The U.S Securities and Exchange Commission (SEC), the Commodity Futures Trading Commission (CFTC), and the Department of Justice (DOJ) charged Caroline Ellison, the former CEO of Alameda Research, and Zixiao (Gary) Wang, the former Chief Technology Officer of FTX Trading Ltd. (FTX), for their roles in fraudulent FTX crypt scheme co-founded by Sam Bankman-Fried (SBF) and Wang. Ellison and Wang pleaded guilty to the criminal charges and cooperate with the authorities.
Defrauding Investors
According to the SEC’s complaint, between 2019 and 2022, Ellison, at the direction of Sam Bankman-Fried, 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, a crypto hedge fund owned by Wang and Bankman-Fried and run by Ellison. The complaint alleges that, by manipulating the price of FTT, Bankman-Fried and Ellison caused the valuation of Alameda’s FTT holdings to be inflated, which in turn caused the value of collateral on Alameda’s balance sheet to be overstated, and misled investors about FTX’s risk exposure.
In addition, the complaint alleges that, from at least May 2019 until November 2022, SBF raised billions of dollars from investors by falsely touting FTX as a safe crypto asset trading platform with sophisticated risk mitigation measures to protect customer assets and by telling investors that Alameda was just another customer with no special privileges. However, Bankman-Fried and Wang improperly diverted FTX customer assets to Alameda. The complaint alleges that Ellison and Wang knew or should have known that such statements were false and misleading.
The complaint also alleges that Ellison and Wang were active participants in the scheme to deceive FTX’s investors and engaged in conduct that was critical to its success. The complaint alleges 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. The complaint further alleges that, even as it became clear that Alameda and FTX could not make customers whole, SBF, with the knowledge of Ellison and Wang, directed hundreds of millions of dollars more in FTX customer funds to Alameda.
As part of their deception, we allege that Caroline Ellison and Sam Bankman-Fried schemed to manipulate the price of FTT, an exchange crypto security token that was integral to FTX, to prop up the value of their house of cards.
SEC Chair Gary Gensler
Manipulated Platform
The CFTC complaint alleges that Wang created features in the code underlying the FTX trading platform that allowed Alameda to maintain an essentially unlimited line of credit on FTX. At Bankman-Fried’s direction, FTX executives including Wang created other exceptions to FTX’s standard processes that allowed Alameda to have an unfair advantage when transacting on the platform, including quicker execution times and an exemption from the platform’s distinctive auto-liquidation risk management process. These critical code features and structural exceptions allowed Alameda to secretly and recklessly siphon FTX customer assets from the FTX platform.
Criminal Charges
In a parallel action, the U.S. Attorney’s Office for the Southern District of New York announced charges against Caroline Ellison and Gary Wang. They pleaded guilty to the charges. The guilty pleas and cooperation agreements are a major advance in the federal prosecution of SBF who is in U.S. custody after agreeing to be extradited from the Bahamas to face trial in the Southern District of New York.
