On December 21, 2022, Sam Bankman-Fried’s Bahamian vacation came to an end. He was extradited to the United States to face fraud charges relating to the collapse of his cryptocurrency trading platform, FTX.
World-renowned bankruptcy and restructuring CEO – and the new CEO of FTX – John J. Ray, in FTX’s First Day Declaration stated, “Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here.” This is the same John J. Ray who handled Enron’s bankruptcy.
Unfortunately for Sam Bankman-Fried and his associates, Caroline Ellison and Gary Wang, FTX’s bankruptcy is currently the least of their concerns. Ellison and Wang have already plead guilty to the Department of Justice’s fraud charges and settled with the Securities and Exchange Commission.
On December 21, 2022, the SEC filed its complaint against Ms. Ellison and Mr. Wang, outlining the details of how Bankman-Fried’s short-lived empire came crashing down. It starts, and ends, with an entity (and its subsidiaries) named Alameda Research LLC (“Alameda”), a crypto asset hedge fund that Bankman-Fried and Wang co-founded, and Ellison ran as CEO.
Alameda is a distinct entity from FTX. This distinct entity, however, was wholly owned by two individuals, Sam Bankman-Fried (90%) and Gary Wang (10%). By the hands of and at the direction of Bankman-Fried, he and Wang, the SEC complaint alleges, improperly diverted billions of dollars of FTX customer assets to Alameda. Wang created and participated in the creation of the software code that allowed Alameda to divert FTX customer funds. Ellison then used the misappropriated FTX customer funds for Alameda’s trading activity. Bankman-Fried then used those customer funds to make undisclosed venture investments, lavish real estate purchases for himself, friends, and family, and large political donations.
Beyond this “line of credit” from FTX, as the SEC puts it, 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 issued by none other than FTX and provided to Alameda at no cost (read, fake). Ellison then engaged in automatic purchases of FTT tokens on various platforms to increase the price of those tokens and inflate the value of Alameda’s collateral, allowing it to borrow even more money.
Everything was going swimmingly until May 2022, until the prices of crypto assets plummeted, and Alameda’s lenders demanded repayment on billions of dollars’ worth of loans. Despite having already funneled billions in FTX customer assets, Alameda was unable to satisfy those loan obligations. Bankman-Fried’s solution? Direct FTX to divert billions more in customer assets to ensure Alameda maintained its lending relationships, of course.
In case these actions did not sound fraud-y enough already, bring on the personal loans. Between March 2020 and September 2022, Bankman-Fried executed promissory notes for loans from Alameda totaling more than $1.38 billion, including two instances in which Bankman-Fried was both the borrower in his individual capacity and the lender in his capacity as CEO of Alameda prior to Ellison’s appointment. These loans between Bankman-Fried and Bankman-Fried were poorly documented and sometimes not documented at all.
As all good things come to an end (good if you’re a 30-year-old billionaire from stolen money, at least), the continued downward trend in crypto assets resulted in a solvency crisis for FTX. Bankman-Fried had to search for investors who could provide additional funding. This resulted in an approximately 24 hour window of hope in which competitor Binance would acquire FTX. They did not, and as a result, FTX customers withdrew $5 billion in a single day.