Just months after cryptocurrency exchange FTX was launched in 2019, founder Sam Bankman-Fried issued a secret order: Tweak the system’s digital architecture to allow Bankman-Fried’s hedge fund, Alameda Research, to run negative balances, according to U.S.authorities.Now, as Bankman-Fried is scheduled to stand trial on fraud charges beginning this week, that obscure change to FTX’s computer coding is set to play a major role in accusations that he stole billions in customer funds.Prosecutors and Bankman-Fried’s legal team are scheduled to start screening jurors on Tuesday with the trial starting as early as Friday.What’s not in dispute are the losses Alameda racked up as crypto assets nosedived in 2022.The hedge fund ultimately lost more than $10 billion, and its special status in FTX’s computer code allowed it to use customer deposits to cover those wrong-way bets, prosecutors allege.Alameda’s bad trades were the single-largest source of losses for FTX customers, far eclipsing Bankman-Fried’s splashy purchases of Bahamas real estate and political donations, according to court documents and people familiar with the case.FTX’s trading platform didn’t allow customers to trade if they had negative balances.
In fact, it automatically liquidated those accounts.Prosecutors say FTX used a manual override to allow Alameda to trade without consequence, evidence that Bankman-Fried knowingly and intentionally diverted customer funds for his own use.“The fact they put a back door in for their firm seems to be evidence that they knew what they were doing was wrong,” said Joshua Naftalis, a former federal securities fraud prosecutor in New York.“It could be evidence of Bankman-Fried’s consciousness of guilt.
It’s a mistake that only benefits him.” Ex-Girlfriend Caroline Ellison to Testify It’s just one slice of the drama that has played out in the months since FTX’s collapse between Bankman-Fried and Caroline Ellison, a onetime girlfriend who was primarily running Alameda as the losses mounted.Ellison, who pleaded guilty and agreed to cooperate with authorities, is now expected to be one of the chief witnesses against Bankman-Fried during the trial.Bankman-Fried, who was initially allowed to remain free on bail pending trial, was jailed in August for leaking embarrassing contents of Ellison’s personal writings to [The New York Times](https://www.nytimes.com/2023/07/20/technology/ftx-caroline-ellison-bankman-fried.html), which Judge Lewis Kaplan concluded was an attempt to interfere with her upcoming testimony.Bankman-Fried’s lawyers have indicated in court filings that SBF wasn’t aware the change allowed Alameda to tap customer deposits, and that the system’s design obscured the mounting losses.
His lawyers have also indicated Bankman-Fried intends to rely at least in part on a so-called “advice of counsel” defense, meaning that he relied on advice from his former attorney on conduct and decisions that prosecutors now say was illegal, though the judge has indicated he may limit its use.Bankman-Fried created FTX, in part, to give Alameda a reliable platform to trade crypto currencies with other funds.The hedge fund initially acted as a market-maker on the system, standing in as a willing counterparty whenever clients wanted to buy or sell digital assets.Evidence supporting the allegations about the trading override could come from Gary Wang, FTX’s chief technology officer and a co-founder of the exchange with Bankman-Fried.
Prosecutors have alleged Wang was the one ordered by SBF to change the code, and evidence of the change to FTX’s code base was stored on Wang’s laptop, according to court filings.No other client on the exchange was allowed to carry negative balances.FTX’s computer code automatically liquidated accounts when losing positions exceeded their collateral, according to court filings.But that small tweak for Alameda – and a second similar one the following year – would ultimately have grave consequences for FTX, Bankman-Fried and the cryptocurrency markets as a whole.
Crypto Currency Markets Fall Trouble for Alameda began to mount in spring 2022 as crypto markets came unglued, primarily with the collapse of so-called “stable” digital coins that were supposed to be pegged to the value of the U.S.dollar.Alameda’s role on the exchange evolved from standing in as a market-maker to placing large directional bets for its own portfolio.It held leveraged positions on several trades, meaning it was trading with borrowed money, as well as a portfolio of venture capital investments in digital properties.
It owed billions in loans from digital asset lenders, bank lines of credit and in borrowing from the FTX exchange, including from customer funds, according to U.S.authorities.
In May and June of 2022, it began receiving so-called margin calls and loan recalls from creditors, but it couldn’t make the payments.So it tapped customer funds on the FTX exchange to pay them, authorities allege.’Korean Friend’s Account’ As the losses mounted through the fall of 2022, Bankman-Fried and other FTX executives sought to obscure Alameda’s massive losses.They reallocated $8 billion of the losses to a separate account, which they dubbed internally as “our Korean friend’s account” and “the weird Korean account,” and structured it in a way that it didn’t show up on the system, according to U.S.officials.
As news of FTX’s instability mounted, customers began demanding their money back, but the exchange was unable to meet all the withdrawal requests.It halted operations on November 8 and filed for bankruptcy a few days later.In a tandem bankruptcy proceeding, auditors have been able to recover about $6 billion in assets; a precise loss amount has never been determined.[Prosecution Witnesses in Bankman-Fried Criminal Trial Can Be Questioned on the Role Drug Use Played in FTX Collapse](/business/prosecution-witnesses-in-bankman-fried-criminal-trial-can-be-questioned-on-the-role-drug-use-played-in-ftx-collapse?utm_source=onsite&utm_medium=related_story) [Sam Bankman-Fried Appeals Decision to Hold Him in Jail While Awaiting Trial](/business/sam-bankman-fried-appeals-decision-to-hold-him-in-jail-while-awaiting-trial?utm_source=onsite&utm_medium=related_story) [Could Sam Bankman-Fried get life in prison? The legal catastrophe the FTX founder may face.](/grid/could-sam-bankman-fried-get-life-in-prison-the-legal-catastrophe-the-ftx-founder-may-face?utm_source=onsite&utm_medium=related_story) [DOJ Agrees to Only Try Sam Bankman-Fried on Original Charges – For Now](/news/doj-agrees-to-only-try-sam-bankman-fried-on-original-charges-only-for-now?utm_source=onsite&utm_medium=related_story) [Ex-Crypto King Sam Bankman-Fried Loses Bid to Dismiss Criminal Charges in FTX Collapse](/news/sam-bankman-fried-loses-bid-to-dismiss-criminal-charges-in-ftx-collapse?utm_source=onsite&utm_medium=related_story) [Sam Bankman-Fried’s Lawyers Say They’re Not Prepared For a Trial](/business/sam-bankman-frieds-lawyers-say-theyre-not-prepared-for-a-trial?utm_source=onsite&utm_medium=related_story) [privacy policy](/info/privacy-policy)and [terms of use](/info/terms-of-use).- Birkenstock Sets IPO Shares at $44 to $49Business – Former Abercrombie & Fitch CEO Allegedly Exploited Young Men for Sex: ReportBusiness – US Expands, Upgrades Probe Into 709,000 Ford Vehicles Over ‘Catastrophic’ Engine FailureBusiness – Cigna To Pay $172 Million To Settle Fraud AllegationsBusiness – Microsoft CEO Satya Nadella Spoke At Google’s Antitrust Trial.Here Are 4 Major Takeaways From His TestimonyTech – Tesla Misses Expected Cybertruck Delivery DeadlineBusiness – General Motors Furloughs 160 Workers as Auto Workers Strike ContinuesBusiness – Spotify’s Daniel Ek Wants the UK To Get Tough on Tech ‘Gatekeepers’Tech – Former CNN Chief Jeff Zucker’s RedBird IMI Buys Stake in Front Office SportsBusiness – United Auto Worker Strikes Have Cost $4 Billion — So FarBusiness – Turns Out Combined Incomes in California, NY and Illinois Actually Fell Last YearBusiness – As Strike Date Nears, Kaiser Permanente Unions’s Contract Expires Without AgreementBusiness.
