SBF knowingly diverted funds from FTX clients to fuel Alameda’s growth and raise billions per lawsuit

Securities and Exchange Commission (the “Commission”) v Caroline Ellison (“Ellison”) and Zixiao “Gary” Wang (“Wang”) in court, December 21, 2022, is part of HackerNoon’s Legal PDF Series. You can jump to any part of this file here. This is part 7 of 12.

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case number: 1:22-cv-10794

plaintiff: Securities and Exchange Commission (the “Commission”)

accusedStarring: Caroline Ellison (“Ellison”) and Zixiao “Gary” Wang (“Wang”)

Submission date: December 21, 2022

Location: US District Court, Southern District of New York

filer: Jorge G. Tenreiro, David L. Hirsch (unregistered in SDNY), Ladan F. Stewart, Amy Harman Burkart, David J. D’Addio – plaintiff’s attorneys

FACTS

A.Bankman-Fried, with the active support of Defendants, created a complex network of entities centered on FTX and Alameda.

18. In or around October 2017, Bankman-Fried and Wang founded Alameda, a quantitative trading firm specializing in crypto assets.(3)

19. Initially, Alameda focused on arbitrage trading strategies, but then adopted other strategies including market making, yield farming (pooling crypto assets for interest or other rewards), and volatility trading. Alameda also provided over-the-counter trading services and made and managed other debt and equity investments.

20. Initially, Bankman-Fried was responsible for trading operations, and Wang handled the technical and programming functions. Over time, Alameda hired additional employees, including Singh (in or about December 2017), Ellison (in or about March 2018), and Trabucco (in or about 2019). At the end of 2021, Alameda had around 30 employees. Alameda temporarily shared office space and employees with FTX.

21 Bankman-Fried remained the ultimate decision maker at Alameda even after Ellison and Trabucco became co-CEOs in or about October 2021. Bankman-Fried guided investment and operational decisions, communicated frequently with Alameda employees and had unrestricted access to Alameda records and databases.

22. Ellison was a trader at Alameda when Bankman-Fried served as CEO. When Ellison became co-CEO in 2021, Ellison was responsible for day-to-day operations of Alameda until November 2022. Although Ellison made some trading decisions, she consulted frequently with Bankman-Fried, particularly on strategic issues and significant trades.

23. In or around 2018, Bankman-Fried began work on building a crypto asset trading platform. Eventually, along with Wang and Singh, Bankman-Fried formed FTX, which began operations in or around May 2019.

24. FTX offered a range of services to its customers. For example:

• FTX offered a “spot market,” a trading platform through which clients could trade crypto assets with other FTX clients for fiat currency (i.e. currencies like US dollars) or other crypto assets.
• FTX offered “spot margin trading” services which allowed FTX clients to trade assets they did not have (i.e. trade “on margin”) by depositing collateral in their FTX accounts and crypto -Borrow assets via the “spot market” on the FTX platform. FTX also allowed clients to lend their crypto assets to other FTX clients who would then use those crypto assets for spot trading.
• FTX offered an off-platform (over-the-counter or “OTC”) portal that allowed clients to connect and request quotes on spot crypto assets and execute trades.

25Bankman-Fried was the ultimate decision maker at FTX from the inception of the Platform on or about May 2019 until his resignation as CEO on or about November 11, 2022 (“the Relevant Period”). Wang and Singh were the lead engineers responsible for writing the software code for FTX, including the code that enabled the services described above.

26. In or around January 2020, Bankman-Fried, Wang and Singh founded FTX US, a crypto asset trading platform designed primarily for clients in the United States.(4)

27. Over time, Bankman-Fried expanded its holdings to include a number of companies focused on making and managing private (or “venture”) investments.

28. This interconnected web of companies grew to over 100 separate entities, with Bankman-Fried at the top and Alameda, his crypto hedge fund, at the center.

29. During the relevant period, Bankman-Fried made several public statements that identified himself as a visionary leader in the crypto industry and touted his efforts to create a regulated and thriving crypto asset market. He ran an intense PR campaign to brand himself and his companies as honest stewards of crypto.

30. The reality was very different: Contrary to what FTX investors and trading clients have been told, Bankman-Fried, actively assisted by the Defendants, continuously diverted FTX client funds to Alameda from the start and then used those funds to further expand his empire by making billions of dollars used to achieve secrecy Private venture investments, political donations and real estate purchases.

31. Concurrently, throughout the relevant period, Bankman-Fried, with Defendants’ knowledge, solicited stock investors by promoting FTX’s controls and risk management, eventually raising at least $1.8 billion from investors in exchange for various stock classes in FTX through multiple rounds of fundraising, including raising:

(1) approximately $8 million from the sale of FTX Series A preferred stock, with the fundraising closing in or about August 2019;

(2) approximately $1 billion from the sale of FTX Series B preferred stock, with fundraising completed in or about July 2021;

(3) approximately $420 million from the sale of FTX Series B-1 stock, with fundraising completed on or about October 2021; and

(4) approximately $500 million from the sale of shares of FTX’s Series C common stock, with the fundraising completed in or about January 2022.

Of that total, approximately $1.1 billion has been invested in FTX by approximately 90 investors based in the United States.

32. Throughout the span of the relevant period while he was raising money from equity investors, Bankman-Fried and those who spoke at his direction and on his behalf, with the knowledge of the Defendants, alleged in widely publicized public forums and directly to investors that : FTX was a secure crypto asset trading platform; FTX had a comparative advantage due to its automated risk mitigation techniques; and FTX and its clients were protected from the losses of other clients due to FTX’s automated liquidation process. A**As discussed further herein, these and other statements were misleading given Bankman-Fried’s failure to disclose to FTX investors the diversion of FTX client funds to Alameda, which he then used for his own purposes, including lending to himself.**Similarly, statements made by Bankman-Fried about the split of FTX and Alameda throughout the relevant period were misleading given the special treatment accorded Alameda at FTX, including his virtually unlimited “line of credit” at FTX, did not disclose its ability to maintain a negative balance on its FTX client account and its exemption from FTX’s automated liquidation process – which did not benefit any other client of the platform, but which changed FTX’s risk profile. Defendants were aware that Bankman-Fried was providing false or misleading information in order to raise money for FTX from lenders. They have at times been in close proximity to these discussions and directly or indirectly assisted Bankman-Fried in providing false and misleading information to investors.

33. Bankman-Fried also misrepresented the risk profile of an investment in FTX during the relevant period by failing to disclose FTX’s exposure to Alameda and related that the collateral posted by Alameda on FTX consists largely of illiquid FTX-related collateral Passed tokens, including FTT, the price of which Alameda actively manipulated. In addition to these material omissions, Bankman-Fried also made material misstatements to FTX investors about FTX’s risk management and its relationship with Alameda. As detailed below, Bankman-Fried made these material misstatements throughout the relevant period and throughout the time that he raised or attempted to raise funds for FTX – from FTX’s commencement of operations in May 2019 to his final end in November 2022. Again, the defendants were aware that Bankman-Fried was making these false or misleading statements and that he was doing so to raise money from equity investors, and they directly or indirectly assisted him in doing so.

(3) Crypto assets are unique digital assets managed on a cryptographically secured blockchain. A blockchain, or distributed ledger, is a peer-to-peer database distributed across a network of computers that records all transactions in theoretically immutable, digitally captured data packets. The system relies on cryptographic techniques to securely record transactions. Crypto tokens can be traded against other crypto assets or fiat currency (legal tender issued by a country) on crypto asset trading platforms.

(4) FTX US is the d/b/a for a subsidiary of West Realm Shires Inc., a separate legal entity from FTX Trading Ltd., which has provided various services. The conduct of FTX US is not the subject of the allegations in this complaint.

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This Court Case 1:22-cv-10794, accessed December 21, 2022, is in the public domain. The documents created by the court are works of the federal government and are automatically placed in the public domain under copyright law and may be passed on without legal restrictions.

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