SBF knowingly diverted FTX customers' funds to fuel Alameda's growth and raise billions, per lawsuit

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

A.Bankman-Fried, Actively Supported by Defendants, Created a Complex Web of Entities, with FTX and Alameda at Its Center.

18. In or around October 2017, Bankman-Fried and Wang founded Alameda, a quantitative trading firm specializing in crypto assets.(3)

19. At inception, Alameda was focused on arbitrage trading strategies, but went on to employ other strategies including market making, yield farming (pooling of crypto assets in exchange for interest or other rewards), and volatility trading. Alameda also offered over-the- counter trading services, and made and managed other debt and equity investments.

20. At first, Bankman-Fried was responsible for trading operations, and Wang handled the engineering and programming functions. Over time, Alameda hired additional employees, including Singh (in or around December 2017), Ellison (in or around March 2018), and Trabucco (in or around 2019). By the end of 2021, Alameda had approximately 30 employees. At times, Alameda shared office space and employees with FTX.

21. Bankman-Fried remained the ultimate decision-maker at Alameda, even after Ellison and Trabucco became co-CEOs in or around October 2021. Bankman-Fried directed investment and operational decisions, frequently communicated with Alameda employees, and had full access to Alameda’s records and databases.

22. Ellison was a trader at Alameda during the time Bankman-Fried acted as CEO. When Ellison became co-CEO in 2021, and continuing through November 2022, Ellison was responsible for Alameda’s day-to-day operations. Though Ellison made some trading decisions, she frequently consulted with Bankman-Fried, particularly about strategic issues and significant trades.

23. In or around 2018, Bankman-Fried began work on building a crypto asset trading platform. Together with Wang and Singh, Bankman-Fried ultimately founded FTX, which began operations in or around May 2019.

24. FTX offered its customers a number of services. For example:

• FTX offered a “spot market,” a trading platform through which customers could trade crypto assets with other FTX customers in exchange for fiat currency (i.e., currency such as U.S. Dollars) or other crypto assets.
• FTX offered “spot margin trading” services, which allowed FTX customers to trade using assets they did not have (i.e., to trade “on margin”) by posting collateral in their FTX accounts and borrowing crypto assets through the “spot market” on the FTX platform. FTX also allowed customers to lend their crypto assets to other FTX customers who would then use those crypto assets to spot trade.
• FTX offered an off-platform (over-the-counter or “OTC”) portal that enabled customers to connect and request quotes for spot crypto assets and to conduct trades.

25.Bankman-Fried was the ultimate decision maker at FTX from the platform’s inception in or around May 2019 until he resigned as CEO on or about November 11, 2022 (“the Relevant Period”). Wang and Singh were the lead engineers responsible for writing the software code for FTX, including the code that allowed for the services described above.

26. In or around January 2020, Bankman-Fried, Wang, and Singh founded FTX US, a crypto asset trading platform designed primarily for customers in the United States.(4)

27. Over time, Bankman-Fried expanded his holdings to include a number of companies focused on making and managing private (or “venture”) investments.

28. This interconnected web of companies grew to include over 100 separate entities, with Bankman-Fried at the top and Alameda, his crypto hedge fund, at the center.

29. Throughout the Relevant Period, in multiple public statements, Bankman-Fried held himself out as a visionary leader in the crypto industry, and touted his efforts to create a regulated and thriving crypto asset market. He conducted an intensive public relations campaign to brand himself and his companies as honest stewards of crypto.

30. The reality was very different: From the start, contrary to what FTX investors and trading customers were told, Bankman-Fried, actively supported by Defendants, continually diverted FTX customer funds to Alameda and then used those funds to continue to grow his empire, using billions of dollars to make undisclosed private venture investments, political contributions, and real estate purchases.

31. At the same time, throughout the Relevant Period, Bankman-Fried, with Defendants’ knowledge, solicited equity investors by touting FTX’s controls and risk management, ultimately raising at least $1.8 billion from investors in exchange for various classes of stock in FTX through multiple fundraising rounds, including raising:

(1) approximately $8 million from the sale of shares of FTX Series A preferred stock, with fundraising completed in or around August 2019;

(2) approximately $1 billion from the sale of shares of FTX Series B preferred stock, with fundraising completed in or around July 2021;

(3) approximately $420 million from the sale of shares of FTX Series B-1 stock, with fundraising completed in or around October 2021; and

(4) approximately $500 million from the sale of shares of FTX Series C stock, with fundraising completed in or around January 2022.

Of this total, approximately $1.1 billion was invested in FTX by approximately 90 investors based in the United States.

32. For the entire span of the Relevant Period, while raising money from equity investors, Bankman-Fried, and those speaking at his direction and on his behalf, with the knowledge of Defendants, claimed in widely distributed public forums and directly to investors that: FTX was a safe crypto asset trading platform; FTX had a comparative advantage due to its automated risk mitigation procedures; and FTX and its customers were protected from other customers’ losses due to FTX’s automated liquidation process. A**s discussed further herein, these statements and others were misleading in light of Bankman-Fried’s failure to disclose to FTX investors the diversion of FTX customer funds to Alameda, which he then used for his own purposes, including loans to himself.** Similarly, Bankman-Fried’s statements concerning the separation of FTX and Alameda, made throughout the Relevant Period, were misleading because he did not disclose the special treatment afforded to Alameda on FTX, including its virtually unlimited “line of credit” at FTX, its ability to carry a negative balance in its FTX customer account, and its exemption from FTX’s automated liquidation process—none of which any other customer of the platform enjoyed, but which changed the risk profile of FTX. Defendants were aware that Bankman-Fried was making false or misleading statements in order to raise money for FTX from equity investors. At times, they were in close proximity to these discussions, and directly or indirectly supported Bankman-Fried in providing false and misleading information to investors.

33. Bankman-Fried also misrepresented the risk profile of investing in FTX throughout the Relevant Period by failing to disclose FTX’s exposure to Alameda and, relatedly, that the collateral Alameda deposited on FTX consisted largely of illiquid, FTX-affiliated tokens, including FTT, the price of which Alameda was actively manipulating. In addition to these material omissions, Bankman-Fried also made material misrepresentations to FTX investors about FTX’s risk management and its relationship with Alameda. As detailed below, Bankman- Fried made these material misstatements throughout the Relevant Period, and the entire time he was raising or attempting to raise funds for FTX—from the time FTX began operations in May 2019 through its ultimate demise in November 2022. Again, Defendants were aware that Bankman-Fried was making these false or misleading statements and that he was doing so in order to raise money from equity investors, and they directly or indirectly supported him in doing so.

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