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Sam Bankman-Fried Has Uphill Legal Battle After Business Partners Agree to Plea Deals

Two of Sam Bankman-Fried’s business partners have pleaded guilty to fraud, according to a federal prosecutor in New York. Former Alameda CEO Caroline Ellison and FTX co-founder Gary Wang are cooperating with prosecutors, according to the U.S. attorney for Southern New York. 

The SECs complaint further alleges that Ellison and Wang worked with Bankman-Fried to transfer customer funds to the Alameda Research hedge fund. “Billions of dollars of FTX customer funds were so deposited into Alameda-controlled bank accounts,” the complaint reads.

It adds: “From the inception of FTX, Defendants and Bankman-Fried diverted FTX customer funds to Alameda, and continued to do so until FTX’s collapse in November 2022.”

Alameda Research, managed by Ellison, borrowed billions of dollars from FTX, losing them in several ill-conceived deals and transactions. The suit alleges that funds FTX transferred into an Alameda Research subsidiary were used to cover losses made by the company.

“In truth, Bankman-Fried and Wang, with Ellison’s knowledge and consent, had exempted Alameda from the risk mitigation measures and had provided Alameda with significant special treatment on the FTX platform, including a virtually unlimited ‘line of credit’ funded by the platform’s customers,” the SEC wrote in its complaint. 

Things became muddied at FTX. “As a result, it was no longer apparent on FTX’s ledgers that Alameda had an $8 billion negative balance on its FTX account,” the complaint reads.

The suit, filed on Dec. 13 by the Commodity Futures Trading Commission (CFTC), alleges that the exchange’s founder instructed the executives at the FTX exchange to shift about $8 billion of liabilities from Alameda Research into the pseudonymous FTX account. 

The SEC’s filing revealed Bankman-Fried directed customer funds to be deposited in banks controlled by Alameda, but not always listed in Alameda’s name. The regulator alleges Bankman-Fried immediately engaged in fraudulent practices, instructing FTX executives to transfer substantial obligations of Alameda Research to the exchange into an account Bankman-Fried referred to as “our Korean friend’s account.” 

Growing heavily leveraged, Alameda Research, its trading company, ultimately used funds from the FTX customer, pursuant to orders from Bankman-Fried, to cover credit calls and margin calls in June 2022, the CFTC alleged.

Bankman-Fried used backdoors to move $10bn of FTX customer funds to its sister trading company, with at least $1bn still missing today. 

Reuters last month said that Bankman-Fried had built a backdoor in the FTX’s accounting systems, allowing him to change the firm’s financial records without having to go through accounts. A GitHub account with the name of Nishad Singh, a former FTX executive, authored code that hid Alameda Research’s liabilities. 

Investigators have now said a backdoor was built for Bankman-Fried, who directed cryptocurrency exchange FTX executives to shift $8bn of Bankman-Fried’s trading and investment firm’s liabilities into unknown customers accounts in the crypto exchanges systems.

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