The SEC says former FTX founder and CEO Sam Bankman-Fried internally directed the software code to be written in a way that would allow his cryptocurrency hedge fund, Alameda, to operate with a negative balance in his client account at FTX .
This allegedly happened in August of 2019, approximately four months after FTX began operations.
That effectively provided sister trading firm, Alameda, with an unlimited line of credit funded by customer assets, according to the Securities and Exchange Commission complaint filed in federal court Tuesday.
This meant that there was no meaningful distinction between FTX client funds and the Alameda funds that Bankman-Fried used as his “personal piggy bank,” the complaint said. He hid from investors and clients that he used the funds to buy luxury condos, support political campaigns and make private investments, according to the SEC.
Between March 2020 and September 2022, Bankman-Fried executed more than $1.338 billion in loans from Alameda, including two instances where Bankman-Fried was both the individual borrower and the lender as Alameda’s CEO, says the SEC in its civil complaint.
Bankman-Fried used Alameda’s funds to purchase tens of millions of dollars in Bahamian real estate for himself, his parents and other FTX executives, according to the filing.
Alameda co-founders Nishad Singh and Gary Wang also borrowed $554 million and $224.7 million, respectively, similarly executing promissory notes with Alameda in 2021 and 2022, the filing said.
Singh and Wang have not been charged with any crimes at this point.
The loans to Bankman-Fried and others were “poorly documented and sometimes not documented at all,” the lawsuit says.
When crypto asset prices plummeted in May 2022, Bankman-Fried repaid Alameda’s demanding third-party lenders from its FTX “credit line,” further increasing the multibillion-dollar liability and then hid it on Alameda’s balance sheet for avoid alarming investors, claims the complaint.
FTX’s CEO continued to leverage the companies to his personal advantage, lending himself $136 million at the end of July 2022, a month after offering crypto financial services firm BlockFi a $250 million revolving line of credit to relieve its liquidity problems, according to the filing. . Meanwhile, throughout the summer, it presented investors with a “false and misleading positive account” of the company, despite its “weak financial condition,” the SEC said.