Cryptocurrency derivatives exchange FTX has been lying to banks about the suspicious movements of customer assets as far back as 2020, the company’s new leadership alleged in court filings.
Once a $32 billion crypto empire, FTX collapsed in November 2022 after its disgraced founder Sam Bankman-Fried allegedly misappropriated customers’ money to cover losses at his privately held trading firm Alameda Research. Bankman-Fried pleaded not guilty in January to a slew of criminal charges, including wire fraud and money laundering.
According to a report filed on Monday in a federal bankruptcy court in Delaware, Bankman-Fried and his several senior executives commingled customer and corporate funds on purpose so they could venture speculative trades, buy luxury Caribbean real estate, and make political donations “designed to enhance their own power and influence.”
In 2019, when the FTX Group launched its online crypto-trading platform, it didn’t established new bank accounts in its own name but “instead used Alameda’s existing bank accounts to receive customer deposits and fund customer withdrawals,” FTX chief executive John J. Ray alleged in the report.
When banks grew suspicious and started to question the FTX management about the wire transfers, the FTX Group “lied” rather than telling the truth to the bank that it “not only intended to, but had in fact been using the Alameda account for FTX.com customer transactions for nearly a year,” Ray added.
“Specifically, at the direction of a senior FTX Group executive, an Alameda employee falsely responded that ‘customers occasionally confuse FTX and Alameda,’ but that ‘all incoming/outgoing wires are to settle trades with Alameda Research,’” the report read.
Thereafter, in an effort to avoid scrutiny, the FTX Group allegedly lied to an unidentified U.S. bank in order to open new accounts in the name of North Dimension. According to the court filing, the group falsely told the bank that North Dimension was a crypto-trading firm with “substantial operations,” when in fact it was just a shell company with zero operations.
A senior FTX executive, referred to throughout the report only as “Attorney-1,” worked with Bankman-Fried to play “leading roles in carrying out this deception,” Ray stated.
After Attorney-1 directed an FTX staff to copy information from Alameda’s bank applications, “Bankman-Fried signed and certified that this response to the bank’s questionnaire was correct and complete to the best of his knowledge and belief,” the report claimed.
“Unlike Alameda, which was a crypto trading and market-making firm with employees, operations, and trading activity, North Dimension had no business operations or employees,” it added.
While the report didn’t name Attorney-1, The Wall Street Journal identified him as FTX’s former chief regulatory officer, Daniel Friedberg, citing people familiar with the matter. Friedberg has not been criminally charged in the FTX case.
The new FTX leadership also alleged that their predecessors made more than $100 million in political donations that appear to have been funded in part by commingled customer deposits.
For example, according to the report, former FTX engineering chief Nishad Singh made a $500,000 contribution to People for Progressive Governance, a PAC formed by Michael Sadowsky, the head of Bankman-Fried’s super PAC, Protect Our Future. Singh has pleaded guilty to charges including fraud and conspiracy.
In addition, the report claimed that the previous FTX leaders used commingled customer deposits to purchase “more than 30 properties, including a $30,000,000 six-bedroom, 11,500-square foot penthouse” in a luxury resort community in the Bahamas in January 2022.
The property, known as the Orchid Penthouse, was home to Bankman-Fried, Singh, FTX technology chief Gary Wang, and Alameda chief executive Caroline Ellison prior to the company’s collapse, the report said.
Overall, the exchange’s ex-management allegedly misappropriated $8.7 billion in customer-desposited assets, the vast majority of which was in the form of cash and stablecoin—a type of cryptocurrency that seeks to maintain a constant value relative to certain fiat currencies.
Bankman-Fried is currently free after paying a $250 million bond. He is expected to appear for trial in early October.
