In mid-2020, FTX’s chief engineer secretly modified the cryptocurrency exchange’s software to exclude Sam Bankman-Fried’s fund.
He changed the code to exclude Sam Bankman-Fried’s fund Alameda Research from a provision that would have automatically auctioned off Alameda’s assets if it was losing too much borrowed money.
The engineer, Nishad Singh, underscored that FTX should never sell Alameda’s positions in a message outlining the move. Singh added a note to the platform’s code that read, “Be extra careful not to liquidate,” indicating that he contributed to its creation. The code base was examined by Reuters; this was unreported previously.
Due to the exception, Alameda was able to continue borrowing money from FTX regardless of the value of the collateral used to secure those loans. The U.S. Securities and Exchange Commission noticed that alteration in the code and on Tuesday accused Bankman-Fried with fraud. Alameda now has a “virtually unlimited line of credit,” according to the SEC. In addition, the SEC claimed that the billions of dollars that FTX secretly provided to Alameda during the following two years were not from its own reserves but rather were deposits made by other FTX customers.
SEC and a Bankman-Fried representative declined to comment
Both the SEC and a Bankman-Fried representative declined to comment for this article. Multiple requests for comment from Singh went unanswered.
The regulator claimed Bankman-Fried disguised that FTX routed consumer monies to Alameda in order to make covert startup investments, pricey real estate purchases, and political donations. The regulator referred to the exchange as “a house of cards.” Separate criminal and civil allegations were also brought by US authorities and the Commodity Futures Trading Commission, respectively.
The complaints, along with previously unreported FTX documents seen by Reuters, three people with knowledge of the cryptocurrency exchange, and others, offer fresh perspectives on how Bankman-Fried improperly spent billions more than FTX was making without the consent of investors, customers, and the majority of its staff.
Bankman-Fried was taken into custody by police in the Bahamas, where FTX had its headquarters, on Monday night, marking a remarkable fall from grace for the 30-year-old former billionaire. In November, his business failed as customers hurried to withdraw their cash and investors turned down his pleas for additional funding. On November 11, FTX filed for bankruptcy, and Bankman-Fried was fired as CEO.
Alameda was able to keep expanding its line of credit
Although Bankman-Fried expressed regret to his clients, he insisted that he didn’t believe he was legally responsible.
Alameda was able to keep expanding its line of credit thanks to the auto-liquidation exception included in the FTX legislation, which, according to the SEC complaint, “grew to tens of billions of dollars and effectively became limitless.” It was one of two methods used by Bankman-Fried to redirect client money to Alameda.
The second method included FTX clients depositing more than $8 billion in conventional money into accounts that were surreptitiously under Alameda’s control. The complaint claimed that these deposits were reported in an internal FTX account that was unrelated to Alameda, concealing Alameda’s culpability.