Crypto winter did not spare FTX or Alameda, although SBF pretended that it didn't

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Case Number: 1:22-cv-10794

Plaintiffs: Securities and Exchange Commission (the “Commission”)

Defendants: Caroline Ellison (“Ellison”) and Zixiao “Gary” Wang (“Wang”)

Filing Date: Dec 21, 2022

Location: US District Court, Southern District of New York

Filer: Jorge G. Tenreiro, David L. Hirsch (not admitted in SDNY), Ladan F. Stewart, Amy Harman Burkart, David J. D'Addio - Attorneys for the Plaintiff

FACTS

D. Despite the Precarious Financial Position of FTX and Alameda, Bankman- Fried and Ellison Continued to Use FTX Customer Assets in the Summer of 2022, Including to Rescue Distressed Crypto Firms and to Further Mislead Investors.

98. In May 2022, the crypto markets plummeted due to a significant loss in value of certain crypto assets and networks and the collateral effects on the interrelated markets. Bankman-Fried characterized FTX, and himself, as playing an important role in stabilizing the industry. Bankman-Fried entered into a series of transactions with other members of the industry, providing credit to and taking over other failing firms. On or about June 21, 2022, after giving a $250 million line of revolving credit to BlockFi, a global crypto financial services company, to provide the company with access to capital to ease liquidity concerns, Bankman- Fried tweeted: “We take our duty seriously to protect the digital asset ecosystem and its customers.”

99. At the same time that Bankman-Fried was positioning himself as a hero in the industry, however, the plummeting value of crypto assets was impacting Alameda, and as a result impacting FTX. As discussed above, as a result of the same market conditions impacting BlockFi’s liquidity, many of Alameda’s lenders demanded repayment of loans they had made to Alameda. Ellison, at the direction of Bankman-Fried, drew down billions of dollars from its “line of credit” from FTX to repay some of Alameda’s loans—money that came from FTX’s spot market funded by FTX customers.

100. Thus, in the summer of 2022, Defendants and Bankman-Fried knew, or were reckless in not knowing, that FTX was in a precarious financial condition. However, Bankman- Fried and Ellison, with Wang’s knowledge, continued to spend hundreds of millions of dollars to purchase and support other crypto companies, and allowed Alameda to use FTX customer funds to repay its debts. In addition, Bankman-Fried, Wang, and other FTX executives continued to withdraw customer funds in the form of the poorly documented and undisclosed “loans” described above. Specifically, on or about July 22, 2022, Bankman-Fried loaned himself $136 million and, on or about September 28, 2022, Wang signed a promissory note to Alameda for $13.7 million, which was used by Bankman-Fried for a venture investment. Defendants and Bankman-Fried knew, or were reckless in not knowing, of the significant financial risk these “loans” posed to both Alameda and FTX. Collectively, Defendants’ and Bankman-Fried’s actions in the summer of 2022 further imperiled FTX’s financial condition.

101. Defendants knew or were reckless in not knowing that Bankman-Fried continued to present a false and misleading positive account of FTX to investors, despite FTX’s tenuous financial condition at this time. In a meeting with FTX’s U.S. investors in September 2022, for example, an FTX presentation included the claim that: “Outside of BlockFi, we didn’t increase our exposure to crypto.” This statement was false and misleading: the customer funds that FTX diverted to Alameda, including customer funds that Ellison used to repay Alameda’s lenders, were collateralized in part by Alameda’s FTT holdings. Defendants and Bankman-Fried knew or were reckless in not knowing that, as a result, FTX’s exposure to crypto, including its own FTT token, increased substantially as Alameda increased its borrowing, backed by FTT as collateral, in the second quarter of 2022.

102. In that same meeting with FTX investors, FTX also represented that certain investments did not involve the assets of FTX or its customers. Contrary to that representation, two $100 million investments made by FTX’s affiliated investment vehicle, FTX Ventures Ltd., were funded with FTX customer funds that had been diverted to Alameda.

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This court case 1:22-cv-10794 retrieved on Dec 21 2022, is part of the public domain. The court-created documents are works of the federal government, and under copyright law, are automatically placed in the public domain and may be shared without legal restriction.