Why Sam Bankman-Fried did scam of $8 billion in customer funds FTX, according to a federal prosecutor

FTX: Sam Bankman-Fried

We has compiled a timeline of the collapse of Sam Bankman-Fried’s cryptocurrency business, based on accusations made in the last week by a federal prosecutor within the Southern District of New York and civil suits brought by the Securities and Exchange and Commodity Futures Trading Commission.

Bankman-Fried’s rapid transformation from hero into criminal in the crypto industry exposed a decade-long fraud traced to the launch of FTX in 2019. According to the authorities.

Federal authorities at the CFTC declare that just one month after establishing FTX.com, Bankman-Fried, “unbeknownst to all but a small circle of insiders,” was using customer’s assets specifically, their cryptocurrency accounts — to hedge Alameda’s bets.

Before his shocking morning arrest on Monday, Bankman-Fried apologized for every mistake he could think of to anyone willing to take the time to listen. In a leaked draft of his defunct House testimony in which, he admitted that he was, throughout his adult existence, “sad.” He “f —– up,” tweeted, wrote, and then said.

He told Bahamas regulators that he had been “deeply sorry for ending up in this position.” However, when Bankman-Fried was taken out of his penthouse home in Nassau with handcuffs in the Bahamas, it was not evident what he apologized for, despite denying having committed fraudulent acts to CNBC’s Andrew Ross Sorkin, ABC News George Stephanopoulos and on Twitter for several weeks.

However, the next day following his arrest, Federal prosecutors and regulators released hundreds of pages of documents and allegations that accused Bankman-Fried of not only committing fraud but of doing it “from the start,” according to a statement of the Securities Exchange Commission. Securities Exchange Commission

While not having “f —– up,” SEC and Commodity Futures Trading Commission regulators, along with federal prosecutors of the United States Attorney’s Office for the Southern District of New York, claim the fact that Bankman-Fried is at the center — and even the driving force behind “one of the biggest financial frauds in American history,” according to U.S. Attorney Damian Williams. The allegations against Bankman Fried were put together at a furious speed but give insights into one of the most well-known fraud investigations since Enron.

Bankman-Fried established the crypto-hedge fund Alameda Research in November 2017 and rented offices in Berkeley, California. He is the son of two Stanford law professors. Bankman-Fried completed his studies at MIT, worked for the highly regarded quantitative trading company Jane Street Capital, and got into cryptocurrency with an MIT student, Gary Wang.

Alameda Research was an arbitrage shop that bought bitcoin at a lower cost on one exchange and then sold it at a higher cost on a different one. The price differences between South Korea versus the rest of the world allowed Bankman Fried and Wang to reap huge profits from what was dubbed “the kimchi swap.”

In April of 2019, Bankman-Fried and Wang, together with U.C. Berkeley graduates Nishad Singh — founded FTX.com, the world’s first cryptocurrency exchange that offers customers cutting-edge trading tools as well as a highly responsive platform and a consistent experience.

The federal regulators of the CFTC claim the CFTC clearly understands that only a month after the creation of FTX.com, Bankman-Fried, “unbeknownst to all but a small circle of insiders,” was making use of customers assets specifically, their cryptocurrency deposits to hedge Alameda’s bets.

Rehypothecation is the name used to describe the legal use by businesses of customers’ assets for speculation and investment. Bankman-Fried, however, needed consent from customers to play with their funds. The terms of service for FTX expressly prohibited him and Alameda from using money from customers to buy anything if the customer had consented to it.

Since the beginning of FTX, customer cash has been abundant. The CFTC reported in 2019 from FTX, which estimated the volume of futures transactions exceeding $100 million daily.

Utilizing customer funds to fund Bets on Alameda’s was a fraud, according to the CFTC asserts. The CFTC also alleges that in the Southern District of New York, where a grand jury convicted Bankman-Fried, Bankman-Fried is also facing criminal fraud charges. Since the beginning of FTX, the regulators claim that Bankman-Fried used customers’ funds to fund his speculations.

It’s been a swift slide from grace for the former king of cryptocurrency, hailed as the”savior” of the business as recently as only two months earlier. Bankman-Fried is heading to the Bahamian judge on Tuesday to submit himself to authorities in the U.S. extradition process, according to an individual familiar with the situation. A criminal trial is expected when he returns to U.S. soil.

Lawyers representing Bankman-Fried and attorneys from his previous companies have yet to respond to requests for information. Bankman-Fried’s representative declined to respond.

Rise of the Alameda-FTX Empire

FTX quickly gained momentum, and it launched its token, FTT, in July 2019 and then secured one of the largest equity investments through Binance in November of the same year.

According to the CFTC filing, FTX and its subsidiaries had around $15 billion of assets. It also represented 10% of all global digital transactions, clearing the equivalent of $16 billion in trades between customers daily.

The company’s “years-long” fraud didn’t just include playing with customers’ funds, as per the SEC.

FTX could operate efficiently, handle huge volumes and attract much attention because it was its own authorized market maker (DMM). In the traditional world of finance terms, DMM is a company that buys and sells the security to or from clients, hoping to make profits on any difference in price, also known as the spread.

Since the FTX’s inception in 2019, Alameda has been that market maker, acquiring and releasing cryptocurrency on the exchange. Alameda and FTX’s synergy resulted in a win-win for both sides of Bankman-Fried’s business empire.

As FTX advanced, it was followed by other market makers who began to come online to provide liquidity. However, Alameda was and remained the largest provider of liquidity for FTX and was able to ease platform functions in “Bankman-Fried’s direction,” the SEC asserts.

In contrast to other market makers and power consumers, Alameda had a set of tools that were powerful and available.

In August, the SEC says that Bankman-Fried directed his staff at FTX to incorporate an exception to the exchange’s code, which allowed 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,” the SEC document continues. The balance was negative, which meant Alameda was effectively backed up by the customer’s assets when making trades.

A former Alameda Chief Executive Officer, Caroline Ellison, once alluded to this in a widely distributed interview.

“We tend not to have things like stop losses,” Ellison explained.

Traditional finance uses a stop-loss option can help traders reduce the potential loss of a trade. If any asset (stocks, for instance) exceeds a certain upper limit, the purchase will immediately sell the asset to avoid losses from spiraling into the uncontrollable realm.

Not satisfied with what would turn into a “virtually unlimited” line of credit from investors — as well as his customers, Bankman-Fried worked to play the game in favor of Alameda Regulators say.

FTX allowed power users accessibility to APIan interface that allowed users access to bypass the front end of FTX’s system and connect directly to the back-end systems at FTX. Users who did not power users were still subject to checks that were common sense: confirming the amount of money in their accounts.

Alameda traders had access to an expedited lane that allowed them to speed past other users and cut “several milliseconds” off their execution times for trades, in the words of the CFTC. The high-frequency trading FTX users took part in was highly beneficial.

A sloppy crypto hedge fund

Even though the odds were stacked against Alameda, the hedge fund provided poor returns. A court filing showed that Alameda was able to lose more than $3.7 billion over its life despite statements made by FTX officials praising the profitability of trading.

The losses of Alameda and its lending structure were significant factors in the eventual collapse of FTX.

Alameda did not just play around with the money of customers. The hedge fund took loans aggressively from several lenders, which included Voyager Digital and BlockFi Lending. Both companies filed Chapter 11 bankruptcy proceedings this year, and FTX focused on both for acquisition.

Alameda obtained its loans through Voyager and BlockFi using FTT tokens that FTX produced. Bankman-Fried’s empire ruled the majority of FTT currency available, with just a tiny amount of FTT being in circulation at any moment.

Alameda should have recognized that its tokens could not be sold at the prices they claimed they were worth, as the CFTC asserts in its complaint.

This was because every attempt made by Alameda to dispose of their FTT tokens would lower FTT’s price, given how much supply Alameda managed.

Instead of marking its tokens in the market, Alameda recorded their entire pile of FTT as having a value of the market rate at the time.

Alameda utilized this method in conjunction with other coins such as Solana and Serum (a token developed that was promoted and marketed by FTX and Alameda) and used them to secure billions of loans to other cryptocurrency players. Insiders in the industry even had a term for the tokens they created -“Sam coins. “Sam coins.”

The tables turned in the aftermath of the demise of Luna, a stablecoin whose collapse and crash caused havoc for other crypto and lending firms, sending cryptocurrency prices plummeting. Large Alameda lenders, including Voyager, announced bankruptcy. The remaining lenders started to make margin calls or liquidate existing accounts with customers, which includes Alameda.

The CFTC claims that between June 2022 and May 2022, Alameda was the victim of “a large number of margin calls and loan recalls.”

Without investors, lenders, or even regulators, Alameda lacked enough liquid assets to pay its loans.

While Alameda was not liquid, however, the customers of FTX — who were constantly assured by the exchange along with Bankman-Fried were determined to safeguard their interests not.

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