- Alameda Research has borrowed billions of dollars of client funds from the FTKS exchange.
- The company’s liabilities were then masked under a pseudonymous account on FTKS.
- Caroline Ellison and Gary Wang pleaded guilty to multiple counts of fraud.
The case of “where did the money go” is starting to unravel for crypto exchange FTKS.
Stock exchange founder Sam Bankman-Fried filed for Chapter 11 bankruptcy protection on Nov. 11 for FTKS and about 130 of its affiliates. The decision came after a flurry of withdrawals made the stock market illiquid.
Bankman-Fried arrived on American soil on Wednesday after being extradited from the Bahamas. On Friday, the Associated Press reported that a US judge kept secret that two of his former associates, Alameda CEO Caroline Ellison and FTKS co-founder Gary Wang, had pleaded guilty to fraud charges and were cooperating with the feds. Prosecutors feared Bankman-Fried would fight extradition if he knew his partners had turned against him.
Alameda Research, the trading and investment fund started by Bankman-Fried, borrowed billions of dollars in the stock market, losing it in a series of bad deals and trades. It was later revealed that the money came from customer deposits.
The complaint filed Dec. 13 by the Commodity Futures Trading Commission alleges that Bankman-Fried directed FTKS executives to transfer Alameda’s approximately $8 billion in liabilities to an unknown customer account on FTKS systems.
The lawsuit also alleged that Bankman-Fried would later refer to the account as “our Korean friend’s account” and/or “the weird Korean account.” He adds that although it was an Alameda sub-account, it did not have the typical investment firm email identifier “@alameda-research.com”. Notes attached to the account are labeled “FTKS fiat old”.
The lawsuit alleges that this helped conceal Alameda’s negative balance on FTKS. However, the account had the same privileges as Alameda accounts, including an exemption from liquidation features.
A day later, on December 14, Bloomberg reported that a GitHub account under the name Nishad Singh, a former director of engineering at FTKS, had created code to hide Alameda’s listing obligations.
The implosion of FTKS sent shockwaves throughout the crypto community. A few months before his crash, Bankman-Fried assured investors that the worst of the crypto market’s liquidity crisis was likely over. He added that he still has “several billion” available to prop up struggling firms that could further destabilize the digital asset industry.
Bankman-Fried walked out of federal court in New York on Thursday after being released on $250 million bail.
On December 18, Ellison pleaded guilty to seven counts of federal fraud charges, including conspiracy to commit wire fraud against FTKS customers and money laundering. She could have faced up to 110 years in prison, but agreed to fully cooperate in exchange for a reduced sentence.
Wang pleaded guilty to four counts of similar charges. He could face up to 50 years in prison and has also agreed to cooperate with the feds.