FTX: Sam Bankman-Fried's 2 Friends Caroline Ellison and Zixiao 'Gary' Wang Plead Guilty
Moneylife Digital Team/ IANS 22 December 2022
Two of FTX founder Sam Bankman-Fried’s closest associates have pleaded guilty to fraud-related charges in connection with the collapse of the cryptocurrency exchange and agreed to cooperate with US authorities investigating the collapse of the bankrupt cryptocurrency exchange, according to a Manhattan Federal prosecutor. This means Caroline Ellison and Zixiao “Gary” Wang took a plea deal or settlement to avoid even more prison time in exchange for sharing the details on Sam Bankman-Fried. However, there is no news on Indian-origin Nishad Singh, another key executive of FTX.
Damian Williams, the US attorney for the Southern District of New York, announced the guilty pleas and criminal charges against Caroline Ellison and Zixiao “Gary” Wang, the low-profile co-founder of FTX, in a short video statement. Last week, his office had brought eight charges against Bankman-Fried, who is a Bahamas-permanent resident. The guilty pleas were related to their roles as insiders at FTX and its sister company Alameda Research, as per media reports.
Caroline Ellison, 28, ran the crypto hedge fund Alameda Research that was a subsidiary of FTX. Ellison previously worked with former FTX CEO Sam Bankman-Fried at Jane Street.
Gary Wang, 29, was a former college roommate of Bankman-Fried at the Massachusetts Institute of Technology. Mr Wang cofounded FTX with Bankman-Fried in 2019.
Though Mr Williams did not specify what charges Mr Wang and Ms Ellison pleaded guilty to, he said the announcement would not be the last his office makes concerning its investigation into FTX.
“Let me reiterate a call I made last week. If you participated in misconduct at FTX or Alameda, now is the time to get ahead of it. We are moving quickly and our patience is not eternal,” Mr Williams said.“We continue to work around the clock and we are far from done,” he added.
In separate announcements on Wednesday, the US Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) announced civil charges against Ellison and Wang.
According to some media reports, Ms Ellison pleaded guilty to seven counts and faces up to 110 years in prison. Mr Wang pleaded guilty to four counts and faces up to 50 years in prison. The SEC said Ms Ellison and Mr Wang were cooperating with its ongoing investigations.
On Wednesday, a judge approved Bankman-Fried's extradition to the United States after the Bahamas minister of foreign affairs signed off on the order. Mr Williams also confirmed Sam Bankman-Fried’s extradition and transfer to US custody.
According to the SEC’s complaint, from 2019 and 2022, Ms Ellison, at the direction of Mr Bankman-Fried, furthered a scheme to manipulate the price of FTX's token, FTT, "by purchasing large quantities on the open market to prop up its price."
This practice allowed FTX to use FTT as collateral for loans taken out by FTX using its customers' assets to Alameda. The outcome permitted the value of Alameda's balance sheet to be overstated, thereby misleading investors about FTX's exposure, the SEC complaint alleges. The SEC did not respond to Yahoo Finance's request for comment by press time.
During the same time, Mr Bankman-Fried touted FTX as a "safe crypto asset trading platform with sophisticated risk mitigation measures to protect customer assets." FTX's current CEO, John J Ray III, said in testimony before the US House Financial Services Committee on 13th December that he estimates FTX's losses are in excess of US$7bn (billion) dollars.
FTX customer funds were used for Alameda's trading activities, loans to FTX executives, and to fund personal real estate purchases, according to the SEC complaint.
"Between March 2020 and September 2022, Bankman-Fried executed promissory notes for loans from Alameda totaling more than $1.338 billion, including two instances in which Bankman-Fried was both the borrower in his individual capacity and the lender in his capacity as CEO of Alameda," the complaint said. "Ellison knew, or was reckless in not knowing, about these 'loans.'"
As CTO of FTX, Mr Wang created the platform's software code that allowed Alameda to divert FTX customer funds, the SEC alleged. At Alameda, Ellison used the misappropriated funds for the hedge fund's trading activity, according to the SEC's complaint.
The complaint also alleges that even after it was made clear FTX could not make customers whole, Mr Bankman-Fried "directed hundreds of millions of dollars more in FTX customer funds to Alameda" with the knowledge of Ms Ellison and Mr Wang.
"By surreptitiously siphoning FTX’s customer funds onto the books of Alameda, defendants hid the very real risks that FTX’s investors and customers faced," said in SEC's statement on its complaint.
SEC is seeking monetary penalties and to bar Ms Ellison and Mr Wang from acting as corporate officers or directors. The action also asks for an injunction to stop the defendants from participating directly or indirectly in the issuing, purchasing, offering, or selling traditional and crypto securities.
SEC said both have reached settlements, subject to court approval.
“As part of their deception, we allege that Caroline Ellison and Sam Bankman-Fried schemed to manipulate the price of FTT, an exchange crypto security token that was integral to FTX, to prop up the value of their house of cards,” said SEC’s chairperson Gary Gensler.
“We further allege that Ms Ellison and Mr Wang played an active role in a scheme to misuse FTX customer assets to prop up Alameda and to post collateral for margin trading. When FTT and the rest of the house of cards collapsed, Mr Bankman-Fried, Ms Ellison, and Mr Wang left investors holding the bag. Until crypto platforms comply with time-tested securities laws, risks to investors will persist.”
CFTC’s chairman Rostin Behnam said the agency had moved “aggressively to hold all individuals who commit fraud accountable and protect customers from additional harm and losses.”
SEC and Commodity Futures Trading Commission (CFTC) have filed civil suits against FTX and its key executives.
After the arrest of Mr Bankman-Fried, the FTX founder and a former cryptocurrency mogul, from the Bahamas who has agreed to be extradited to the US, all eyes were on his key associates, including Mr Singh.
Mr Bankman-Fried spent the past nine days in Nassau's Fox Hill prison, in New Providence, Bahamas weighing his choices before telling a magistrate court on Wednesday that he would not fight extradition. A court in Manhattan has charged him of engaging in a scheme to defraud FTX customers by using billions of dollars in stolen deposits to pay for expenses and debts and to make investments for his crypto hedge fund, Alameda Research LLC.
Meanwhile the plane that was reportedly carrying Sam Bankman-Fried, arrived in Westchester County, New York on Wednesday. Mr Bankman-Fried decided to agree to extradition in part out of a "desire to make the relevant customers whole," as per a court filing dated 20th December. He is due to appear in a Manhattan court as soon as Thursday morning, Financial Times reported.
FTX has filed for bankruptcy, following which many of its investors told the media that they are unable to withdraw funds. According to a Manhattan court filing, FTX owed its 50 largest creditors almost US$3.1bn in credit. 
Mr Bankman-Fried was once cited as a young version of the marvellous US investor Warren Buffett. Mr Bankman-Fried had an estimated net worth of over US$15bn as recently as late October. 
Mr Singh was in the inner circle of FTX's 30-year-old founder Mr Bankman-Fried.
As FTX's director of engineering, he lived in a penthouse in the Bahamas, along with Ms Ellison and Mr Wang.
Mr Singh and the close friends of Mr Bankman-Fried had a group on encrypted messaging platform Signal, called "Wirefraud", which was used to discuss company operations.
According to earlier reports, Mr Wang, Mr Singh and Mr Bankman-Fried controlled the code, the Exchange's matching engine, and funds. Ms Ellison, Mr Wang and Mr Singh are key players in this FTX catastrophe, media reports mentioned.
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