Charged with fraud by the SEC, Caroline Ellison and Garry Wang wisely turned on SBF

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Feature Image: HackerNoon’s Midjourney AI, Prompt “a house of cards that is crumbling”

COMPLAINT

Plaintiff Securities and Exchange Commission (the “Commission”), for its complaint against Caroline Ellison (“Ellison”) and Zixiao “Gary” Wang (“Wang,” together with Ellison, “Defendants”), alleges as follows:

SUMMARY

1. From at least May 2019 through November 2022, Defendants, together with Samuel Bankman-Fried (“Bankman-Fried”) and others, engaged in a scheme to defraud equity investors in FTX Trading Ltd. (“FTX”), the crypto asset trading platform of which Bankman- Fried and Wang were co-founders, at the same time that they were also defrauding the platform’s customers(1).

   FTX raised more than $1.8 billion from investors, including U.S. investors, who bought an equity stake in FTX believing that FTX had appropriate controls and risk management measures. Unbeknownst to those investors (and to FTX’s trading customers), Bankman-Fried was orchestrating a massive, years-long fraud, diverting billions of dollars of the trading platform’s customer funds for his own personal benefit and to help grow his crypto empire. Defendants were active participants in the scheme and engaged in conduct that was critical to its success.

2. Throughout this period, Bankman-Fried portrayed himself as a responsible leader of the crypto community. He touted the importance of regulation and accountability. He told the public, including investors, that FTX was both innovative and responsible. Customers around the world believed his lies, and sent billions of dollars to FTX, believing their assets were secure on the FTX trading platform. But Bankman-Fried and Wang improperly diverted customer assets to Alameda Research LLC and its subsidiaries (“Alameda”), the crypto asset hedge fund that they had founded and co-owned and that Ellison ran. Wang created and participated in the creation of the software code that allowed Alameda to divert FTX customer funds. Ellison, in turn, used the misappropriated FTX customer funds for Alameda’s trading activity. And Bankman-Fried used those customer funds to make undisclosed venture investments, lavish real estate purchases, and large political donations.

3. Working with Bankman-Fried, Defendants hid the scheme from FTX’s equity investors, including U.S. investors, from whom FTX sought to raise billions of dollars in additional funds. Bankman-Fried repeatedly cast FTX as an innovative and conservative trailblazer in the crypto markets. He told investors and prospective investors that FTX had top-notch, sophisticated automated risk measures in place to protect customer assets, that those assets were safe and secure, 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 truth, Bankman-Fried and Wang, with Ellison’s knowledge and consent, had exempted Alameda from the risk mitigation measures and had provided Alameda with significant special treatment on the FTX platform, including a virtually unlimited “line of credit” funded by the platform’s customers.

4. Beyond its “line of credit” with FTX, Ellison, at Bankman-Fried’s direction, caused Alameda to borrow billions of dollars from third-party lenders. Those loans were backed in significant part by Alameda’s holdings of FTT—an illiquid crypto asset security that was issued by FTX and provided to Alameda at no cost. Ellison, acting at the direction of Bankman- Fried, engaged in automated purchases of FTT tokens on various platforms in order to increase the price of those tokens and inflate the value of Alameda’s collateral, which allowed Alameda to borrow even more money from external lenders at increased risk to the lenders and to FTX’s investors and customers, all in furtherance of the scheme.

5. While Bankman-Fried spent lavishly on office space and condominiums in The Bahamas and sank billions of dollars of customer funds into speculative venture investments, his house of cards began to crumble. When prices of crypto assets plummeted in May 2022, Alameda’s lenders demanded repayment on billions of dollars of loans. Despite the fact that Alameda had, by this point, already taken billions of dollars of FTX customer assets, it was unable to satisfy its loan obligations. Bankman-Fried, with Defendants’ knowledge, directed FTX to divert billions more in customer assets to Alameda to ensure that Alameda maintained its lending relationships, and that money could continue to flow in from lenders and other investors. Ellison then used FTX’s customer assets to pay Alameda’s debts.

6. Even as it was increasingly clear that Alameda and FTX could not make customers whole, Bankman-Fried and Defendants continued to misappropriate FTX customer funds. Through the summer of 2022, Bankman-Fried, with Defendants’ knowledge, directed hundreds of millions more in FTX customer funds to Alameda, which he then used for additional venture investments and for “loans” to himself and other FTX executives, including Wang. All the while, Bankman-Fried continued to make misleading statements to investors about FTX’s financial condition and risk management. Defendants were aware that Bankman-Fried was making these statements, and knew or were reckless in not knowing that they were false and misleading. Even in November 2022, faced with billions of dollars in customer withdrawal demands that FTX could not fulfill, Bankman-Fried and Ellison, with Wang’s knowledge, misled investors from whom they needed money to plug a multi-billion-dollar hole. This brazen, multi-year scheme finally came to an end when FTX, Alameda, and their tangled web of affiliated entities filed for bankruptcy on November 11, 2022.

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This court case 1:22-cv-10794 retrieved on Dec 22, 2022, is part of the public domain. The court-created documents are works of the federal government, and under copyright law, are automatically placed in the public domain, and may be shared without legal restriction.