On top of those criminal charges outlined by the Department of Justice, the SEC announced civil charges against Wang and Ellison late Wednesday. The SEC complaint alleges the fraud started from the beginning, bilking investors out of billions of dollars.
From the SEC’s civil complaint:
FTX raised more than $1.8 billion from investors, including U.S. investors, who bought an equity stake in FTX believing that FTX had appropriate controls and risk management measures. Unbeknownst to those investors (and to FTX’s trading customers), Bankman-Fried was orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform’s customer funds for his own personal benefit and to help grow his crypto empire. Defendants were active participants in the scheme and engaged in conduct that was critical to its success.
The SEC also alleges that Wang built a backdoor for SBF that allowed him to funnel FTX customer funds to Alameda. SBF has previously denied such a backdoor existed and points out he doesn’t even know how to code. But the SEC says the backdoor was definitely real.
Wang created and participated in the creation of the software code that allowed Alameda to divert FTX customer funds. Ellison, in turn, used the misappropriated FTX customer funds for Alameda’s trading activity. And Bankman-Fried used those customer funds to make undisclosed venture investments, lavish real estate purchases, and large political donations.
Many news outlets have described what happened to FTX in the days before its downfall as a “run on the bank.” And while that’s partially true, it obscures the real reason FTX collapsed. In reality, rival crypto exchange Binance, led by Changpeng “CZ” Zhao, bought a large stake in FTX back in 2019. When CZ and SBF had a falling out, FTX bought out CZ’s share in the company with roughly $2 billion of FTX’s native token, known as FTT. CZ then decided to cash in his funny money, but FTX couldn’t provide the cash value of the worthless token, which tipped over the first dominoes.
A lot of people are angry at CZ for this move, including former FTX spokesperson Kevin O’Leary, who was paid $15 million to promote FTX. But CZ wasn’t doing anything illegal by asking to cash out his chips. CZ was simply calling SBF’s bluff, despite the fact that CZ is sitting on his own house of cards that could collapse at any moment. Binance’s token is currently the third largest variable-priced crypto token in existence behind Bitcoin and Ethereum.
But the SEC complaint provides even more insight into what SBF was allegedly doing with the FTT token during the three years of its existence.
Beyond its “line of credit” with FTX, Ellison, at Bankman-Fried’s direction, caused Alameda to borrow billions of dollars from third party lenders. Those loans were backed in significant part by Alameda’s holdings of FTT—an illiquid crypto asset security that was issued by FTX and provided to Alameda at no cost. Ellison, acting at the direction of Bankman- Fried, engaged in automated purchases of FTT tokens on various platforms in order to increase the price of those tokens and inflate the value of Alameda’s collateral, which allowed Alameda to borrow even more money from external lenders at increased risk to the lenders and to FTX’s investors and customers, all in furtherance of the scheme.
Did you catch the part that says “at Bankman-Fried’s direction”? That’s the kind of language that gets drawn up when one party is talking to the prosecutors and the other party is only trying to win in the court of public opinion.
Amazingly, the SEC alleges that SBF was so bad at trading with Alameda, his bad bets immediately caught up with him when the market turned sour.
When prices of crypto assets plummeted in May 2022, Alameda’s lenders demanded repayment on billions of dollars of loans. Despite the fact that Alameda had, by this point, already taken billions of dollars of FTX customer assets, it was unable to satisfy its loan obligations. Bankman-Fried, with Defendants’ knowledge, directed FTX to divert billions more in customer assets to Alameda to ensure that Alameda maintained its lending relationships, and that money could continue to flow in from lenders and other investors. Ellison then used FTX’s customer assets to pay Alameda’s debts.
And then it all collapsed, according to the SEC:
Even in November 2022, faced with billions of dollars in customer withdrawal demands that FTX could not fulfill, Bankman-Fried and Ellison, with Wang’s knowledge, misled investors from whom they needed money to plug a multi-billion-dollar hole. This brazen, multi- year scheme finally came to an end when FTX, Alameda, and their tangled web of affiliated entities filed for bankruptcy on November 11, 2022.
Ellison’s bail has been set at an extremely low $250,000, according to CoinDesk, though it’s not clear whether Wang’s bail has been set at the same price. Curiously, the unsealed plea agreement notes that if Ellison is not a citizen of the U.S. she may need to be deported after serving any sentence. It’s believed Ellison was born in the U.S., but CoinDesk speculates she may have given up her American citizenship in order to avoid paying taxes, something cryptocurrency traders who move overseas sometimes do.
Cryptocurrency is inherently a Ponzi scheme that powerful and connected people use to extract wealth from people who chuck in their few hundred dollars on a lottery ticket, hoping to get rich. But the game is rigged against them, and the house always wins. Except when you’re a fucking idiot casino manager. Former president Donald Trump famously lost money trying to run casinos. And it looks like SBF will likely go down in history alongside Trump and all the other frauds of this era. It just might take a while before they’re all exposed.
Fumali – Services Marketplace – Listings, Bookings & Reviews