond and handing in their travel documents, as they awaited formal sentencing.
Separately, the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) filed civil lawsuits against 28-year-old Ms Ellison and 29-year-old Mr Wang, accusing them of fraud.
As chief executive of the FTX trading affiliate, Ms Ellison “used FTX’s customer assets to pay Alameda’s debts” and diverted billions of dollars of depositors’ money to the company to fill a hole caused by a crypto market crash in May, the SEC’s complaint alleges.
The CFTC said Mr Wang had a hand in creating some of the algorithms that underpinned FTX, which allowed Alameda “to maintain an essentially unlimited line of credit” on the exchange, giving it an “unfair advantage” over regular depositors.
“These critical code features and structural exceptions allowed Alameda to secretly and recklessly siphon FTX customer assets from the FTX platform,” the CFTC added.
Both defendants are co-operating with the SEC, the agency said. The CFTC said they were not contesting their liability.
A lawyer for Mr Wang, Ilan Graff, said: “Gary has accepted responsibility for his actions and takes seriously his obligations as a co-operating witness.” Lawyers for Ms Ellison did not immediately respond to requests for comment.
Alameda, the trading firm launched in 2017, played a key role in the events leading to FTX’s collapse and the allegations against its senior executives.
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Mr Bankman-Fried, Mr Wang and Ms Ellison were among the earliest employees of the trading firm. Over time, the firm shifted from relatively safe arbitrage strategies to increasingly risky bets on crypto tokens and companies, funded in part with borrowed money.
After launching FTX, Mr Bankman-Fried and Mr Wang formally relinquished their roles at Alameda to avoid the appearance of conflict of interest between the firms. US authorities allege they remained closely involved with Alameda.
The SEC claims that Ms Ellison and Mr Bankman-Fried “schemed to manipulate the price of FTT”, a crypto token issued by FTX. Alameda had taken out large loans underpinned with FTT, so a collapse of the price of the token threatened to wipe out the trading firm.
SEC chair Gary Gensler said that artificially supporting the price served to “to prop up the value of their house of cards”.
The US Department of Justice last week filed charges against Mr Bankman-Fried and accused him of orchestrating “one of the biggest financial frauds in American history” by misappropriating customer assets from FTX to Alameda Research. He was arrested in the Bahamas, where he lives. He is also facing parallel civil cases from the SEC and CFTC.
Mr Bankman-Fried stepped down as chief executive of FTX as it filed for Chapter 11 bankruptcy last month. A representative for Bankman-Fried declined to comment.
Mr Williams reiterated his call for others who worked with Mr Bankman-Fried to come forward. “If you participated in misconduct at FTX or Alameda, now is the time to get ahead of it,” he said. “We are moving quickly and our patience is not eternal.”
Inside FTX: The inner circle
Sam Bankman-Fried
The son of two Stanford law professors, Mr Bankman-Fried took a job as a Jane Street trader after graduating in physics from MIT.
He left Wall Street to work briefly at the Centre for Effective Altruism, a philanthropic initiative. But Mr Bankman-Fried quickly became fascinated by the price gaps on different crypto exchanges in Asia.
He made his first millions taking advantage of these inefficiencies through the trading house he founded, Alameda Research. He later started FTX.
Former employees describe “SBF” as an object of cult-like loyalty within the company. “Everyone employed at FTX was obsessed, and I supposed it made sense,” one former colleague said.
“The kid was young, the principles were revolutionary, the ideas were golden. He was the richest 29 to 30-year-old on Earth. Who was I to challenge that?”
Caroline Ellison
A Stanford graduate, Ms Ellison met Mr Bankman-Fried at Jane Street before joining Alameda as a trader in 2018. She was one of several employees who lived with Mr Bankman-Fried as room-mates.
Ms Ellison took over as co-chief executive of Alameda in the autumn of 2021. She remained close to Mr Bankman-Fried, according to former employees, who frequently saw the pair in conversation on long walks around the parking lot of the FTX office in Nassau, Bahamas. Former employees said the pair had been romantically involved at times.
Gary Wang
FTX’s chief technology officer and second-largest shareholder Mr Wang and Mr Bankman-Fried first met at maths camp in high school and continued their friendship as roommates at MIT.
A former employee said they “had their own language”. Mr Wang was an isolated figure but a prolific coder. “Gary definitely had root access to everything tech,” said a former employee, adding: “Gary would start most new projects by himself... He did no management.”
– Copyright The Financial Times Limited 2022
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