US SEC indictment reveals how SBF and its accomplices defrauded investors

On December 21, 2022, the U.S. Securities and Exchange Commission (SEC) charged two SBF associates, Caroline Ellison (former CEO of Alameda Research) and Zixiao (Gary) Wang (co-founder and former CTO of FTX), with defrauding investors in a multi-year scheme.

According to the SEC's indictment, the SEC found the following four facts: A. SBF established a complex network of entities centered on FTX and Alameda with the active support of the two defendants. B. The defendant used Alameda to implement a fraud scheme. C. The defendant knew that FTX's risk management procedures were seriously inadequate. This is in stark contrast to SBF's claim that "it is a mature and conservative company." D. Despite the precarious financial situation of FTX and Alameda, SBF and Ellison continued to embezzle FTX customer assets in the summer of 2022, including rescuing troubled cryptocurrency companies and further misleading investors.

The U.S. SEC indictment also revealed how SBF and its accomplices Caroline Ellison and Zixiao (Gary) Wang defrauded investors.

1. From at least May 2019 through November 2022, the defendants, together with SBF and others, engaged in a scheme to defraud FTX equity investors.

FTX was co-founded by SBF and Wang. FTX raised over $1.8 billion from investors, including U.S. investors, who purchased equity in FTX believing that FTX had adequate controls and risk management in place. Unbeknownst to these investors (and FTX’s trading customers), SBF was orchestrating a massive, multi-year fraud that diverted the trading platform’s customer funds for his own personal benefit and to help him grow his cryptocurrency empire. The defendants were active participants in the scheme and engaged in conduct that was critical to the success of the fraud.

2. Throughout this period, SBF portrayed himself as a responsible leader of the cryptocurrency community.

He preached the importance of regulation and audits. He told the public, including investors, that FTX was both innovative and responsible. Customers around the world believed his lies and wired billions of dollars to FTX, believing their assets were safe on FTX’s trading platform. However, SBF and Wang improperly transferred customer assets to Alameda Research LLC and its subsidiaries (“Alameda”), a crypto asset hedge fund they founded and co-owned and managed by Ellison. Wang created and co-created software code that allowed Alameda to misappropriate FTX customer funds. In turn, Ellison used the misappropriated FTX customer funds for Alameda’s trading activities. SBF used these customer funds to make undisclosed venture investments, purchase lavish real estate, and make large political donations.

3. Defendants worked with SBF to conceal the scheme from FTX’s equity investors, including U.S. investors, from whom FTX attempted to raise billions of dollars in additional funding.

SBF repeatedly portrayed FTX as an innovative yet conservative trailblazer in the cryptocurrency market. He told investors and potential investors that FTX had best-in-class, sophisticated, automated risk measures to protect customer assets, that those assets were safe, and that Alameda was just another platform customer with no special privileges. Defendants knew or were reckless in not knowing that these statements were false and misleading. In fact, SBF and Wang, with Ellison’s knowledge and consent, exempted Alameda from risk mitigation measures and provided Alameda with significant special treatment on the FTX platform, including a virtually unlimited “line of credit” funded by platform customers.

4. In addition to the "line of credit" with FTX, Ellison, at the direction of SBF, caused Alameda to borrow billions of dollars from third-party lenders.

These loans were largely backed by Alameda’s holdings of FTT , an illiquid crypto asset security issued by FTX and provided to Alameda for free (Note: the US SEC considers FTT to be a security) . Ellison, at the direction of SBF, automatically purchased FTT tokens on various platforms to increase the price of these tokens and inflate the value of Alameda’s collateral, which enabled Alameda to borrow more money from external lenders and increased the risk to lenders and FTX’s investors and customers, all in furtherance of the scheme.

5. As SBF lavishly lavished on offices and condos in the Bahamas and invested billions of dollars of client funds in speculative ventures, his house of cards began to crumble.

When the price of crypto assets plummeted in May 2022, Alameda's lenders demanded repayment of billions of dollars in loans. Although Alameda had taken billions of dollars in FTX customer assets at this time, it was unable to meet its loan obligations. SBF, after being informed, instructed FTX to transfer billions of dollars in customer assets to Alameda to ensure that Alameda maintained its loan relationships and that funds from lenders and other investors continued to flow in. Ellison then used FTX's customer assets to pay Alameda's debts.

6. Even when it became increasingly clear that Alameda and FTX could not repay their customers’ debts, SBF and Defendants continued to misappropriate FTX’s customer funds.

By the summer of 2022, SBF, with knowledge of the matter, had again invested hundreds of millions of FTX customers’ funds in Alameda, which it then used for more venture capital and “loans” to itself and other FTX executives, including Wang. Meanwhile, SBF continued to make misleading statements to investors about FTX’s financial condition and risk management. Defendants knew that SBF was making these statements, and knew or recklessly failed to know that they were false and misleading. Even in November 2022, faced with billions of dollars in customer withdrawal requests that FTX could not meet, SBF and Ellison, with Wang’s knowledge, misled investors that they needed to obtain funds from investors to fill the multi-billion dollar hole.

On November 11, 2022, the multi-year plan finally came to an end when FTX, Alameda, and their entangled related entities filed for bankruptcy.