Market-Making or Theft? FTX Repurposed Customers’ Money, Tech Officer Says

‘The money belonged to customers, and the customers did not give us permission to use [it] for other things,’ former CTO testifies.
Market-Making or Theft? FTX Repurposed Customers’ Money, Tech Officer Says
Sam Bankman-Fried watches as defense lawyer Mark Cohen makes his opening remark in Mr. Bankman-Fried's fraud trial over the collapse of FTX, the bankrupt cryptocurrency exchange, at Federal Court in New York on Oct. 4, 2023. (Courtroom sketch courtesy of Jane Rosenberg/Reuters)
Kevin Stocklin
10/9/2023
Updated:
10/9/2023
0:00

Former FTX co-founder Gary Wang testified over the past week that what co-founder and CEO Sam Bankman-Fried said was a market-making service for traders on the cryptocurrency exchange soon became a means of siphoning off customers’ money for speculation at Alameda Research, a sister-company crypto hedge fund.

Testifying before a New York jury, Mr. Wang, who had been FTX’s chief technology officer, as well as a college roommate and longtime friend of Mr. Bankman-Fried, said FTX affiliate Alameda Research was given the ability to borrow money from FTX accounts starting in July 2019, without customers’ knowledge or consent.

“The money belonged to customers, and the customers did not give us permission to use [it] for other things,” Mr. Wang said.

He testified that Mr. Bankman-Fried instructed him to code Alameda’s accounts in order to give it access to FTX funds. Mr. Wang has already pleaded guilty to securities fraud and is testifying as part of a plea deal with prosecutors.

Securities exchanges typically include market-making firms that facilitate trading by acting as a go-between for buyers and sellers.

Mr. Bankman-Fried’s attorneys argued in his defense that Alameda was playing the role of market-maker and that’s why it was granted a special relationship with the FTX exchange.

Mr. Wang testified that Mr. Bankman-Fried falsely told FTX customers and investors that Alameda didn’t have a special relationship with FTX and that Alameda’s trading account terms were the same as any other investor that traded on the exchange.

Alameda’s line of credit with FTX was, in fact, increased on several occasions, Mr. Wang said, reaching an ultimate limit of $65 billion.

At the time of FTX’s founding, the crypto market was a virtual one-way bet. Prices for the digital currencies trended ever upward as investors sought havens from fiat currencies such as the U.S. dollar that were losing their value to inflation.

However, when the market turned in the spring of 2022, Alameda began to lose money, and its creditors began calling in their loans. 
FTX founder Sam Bankman-Fried leaves following his arraignment in New York on Dec. 22, 2022. (Ed Jones/AFP via Getty Images)
FTX founder Sam Bankman-Fried leaves following his arraignment in New York on Dec. 22, 2022. (Ed Jones/AFP via Getty Images)

Suddenly, the virtual currencies that had been portrayed as a safe harbor against inflation quickly shifted to becoming an industry replete with allegations of fraud, scandal, and inflated valuations.

Creditors who had lent money to Alameda demanded that the loans be repaid.

Mr. Bankman-Fried and other senior managers of FTX realized then that Alameda had run up debts of $11 billion to FTX, Mr. Wang stated.

But Mr. Bankman-Fried nonetheless instructed Alameda to pay off its creditors by taking more money from FTX customers, who were unaware that their investments were being siphoned off for other purposes, according to Mr. Wang.

In media interviews before and during the trial, Mr. Bankman-Fried and his attorneys claimed that the overnight collapse of FTX and Alameda, which cost investors about $9 billion, wasn’t a case of fraud but rather mismanagement and errors made in “good faith.”

Mr. Bankman-Fried has been charged with seven counts of securities fraud, wire fraud, conspiracy, and money laundering. If convicted, he could face up to 115 years in prison. 

Former Alameda CEO to Testify

Starting on Oct. 10, former Alameda CEO Caroline Ellison—a reported ex-paramour of Mr. Bankman-Fried—will testify. Ms. Ellison has pleaded guilty to securities fraud and is expected to testify against Mr. Bankman-Fried from the perspective of Alameda Research.

To prove fraud and conspiracy charges, prosecutors are working to make a case regarding not only Mr. Bankman-Fried’s knowledge of alleged illicit money transfers between FTX and Alameda but also his intentions.

While the technical aspects of the crypto market are complex and opaque, many analysts say the FTX collapse appears to be a standard case of securities fraud, similar to the case of the late Bernie Madoff.

Madoff was convicted of securities fraud in 2009 for co-mingling and misusing investors’ money between his stock brokerage and asset management business.

Before FTX’s collapse, Mr. Bankman-Fried’s net worth was estimated to be more than $16 billion, although some estimates put it as high as $26 billion.
He had been lionized in the media as a selfless philanthropist whose intention was to generate as much wealth as possible so he could give it away to causes ranging from global warming to fighting pandemics.

FTX received high-profile endorsements from Hollywood celebrities and sports stars.

Mr. Bankman-Fried also spent lavishly on himself, residing in a $40 million seaside penthouse in a gated condominium complex and marina called Albany that’s outside of Nassau, Bahamas.

He became an influential political figure as well, reportedly donating $5.2 million to President Joe Biden’s election campaign in 2020, making him one of Mr. Biden’s largest donors.

He reportedly also gave more than $70 million to election campaigns and another $40 million to politicians and political action committees during the 2022 midterm elections.

Most of the money went to Democrats and liberal-leaning groups, making him the second-largest donor to the Democratic Party and left-leaning causes after George Soros. He reportedly also donated far lesser amounts to Republicans.

Government officials often consulted Mr. Bankman-Fried about crypto regulation, and he reportedly had a private meeting with SEC Chairman Gary Gensler in March 2022, before FTX’s collapse.
Kevin Stocklin is a business reporter, film producer and former Wall Street banker. He wrote and produced "We All Fall Down: The American Mortgage Crisis," a 2008 documentary on the collapse of the mortgage finance system. His most recent documentary is "The Shadow State," an investigation of the ESG industry.