Two former top executives of Sam Bankman-Fried’s crypto trading empire have pleaded guilty to federal criminal fraud and are working together in the case against the disgraced crypto entrepreneur, the U.S. Attorney for the Southern District of New York said Wednesday night.
The two are Caroline Ellison, the CEO of cryptocurrency trading company Alameda Research, and Gary Wang, a founder of the FTX crypto exchange. They were key lieutenants in Mr. Bankman-Fried’s vast business empire, which rested primarily on FTX and Alameda, companies he founded and ran.
The Securities and Exchange Commission also filed civil fraud charges against Ms. Ellison and Mr. Wang on Wednesday. The SEC said Ms. Ellison, 28, had misused deposits from FTX clients to fund Alameda’s trading activities and that Mr. Wang, 29, had created software that enabled that misuse of money. The SEC case builds on civil charges filed against Mr Bankman-Fried, 30, this month.
The plea bargains and cooperation agreements are a major advance in the criminal fraud case against Mr Bankman-Fried, who is in US custody after agreeing to be extradited from the Bahamas earlier on Wednesday.
The combination of criminal and civil charges against the former top executives puts Mr Bankman-Fried in an even more dangerous legal position, with the federal government saying he oversaw a sweeping years-long fraud that transformed him from one of the most powerful people in the world. world. the crypto industry into a criminal defendant potentially facing decades in prison.
Federal prosecutors and regulators in the United States have said Mr. Bankman-Fried committed fraud that diverted billions in client money for other uses, including buying real estate in the Bahamas, trading crypto at Alameda, making campaign donations. and investing in other cryptocurrencies. businesses. Prosecutors allege that he defrauded clients, investors and lenders to his crypto trading company before it went bankrupt last month.
The charges are also a major blow to the crypto industry, which has been reeling for the past year as the prices of cryptocurrencies like Bitcoin have plummeted and companies have filed for bankruptcy. The collapse of FTX and allegations of fraud has alarmed clients of other trading platforms who were assured that their funds were safe and protected.
What you need to know about the collapse of FTX
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What is FTX? FTX is a now-bankrupt company that used to be one of the world’s largest cryptocurrency exchanges. It enabled customers to trade digital currencies for other digital currencies or traditional money; it also had a native cryptocurrency known as FTT. Based in the Bahamas, the company built its business on risky trading options that are not legal in the United States.
Who is Sam Bankman Fried? He is the 30-year-old founder of FTX and the former CEO of FTX. Once a golden boy of the crypto industry, he was a major donor to the Democratic Party and known for his commitment to effective altruism, a charitable movement that urges supporters to give away their wealth in efficient and logical ways.
How did FTX’s problems start? Last year, Changpeng Zhao, the CEO of Binance, the world’s largest crypto exchange, sold the stake he had in FTX back to Mr. Bankman-Fried, receiving some FTT tokens in return. In November, Mr. Zhao said he would sell the tokens and expressed concern about FTX’s financial stability. The move, which drove the price of FTT down, spooked investors.
What led to the collapse of FTX? The announcement of Mr. Zhao drove the price down and scared off investors. Traders rushed to pull out of FTX, leaving the company with an $8 billion shortfall. Binance, FTX’s main rival, offered a loan to bail out the company, but later backed out, forcing FTX to file for bankruptcy on November 11.
Why was Mr. Bankman-Fried arrested? The collapse of FTX was the start of investigations by the Department of Justice and the Securities and Exchange Commission aimed at whether FTX improperly used customer funds to support Alameda Research, a crypto trading platform that Mr. Bankman-Fried helped set up. On December 12, Mr. Bankman-Fried was arrested in the Bahamas for lying to investors and committing fraud. The next day, the SEC also filed a civil fraud report.
Ms. Ellison’s and Mr. Wang’s confessions of guilt could prompt other former executives to cooperate with authorities in the case against Mr. Bankman-Fried, who has been charged with fraud, money laundering and campaign finance.
US Attorney Damian Williams said Mr. Wang and Ms. Ellison were charged “in connection with their role in the fraud that contributed to the collapse of FTX.”
Mr Williams also reiterated a point he made last week when the criminal charges against Mr Bankman-Fried were announced. “If you have participated in misconduct at FTX or Alameda, now is the time to get ahead of it,” said Mr Williams. “We are moving fast and our patience is not eternal.”
During a two-week media blitz prior to his arrest on December 12, Mr. Bankman-Fried that he had done nothing wrong and had no intention of defrauding anyone. He also claimed that he was not fully aware of what was happening at Alameda.
Mr. Williams also said in his deposition that Mr. Bankman-Fried was in FBI custody and was being flown back to the United States, and would be brought before a judge as soon as possible. He is expected to be brought before Federal District Court in Manhattan as early as Thursday.
Ms. Ellison’s attorneys declined to comment. Ilan Graff, a lawyer for Mr Wang, said: “Gary has accepted responsibility for his actions and takes seriously his obligations as a cooperating witness.”
A spokesperson for Mr Bankman-Fried declined to comment.
In her complaint, the SEC said that Ms. Ellison, under the leadership of Mr. Bankman-Fried, had manipulated the price of a digital currency created by FTX called FTT by purchasing large amounts of the crypto token in order to lower the price. to increase.
Alameda was one of the major companies trading FTT and had used the crypto token as collateral for loans it received from other major crypto companies to fund its trading.
The aftermath of FTX’s demise
The sudden collapse of the crypto exchange has stunned the industry.
Sanjay Wadhwa, Deputy Director of the SEC’s Enforcement Department, said Mr. Bankman Fried, Mrs. Ellison and Mr. Wang “were active participants in a plan to hide material information from FTX investors, including through the efforts of Mr. Bankman-Fried and Ms. Ellison to artificially support the value of FTT.”
Mrs. Ellison was a key figure in Mr. Bankman-Fried’s business empire. At times, she and Mr. Bankman-Fried were romantically involved, living together in a five-bedroom penthouse in the Bahamas, where FTX was located.
Ms. Ellison met Mr. Bankman-Fried at the quantitative trading firm Jane Street, where she worked after graduating from Stanford University. Both were involved in effective altruism – a community that focuses on using data to maximize the long-term impact of charitable donations.
Mr Bankman-Fried left Jane Street and eventually founded Alameda in 2017. Ms Ellison joined him in 2018 and quickly became part of his close circle. She followed him to Hong Kong and took over as CEO of Alameda after Mr. Bankman-Fried together with mr. Wang FTX had founded.
Even as she became a powerful figure in the emerging crypto industry. Mrs. Ellison never really believed in technology. “I think a lot of crypto projects don’t have much real value,” she said on FTX’s official podcast in early 2021. She got into crypto, she explained in another episode, because she hoped to make a lot of money to give away as part of her commitment to effective altruism.
When FTX collapsed, Ms. Ellison gathered a group of Alameda employees working out of the company’s Hong Kong office and confessed that the company had used customer deposits to make up a shortfall in its accounts, according to one person. who was familiar with the matter.
Mr. Wang, a former Google software engineer who graduated from the Massachusetts Institute of Technology, was one of Mr. Bankman-Fried’s closest confidants at FTX. The pair lived together in a luxury apartment complex in the Bahamas.