The SEC said FTX’s former founder and CEO, Sam Bankman-Fried, internally directed that the software code be written in a way that allowed his crypto hedge fund, Alameda, to operate when FTX’s client accounts had negative balances.
This allegedly happened in August 2019, roughly four months after FTX began operations.
That effectively provided sister trading firm Alameda with an unlimited line of credit funded by client assets, according to the SEC complaint filed Tuesday in federal court.
That meant there was no meaningful distinction between FTX client funds and the Alameda funds that Bankman-Fried used as his “personal piggy bank,” the complaint said. According to the SEC, he concealed from investors and clients the fact that he used the funds to buy luxury condominiums, support political campaigns and make private investments.
The SEC said that between March 2020 and September 2022, Bankman-Fried executed loans from Alameda totaling more than $1.338 billion, including Bankman-Fried in his personal capacity as the borrower and Alameda’s chief executive. Two examples of the officer’s status as a lender are in its civil proceedings.
Bankman-Fried used funds from Alameda to purchase tens of millions of dollars worth of Bahamian real estate for himself, his parents and other FTX executives, according to filings.
According to the filing, Alameda co-founders Nishad Singh and Gary Wang also borrowed 100,000 in 2021 and 2022, respectively, through similar promissory notes with Alameda. $554 million and $224.7 million.
So far, Singh and Wang have not been charged with any crimes.
The loans to Bankman-Fried and others were “poorly documented, and sometimes not recorded at all,” the lawsuit said.
When crypto asset prices plummeted in May 2022, Bankman-Fried repaid Alameda’s demanding third-party lenders from its FTX “line of credit,” adding further billions in liabilities, which were then hidden in the Alameda balance sheet In order to avoid alarming investors, complaints abound.
The FTX CEO continues to use the firms for personal gain, lending himself $136 million in late July 2022 — a month after he extended a $250 million revolving line of credit to crypto financial services firm BlockFi to ease the its own liquidity issues. Meanwhile, the SEC alleges that he provided “false and misleading positive accounts” to investors over the summer despite the company’s “difficult financial condition.”