US Extends FTX Charges to Ellison, Wang
Posted by Colin Lambert. Last updated: December 22, 2022
Just a week after filing charges against former FTX CEO Sam Bankman-Fried, the US Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) have extended the charges to include Caroline Ellison, the former CEO of Alameda Research, and Zixiao (Gary) Wang, the former chief technology officer of FTX – both of whom have accepted the charges and are, the authorities say, co-operating with the investigations.
The CFTC alleges that, along with Bankman-Fried, Ellison, and Wang engaged in a fraudulent scheme to misappropriate FTX customer assets for use by Alameda and by FTX and Alameda executives, including luxury real estate purchases, political contributions, and high-risk, illiquid digital asset industry investments.
The amended complaint further alleges that, at Bankman-Fried’s direction, FTX employees including Wang created undisclosed features in the FTX code that favoured Alameda and allowed it to execute transactions even when it did not have sufficient funds available, including an “allow negative flag” and effectively limitless line of credit that allowed Alameda to withdraw billions of dollars in customer assets from FTX.
As well as similar accusations of code features that favoured Alameda, the SEC’s complaint says that between 2019 and 2022, Ellison, at the direction of 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.
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, Bankman-Fried 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. Meanwhile, the SEC continues, 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.
A sub-theme of the parallel charges is which US regulatory agency will introduce the rules around crypto, if and when they are imposed. This is reflecting in the relative statements from the CFTC and SEC, with CFTC chair Rostin Behnam stating that the charges are part of the effort to ensure “the integrity of commodity markets”.
Conversely, Gary Gensler, chair of the SEC (and former chair of the CFTC), states, “Until crypto platforms comply with time-tested securities laws, risks to investors will persist. It remains a priority of the SEC to use all of our available tools to bring the industry into compliance.”