When Sam Bankman-Fried was arrested in the Bahamas for extradition to the US, people started wondering what would happen next. The criminal charges and arrest made the government’s confidence clear, but nobody knew why. That lasted until Sam Bankman-Fried was in FBI custody, then it was revealed that FTX executives and his business partners had turned against him.
Carolyn Ellison and Gary Wang secretly pled guilty, admitting to their role in the FTX fraud and cooperating to earn leniency in their sentencing. The announcement came after Sam Bankman-Fried was in the air on his way to the US.
- The announcement was delayed until he was in custody to prevent Bankman-Fried from fighting extradition from the Bahamas.
- Ellison and Wang pled guilty in Manhattan federal court and face charges that could put them away for decades.
Ellison and Wang worked closely with Bankman-Fried, serving as two of his most trusted lieutenants. Ellison was the former CEO of Alameda Research, while Wang co-founded FTX. Both agreed to testify to their part in defrauding customers and illegally diverting customer funds from FTX.
- The funds were used for real estate purchases, political donations, and risky trades.
- Alameda Research was Bankman-Fried’s trading house, where he moved $10 billion in customer funds there before the collapse of FTX.
Ellison knew Alameda was “borrowing” customer funds. Alameda received access to a borrowing facility at FTX.com that allowed the company to keep negative balances in various currencies, giving them what was essentially a bottomless line of credit.
- Ellison was aware that negative balances in any currency meant dipping into customer funds deposited into FTX.
- The “bottomless” line of credit meant they could borrow without putting down collateral, owing interest, or being subject to margin calls or liquidation protocols.
Ellison was aware of illiquid investments and lent money. That included knowledge that the investments were financed by loans worth billions from external lenders. When the loans were recalled, an agreement between her and others led to borrowing several billion from FTX to repay them.
- She knew that repaying the loans with funds from FTX meant using customer funds, which customers never expected to be lent out.
- Alameda also “lent money to Mr. Bankman-Fried and other FTX executives,” according to Ellison.
They covered it up with misleading financial statements. Bankman-Fried, Ellison, and others agreed to provide misleading data to Alameda’s lenders to conceal the borrowing and loans to FTX execs and others. Additionally, the relationship between FTX and Alameda was kept hidden, including the credit arrangement.
Wang changed computer code to make everything go smoothly. Knowing what he was doing, Wang changed computer code to ensure the transactions with Alameda could occur.
Will it be enough? According to experts, it will be hard to dismiss any of the money transferred to Alameda as mismanagement. Because of that, the testimony provided by the two business partners will have a devastating effect. Additionally, the usual avenues of shifting guilt will be hard for Bankman-Fried to pull off.
- While Bankman-Fried and Ellison were once romantically involved, which leaves room open for an argument of clouded judgment, it is not as easy to do with Wang.
- Bankman-Fried’s ultimate control over the two companies ensures he cannot escape responsibility. He was CEO of Alameda until Ellison was appointed last year. He also owned 90% of Alameda to Wang’s 10%.
Ellison and Wang might not be the only ones to come forward. Their pleas could drive others to step forward and cooperate in hopes of a lighter sentence. Damian Williams, the U.S. attorney, issued a statement. “If you participated in misconduct at FTX or Alameda, now is the time to get ahead of it,” he said. “We are moving quickly, and our patience is not eternal.”