On Wednesday, the Commodity Futures Trading Commission (CFTC) filed fraud charges against Caroline Ellison, Alameda Research LLC CEO, and Gary Wang, Alameda and FTX Trading Ltd. Co-Founder, in an amended complaint for violations of fraud provisions of the Commodity Exchange Act and and a CFTC Regulation. Similarly, the Securities and Exchange Commission (SEC) filed a complaint against Ellison and Wang for fraud under the federal securities laws. The cases were simultaneously settled.
The actions come less than two weeks after Samuel Bankman-Fried (colloquially known as SBF), FTX, a centralized digital asset derivative trading platform, and Alameda, a trading firm that operated as a primary market maker on FTX, were charged with conducting a fraudulent scheme that caused the loss of more than $8 billion in FTX customer deposits.
The newly filed allegations build on those previously alleged. In the case of the SEC, the agency claims that throughout the “brazen, multi-year scheme,” while SBF hyped investor expectations, Ellison and Wang misappropriated FTX customer funds. Specifically, the SEC says Wang created software code that allowed Alameda to divert FTX customer funds while Ellison used the misappropriated FTX customer funds for Alameda’s trading activity.
Even as the tide turned on crypto markets in May 2022, and “as it was increasingly clear that Alameda and FTX could not make customers whole, [SBF] and Defendants continued to misappropriate FTX customer funds,” the SEC alleges. Further, SBF continued to mislead investors about FTX’s financial condition and risk management and the defendants were aware, or at least reckless in not knowing that the statements were false and misleading.
For example, in June 2022, after receiving a $250 million line of revolving credit to BlockFi, a global crypto financial services company, providing FTX with access to capital to ease liquidity concerns, SBF tweeted, “We take our duty seriously to protect the digital asset ecosystem and its customers.” Yet, the SEC alleges that these assurances were hollow as SBF and Ellison, with Wang’s knowledge, continued to spend hundreds of millions to buy up and support other crypto companies, and allowed Alameda to use FTX customer funds to repay its debts.
For their participation in the “house of cards” collapse, which cost investors billions and resulted in the entities’ bankruptcy, the agencies levelled multiple charges at Ellison and Wang. The Southern District of New York signed off on agreements with the defendants, with penalties and disgorgement amounts to be determined.
