Business partners turn to Sam Bankman-Fried

New York

The stunning collapse of one of the most prominent crypto firms has quickly turned into a legal battle pitting former executives and former romantic partners against each other.

Last week, while FTKS founder Sam Bankman-Fried was extradited to the United States from the Bahamas, two of his former business partners pleaded guilty to multiple charges of fraud and conspiracy.

Caroline Ellison, the 28-year-old former chief executive of crypto hedge fund Alameda, apologized before a federal judge in New York, saying she and her former associates knowingly stole billions of dollars from clients of Bankman-Fried’s FTX exchange and attempted a cover-up, according to court transcripts.

“I am truly sorry for what I have done,” Ellison told the court. “I knew it was wrong.”

Ellison said in court that Alameda had virtually unlimited lending at FTX and knew the exchange would have to use client funds to fund loans to the hedge fund. She also agreed to keep the two firms’ unusually close ties hidden from investors and customers.

From July to October, she told the court, Ellison conspired with Bankman-Fried and others to provide “materially misleading financial statements to Alameda’s lenders” and prepared balance sheets that hid the extent of Alameda’s indebtedness, according to transcripts of the plea hearing held on December 19 and recently unsealed.

Ellison was charged with seven felony counts, including conspiracy to defraud and money laundering. She and Bankman-Fried were close business associates who briefly dated.

Ellison said she knew FTKS executives had created an arrangement that allowed Alameda access to an unlimited line of credit without having to post collateral or pay interest on a negative balance, according to the transcript.

“My understanding is that if Alameda FTKS accounts have significant negative balances in any particular currency, that means Alameda is borrowing funds that FTKS customers have deposited into the exchange,” Ellison said in court.

Another associate, Gary Wang, the former chief technology officer of FTKS, pleaded guilty to four counts of similar charges.

Wang told the court that part of his role at FTKS included making changes to the exchange’s code that would have given Alameda “special privileges” on FTKS.

“Between 2019 and 2022, as part of my employment at FTKS, I was instructed and agreed to make certain changes to the platform’s code,” Wang said in court. “I made those changes, which I knew would give Alameda Research special privileges on the FTKS platform.” I did this knowing that others are representing to investors and buyers that Alameda has no such special privileges and that people are likely investing in and using FTKS based in part on those misrepresentations.

“I knew what I was doing was wrong,” he added.

Wang pleaded guilty during a hearing that began at 11 a.m. Dec. 19, and Ellison did so later that day, beginning at about 4:30 p.m., while SBF remained in the Bahamas, according to court transcripts.

Wang faces up to 50 years in prison under federal sentencing guidelines cited by the court. Ellison faces up to 110 years in prison on the seven counts to which she pleaded guilty, under federal sentencing guidelines.

Both were released on bail as agreed to in their plea agreements. Ellison and Wang are scheduled to be sentenced on December 19, 2023.

Both Ellison and Wang are cooperating with federal prosecutors, making them potentially damning witnesses against Bankman-Fried, who has repeatedly denied that he intentionally misled clients and investors.

Bankman-Fried, 30, appeared in a US court in New York on Thursday, where a federal judge released him on a $250 million bond. He is required to surrender his passport and remain under house arrest at his parents’ home in Palo Alto, California.

Although $250 million is an extraordinary sum, Bankman-Fried will not have to pay it unless she violates the terms of her bail agreement or appears in court. The atypical bail plan was agreed to as part of his commitment to waive his extradition fight.

After appearing in court, Bankman-Fried was spotted in the business class lounge at John F. Kennedy in New York. Crypto reporter Tiffany Fong also tweeted a photo of Bankman-Fried on an American Airlines flight.

Bankman-Fried’s legal team confirmed to CNN Business that he has arrived in Palo Alto and is at home with his parents. His attorney declined to comment on Ellison and Wang’s guilty pleas.

A federal judge said Thursday that Bankman-Fried will be indicted on eight felony counts, including wire fraud and conspiracy, at an unspecified future date.

Prosecutors allege that Bankman-Fried orchestrated “one of the largest financial frauds in American history,” stealing billions of dollars from FTKS clients to cover losses at Alameda and enrich himself. If convicted, he could face life in prison.

Before his arrest in the Bahamas earlier this month, Bankman-Fried tried to portray himself as a down-on-his-luck entrepreneur who went out on skis. He repeatedly apologized to customers and FTKS staff, saying yes “Fed up,” while denying that he knowingly deceived anyone.

—CNN’s Lauren del Valle and Kara Scannell contributed reporting.

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