Sam Bankman-Fried, the co-founder of FTX exchange, has been accused of authorizing the illegal use of customer funds and assets to cover financial shortfalls at an affiliated hedge fund, according to testimony from FTX’s co-founder Gary Wang. Wang testified that the losses at the hedge fund, Alameda Research, eventually became too large to hide, leading to FTX’s bankruptcy filing in November 2022. Prosecutors claim that Bankman-Fried used the stolen funds to support a lavish lifestyle and gain influence. Wang, who has pleaded guilty to several charges, including wire fraud, is expected to complete his testimony on Tuesday.
The prosecution plans to call Caroline Ellison, the former CEO of Alameda and Bankman-Fried’s ex-girlfriend, to the stand later this week. Wang and Bankman-Fried started Alameda in 2017 before founding FTX in 2019.
According to Wang’s testimony, Bankman-Fried instructed him to insert code into FTX’s operations, allowing Alameda Research to make nearly unlimited withdrawals and have a line of credit up to $65 billion. Initially, these privileges were granted because Alameda was a primary market maker for FTX’s early customers. However, Alameda took advantage of these capabilities to withdraw funds, including cryptocurrencies and dollars, exceeding what it had on the exchange. Wang also revealed that Bankman-Fried ordered losses to be moved onto Alameda’s balance sheet to avoid negative publicity surrounding FTX’s financial condition.
The losses at Alameda reached as much as $14 billion, leading to FTX’s bankruptcy filing. After the filing, Bankman-Fried instructed Wang to send most of FTX’s remaining assets to Bahamian regulators instead of the U.S. authorities handling the bankruptcy. Wang contacted the FBI shortly after, confessing his involvement in the scheme.
In Bankman-Fried’s defense, his lawyers argue that Wang and other FTX executives failed to perform their duties properly, including setting up appropriate financial hedges to protect FTX from the crypto market crash in 2021. They claim that Bankman-Fried believed he was managing a liquidity crisis caused by plummeting cryptocurrency values and criticism from competitors.
As the trial continues, more details of the alleged fraud and Bankman-Fried’s involvement are expected to emerge.
