The SEC says former FTX founder and CEO Sam Bankman-Fried internally directed the software code to be written in a way that would allow his cryptocurrency hedge fund, Alameda, to operate with a negative balance in its client account in FTX.
This allegedly happened in August 2019, just about four months after operations at FTX began.
This effectively gave sister trading company Alameda an unlimited line of credit funded by customer assets, according to the Securities and Exchange Commission lawsuit filed in federal court Tuesday.
That meant there was no meaningful distinction between FTX client funds and the Alameda funds that Bankman-Fried used as his “personal piggy bank,” the complaint says. He concealed from investors and clients that he used the funds to buy luxury condos, support political campaigns and make private investments, according to the SEC.
Between March 2020 and September 2022, Bankman-Fried executed Alameda loans totaling more than $1.338 billion, including two instances in which Bankman-Fried was both the borrower in its individual capacity and the lender in its capacity as Alameda CEO, says SEC. in his civil suit.
Bankman-Fried used funds from Alameda to buy tens of millions of dollars in real estate in the Bahamas for himself, his parents and other FTX executives, according to the document.
Alameda co-founders Nishad Singh and Gary Wang also borrowed $554 million and $224.7 million, respectively, by executing similar notes with Alameda in 2021 and 2022, the filing says.
Singh and Wang have not been charged with any crimes at this time.
The loans to Bankman-Fried and others were “poorly documented and sometimes not documented at all,” the lawsuit says.
When crypto asset prices plummeted in May 2022, Bankman-Fried paid off Alameda’s demanding third-party lenders from its FTX “credit facility,” further increasing the multi-billion dollar liability and then hiding it on Alameda’s balance sheet to avoid scaring investors, the complaint alleges.
The FTX CEO continued to leverage the companies for his personal gain, lending himself $136 million at the end of July 2022, a month after offering crypto financial services firm BlockFi a $250 million revolving line of credit to ease its own cash-flow problems, according to the filing. . Meanwhile, throughout the summer, he submitted a “false and misleading account positive” of the company to investors, despite its “weak financial condition,” the SEC alleges.
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