Ellison and Wang carried out the fraud via coding & accounting tricks, but SBF was the architect

Securities and Exchange Commission (the “Commission”) v. Caroline Ellison (“Ellison”) and Zixiao “Gary” Wang (“Wang”) Court Filing, Dec 21 2022 is part of HackerNoon’s Legal PDF Series. You can jump to any part in this filing here. This is part 8 of 12.

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Case Number: 1:22-cv-10794

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

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

Filing Date: Dec 21, 2022

Location: US District Court, Southern District of New York

Filer: Jorge G. Tenreiro, David L. Hirsch (not admitted in SDNY), Ladan F. Stewart, Amy Harman Burkart, David J. D’Addio – Attorneys for the Plaintiff


B. Defendants Used Alameda to Carry Out the Fraudulent Scheme.

34. Alameda (and its many subsidiaries) served a number of essential functions in Bankman-Fried’s growing web of companies. For example, Alameda was the primary market maker on FTX at the time of FTX’s inception in 2019. In this capacity, Alameda, at Bankman- Fried’s direction, was tasked with creating liquidity on FTX to allow the platform to function more efficiently. Bankman-Fried also made venture investments through an Alameda subsidiary. Most crucially, Bankman-Fried used Alameda to house FTX customer assets and to deploy those assets, under Bankman-Fried’s direction, to help grow his empire.

35. 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.

36. Defendants and Bankman-Fried diverted FTX customer funds to Alameda in essentially two ways: (1) by directing FTX customers to deposit fiat currency (e.g., U.S. Dollars) into bank accounts controlled by Alameda; and (2) by enabling Alameda to draw down from a virtually limitless “line of credit” at FTX, which was funded by FTX customer assets.

37. As a result, there was no meaningful distinction between FTX customer funds and Alameda’s own funds. Bankman-Fried and Wang thus gave Alameda and Ellison carte blanche to use FTX customer assets for Alameda’s trading operations and for whatever other purposes Bankman-Fried and Ellison saw fit. In essence, Bankman-Fried and Wang placed billions of dollars of FTX customer funds into Alameda. Bankman-Fried then used Alameda as his personal piggy bank to buy luxury condominiums, support political campaigns, and make private investments, among other uses. Ellison used these funds for Alameda’s operations, including speculative trading strategies and servicing Alameda’s debt to third-party lenders. Defendants knew that none of this was disclosed to FTX equity investors or to the platform’s trading customers.

i. FTX Customers Deposited Billions of Dollars into Alameda-Owned Bank Accounts, Which Alameda Spent on Its Own Trading Operations and to Expand Bankman-Fried’s Empire.

38. From the start of FTX’s operations in or around May 2019 until at least 2021, FTX customers deposited fiat currency (e.g., U.S. Dollars) into bank accounts controlled by Alameda. Billions of dollars of FTX customer funds were so deposited into Alameda-controlled bank accounts. Ellison was aware that Alameda was receiving FTX customer funds.

39. At least some of these bank accounts were not in Alameda’s name, but rather in the name of North Dimension Inc. (“North Dimension”), an Alameda subsidiary. North Dimension’s website does not disclose any connection to Alameda. Ellison knew that Bankman- Fried had directed FTX to have customers send funds to North Dimension in an effort to hide the fact that the funds were being sent to an account controlled by Alameda.

40. Alameda did not segregate these customer funds, but instead commingled them with its other assets, and used them indiscriminately to fund its trading operations and Bankman- Fried’s other ventures.

41. This multi-billion-dollar liability was reflected in an internal account in the FTX database that was not tied to Alameda but was instead called “[email protected]Characterizing the amount of customer funds sent to Alameda as an internal FTX account had the effect of concealing Alameda’s liability in FTX’s internal systems. Defendants knew that FTX customer funds were being sent to Alameda-controlled bank accounts and that Alameda’s liability was reflected in the “[email protected]” account.

42. **In quarterly balance sheets that Ellison prepared, and that were provided to Alameda’s third-party lenders, Alameda tracked this liability as a “loan,” but did not specify that the “loan” was from FTX. Instead, Ellison, at Bankman-Fried’s direction, combined this liability with loans Alameda had received from third-party lenders to obscure Alameda’s intertwined financial relationship with FTX.

43. Alameda was not required to pay interest on the liability reflected in the

[email protected]” account.

44. In 2022, FTX began trying to separate Alameda’s portion of the liability in the

[email protected]” account from the portion that was attributable to FTX (i.e., to separate out customer deposits sent to Alameda-controlled bank accounts from deposits sent to FTX- controlled bank accounts). Alameda’s portion—which amounted to more than $8 billion in FTX customer assets that had been deposited into Alameda-controlled bank accounts—was initially moved to a different account in the FTX database. However, because this change caused FTX’s internal systems to automatically charge Alameda interest on the more than $8 billion liability, Bankman-Fried directed that the Alameda liability be moved to an account that would not be charged interest. This account was associated with an individual that had no apparent connection to Alameda. As a result, this change had the effect of further concealing Alameda’s liability in FTX’s internal systems.

ii. The FTX Platform, By Design, Granted Special Treatment to Alameda, Including Features that Allowed Alameda to Divert FTX Customer Assets.

45. In addition to receiving cash deposits directly from FTX customers, Alameda benefited from undisclosed features of the FTX platform, which were embedded in software code developed by Wang and other FTX engineers, and which allowed Alameda to divert FTX customer assets. For example:

  • Negative Balance: Alameda was able to maintain a negative balance in its customer account at FTX. Bankman-Fried directed FTX engineers, including Wang, to write software code in or around August 2019, and to update it in or around May 2020, ultimately allowing Alameda to maintain a negative balance in its account, untethered from any collateral requirements. No other customer account at FTX was permitted to maintain a negative balance.
  • Line of Credit: On multiple occasions, Bankman-Fried directed FTX engineers, including Wang, to increase the amount by which Alameda could maintain a negative balance in its account. In effect, this gave an unofficial “line of credit” to Alameda, since Alameda was able to draw down on its FTX customer account and use those funds—which were actually the funds deposited by other FTX customers—for its own trading. At Bankman-Fried’s direction, Wang and others continually raised the limit on Alameda’s “line of credit” to the point where it grew to tens of billions of dollars and effectively became limitless. No other FTX customer had a similar “line of credit.”
  • Liquidation Exemption: In or around May 2020, Bankman-Fried directed FTX engineers, including Wang, to exempt Alameda from the “auto-liquidation” feature of FTX’s spot margin trading services. As a result, Alameda’s collateral could fall below the requisite margin levels without triggering the automatic liquidation of its account. Alameda was the only customer exempted from FTX’s automatic account liquidation.
  1. Defendants were both aware that these special privileges were afforded to Alameda—and only Alameda. Defendants were also both aware that the existence of these special privileges, which were put in place at Bankman-Fried’s direction, were hidden from FTX’s investors. These privileges permitted Alameda to draw on FTX customer assets to a virtually unlimited extent for its own uses. Because its own FTX trading account was able to maintain a negative balance of billions of dollars, unbacked by sufficient collateral—as a direct result of software code implemented by Wang and others—Alameda was able to divert billions of dollars in FTX customer assets. Alameda and Ellison did just that in 2022.

iii. In 2022, Alameda Diverted Billions More in FTX Customer Assets.

47. Starting in or around 2021, Bankman-Fried directed Ellison to have Alameda borrow billions of dollars from third-party crypto asset lending firms in order to fund Bankman- Fried’s venture investments and for his personal use. Certain of these loans included provisions permitting the lenders to demand re-payment at any time.

48. In or around May 2022, as prices of crypto assets were dropping precipitously, several of these lenders demanded re-payment from Alameda. Because Alameda did not have sufficient assets to cover all of these obligations, Bankman-Fried directed Ellison to draw on Alameda’s “line of credit” from FTX, which, based on the software code that Wang had previously created, allowed Alameda to borrow virtually limitless funds from FTX. Billions of dollars of FTX customer funds were thus diverted to Alameda and used by Alameda to re-pay its third-party loan obligations.

49. Because Alameda now had billions of dollars more in liability to FTX (on top of the billions of dollars reflected in the “[email protected]” account), Bankman-Fried—concerned that this enormous liability would alarm Alameda’s lenders—directed Ellison to hide this “line of credit” in Alameda’s balance sheet. Ellison did so and presented this information to lenders, knowing that it was materially misleading.

50. Despite the fact that Alameda now owed FTX billions of dollars with no immediate prospects of raising capital to pay off its “line of credit,” Bankman-Fried continued to direct Ellison to draw on the Alameda “line of credit” in the summer of 2022. The customer funds diverted to Alameda were used, among other things, to provide hundreds of millions of dollars in “loans” to Bankman-Fried and other FTX executives, as well as hundreds of millions more to fund additional venture investments.

iv. Bankman-Fried, with Defendants’ Knowledge and Consent, Assured Investors that FTX Customer Assets Were Secure, and Hid Alameda’s Close Relationship with FTX.

51. Throughout the Relevant Period, Bankman-Fried was directly involved in soliciting potential investors in FTX. Bankman-Fried met, and otherwise communicated, with FTX investors, including investors based in the United States. Along with another FTX employee, Bankman-Fried was the point-person for investor relations at FTX. Defendants knew that Bankman-Fried was meeting with and soliciting funds from equity investors.

52. FTX’s Terms of Service, which were publicly available on FTX’s website and accessible to investors, assured FTX customers that their assets were secure, providing: “you control the Digital Assets held in your Account;” “[t]itle to your Digital Assets shall at all times remain with you and shall not transfer to FTX;” and “none of the digital assets in your account are the property of, or shall or may be loaned to, FTX Trading.” The Terms of Service further provided: “Once we receive fiat currency we may issue you an equivalent amount of electronic money (“E-Money”)…which represents the fiat currency that you have loaded” and “[y]ou may redeem all or part of any E-Money held in your Account at any time.”

53. Similarly, FTX posted on its website a document entitled, “FTX’s Key Principles for Ensuring Investor Protections on Digital-Asset Platforms,” in which FTX represented that it “segregates customer assets from its own assets across our platforms.” FTX further represented in that document that it maintained “liquid assets for customer withdrawals…[to] ensure a customer without losses can redeem its assets from the platform on demand.”

54. In addition to making this document available to the public on its website, FTX specifically provided it to potential investors, including a U.S. investor who had invested $35 million in FTX’s Series B fundraising round in July 2021. As described above, these statements to the public, customers, and investors were false—FTX did not segregate its customer assets from its own assets, and, as events would later demonstrate, did not maintain liquidity to allow customer withdrawals on demand.

55. FTX investors were provided with FTX’s audited financial statements, and FTX represented in its purchase agreements that those financial statements “fairly present in all material respects the financial condition and operating results of” FTX. These audited financial statements, which do not include information about Alameda’s undocumented “line of credit” from FTX and other information discussed herein, were, at the very least, materially misleading. Indeed, FTX’s current CEO has voiced “substantial concern as to the information presented in these audited financial statements.”

56. Throughout the Relevant Period, Bankman-Fried made public statements assuring that customer assets were safe at FTX. For example, he stated in a tweet on or about June 27, 2022: “Backstopping customer assets should always be primary. Everything else is secondary.” He likewise tweeted on or about August 9, 2021: “As always, our users’ funds and safety comes first. We will always allow withdrawals (except in cases of suspected money laundering/theft/etc.).”

57. Bankman-Fried also told investors, and directed other FTX and Alameda employees to tell investors, that Alameda received no preferential treatment from FTX. For example, Bankman-Fried told the Wall Street Journal in or around July 2022: “There are no parties that have privileged access.” Likewise, in a Bloomberg article published in or about September 2022, Bankman-Fried claimed that “Alameda is a wholly separate entity” than FTX. In the same article, Ellison is quoted as stating about Alameda: “We’re at arm’s length and don’t get any different treatment from other market makers.” Similarly, in an interview in or about August 2022, Ellison claimed that FTX and Alameda were separate companies, that Alameda received no special treatment on the FTX platform, and that there was an ethical wall between them preventing sharing of customer information between FTX and Alameda. Bankman-Fried made similar statements directly to investors.

58. Defendants were aware of the substance of Bankman-Fried’s statements about FTX customer assets—including the security of the assets and the manner in which they would be handled—and about the relationship between Alameda and FTX. Given their involvement in the fraudulent scheme outlined herein, Defendants knew or were reckless in not knowing that these statements to investors were false and misleading and that they were important to FTX’s investors. Defendants further knew or were reckless in not knowing that these statements were intended to make FTX more attractive to investors and potential investors.

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This court case 1:22-cv-10794 retrieved on Dec 21 2022, is part of the public domain. The court-created documents are works of the federal government, and under copyright law, are automatically placed in the public domain and may be shared without legal restriction.

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