FTX Executives Expressed Concern Over Use of Customer Funds, Documents Show

A few weeks before FTX collapsed, a top executive at the cryptocurrency exchange met with its founder, Sam Bankman-Fried, to express a gnawing concern.

The executive had recently learned that Alameda Research, the crypto trading company that Mr. Bankman-Fried also founded, had borrowed roughly $13 billion from FTX. Alameda was in trouble: The firm had just recorded a loss of about $5 billion, which appeared to include money that FTX’s customers had deposited with the exchange for safekeeping.

When he was approached, Mr. Bankman-Fried acknowledged there was a problem, according to documents describing the conversation obtained by The New York Times. Mr. Bankman-Fried explained to the colleague that the “situation was causing him concern,” the documents show, and that it was hurting his productivity.

The episode, described in private communications between the governments of the United States and the Bahamas, offers new insight into the final days of FTX, as the company’s top executives started to panic. In November, a run on deposits sent the exchange into meltdown, exposing a gaping hole in the firm’s accounts and forcing it to file for bankruptcy. Last month, federal prosecutors in Manhattan charged Mr. Bankman-Fried, 30, with fraud, money laundering and campaign finance violations.

The authorities claim that Mr. Bankman-Fried siphoned billions of dollars in customer funds from FTX and used the money to make political contributions, finance trading at Alameda and buy luxury real estate in the Bahamas, where FTX was based. Mr. Bankman-Fried was arrested by the Bahamian police on Dec. 12 and later extradited to the United States.

The government documents obtained by The Times show how the U.S. authorities described the case to the Bahamians as they pushed for Mr. Bankman-Fried’s arrest. And the documents offer a detailed account of the discussions among FTX and Alameda executives about the exchange’s use of customer funds. While some details of those conversations have appeared in public charging documents, others have not been previously disclosed.

Except for Mr. Bankman-Fried, none of the executives are named in the documents. But two of them, including the one who met with Mr. Bankman-Fried to discuss the customer funds, are described as high-level software developers who worked on FTX’s code.

What to Know About the Collapse of FTX

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What is FTX? FTX is a now bankrupt company that was one of the world’s largest cryptocurrency exchanges. It enabled customers to trade digital currencies for other digital currencies or traditional money; it also had a native cryptocurrency known as FTT. The company, based in the Bahamas, built its business on risky trading options that are not legal in the United States.

Who is Sam Bankman-Fried? He is the 30-year-old founder of FTX and the former chief executive of FTX. Once a golden boy of the crypto industry, he was a major donor to the Democratic Party and known for his commitment to effective altruism, a charitable movement that urges adherents to give away their wealth in efficient and logical ways.

How did FTX’s troubles begin? Last year, Changpeng Zhao, the chief executive of Binance, the world’s largest crypto exchange, sold the stake he held in FTX back to Mr. Bankman-Fried, receiving a number of FTT tokens in exchange. In November, Mr. Zhao said he would sell the tokens and expressed concerns about FTX’s financial stability. The move, which drove down the price of FTT, spooked investors.

What led to FTX’s collapse? Mr. Zhao’s announcement drove down the price and spooked investors. Traders rushed to withdraw from FTX, causing the company to have a $8 billion shortfall. Binance, FTX’s main rival, offered a loan to save the company but later pulled out, forcing FTX to file for bankruptcy on Nov. 11.

Why was Mr. Bankman-Fried arrested? FTX’s collapse kicked off investigations by the Justice Department and the Securities and Exchange Commission focused on whether FTX improperly used customer funds to prop up Alameda Research, a crypto trading platform that Mr. Bankman-Fried had helped start. On Dec. 12, Mr. Bankman-Fried was arrested in the Bahamas for lying to investors and committing fraud. The day after, the S.E.C. also filed civil fraud charges.

In public charging documents, the authorities have identified two FTX executives who worked on the exchange’s code: Gary Wang and Nishad Singh, who both helped found FTX with Mr. Bankman-Fried. The other unnamed person mentioned in the communications is described as a high-level Alameda official, an apparent reference to Caroline Ellison, who was Alameda’s chief executive.

Both Ms. Ellison and Mr. Wang have pleaded guilty to fraud charges and agreed to cooperate with prosecutors. Mr. Singh has not been charged.

Lawyers for Mr. Wang and Mr. Singh declined to comment. A lawyer for Ms. Ellison did not respond to a request for comment. A spokesman for the U.S. attorney’s office for the Southern District of New York, which is leading the criminal investigation into FTX, declined to comment.

A spokesman for Mr. Bankman-Fried declined to comment.

The government communications came at a relatively early phase of the investigation into Mr. Bankman-Fried, before Ms. Ellison and Mr. Wang pleaded guilty, and it’s possible that prosecutors’ understanding of some details of the case may have evolved.

But according to the documents, in 2020, one of the FTX software developers, known as CC-1, ran a query in a company database and learned that Alameda had a negative balance on the exchange of “approximately hundreds of millions of dollars.” The data led CC-1 to conclude that Alameda was “inappropriately using customer funds,” according to the documents.

The executive raised the issue with Mr. Bankman-Fried, who responded that “it was okay,” the documents say, because the money Alameda had borrowed was backed by FTT, a cryptocurrency that FTX had invented.

Around the same time, FTX was undergoing an audit, according to the documents, and the high-level Alameda executive asked Mr. Bankman-Fried whether the auditors would raise any concerns about Alameda’s use of customer funds. “Bankman-Fried responded that auditors did not typically focus on such issues,” the documents show.

Concerns about Alameda intensified sometime around last September. The firm had recently lost about $5 billion, and Mr. Bankman-Fried discussed the possibility of shutting it down, according to the documents.

Around that time, the documents say, the software developer known as CC-1 told the other software developer, labeled CC-2, that Alameda had borrowed approximately $13 billion from FTX.

CC-2 was “alarmed” that FTX appeared to have lost customer money, according to the documents, and met with Mr. Bankman-Fried to express that concern.

“Bankman-Fried acknowledged that the situation was causing him concern, resulting in Bankman-Fried being ‘5-10 percent less productive,’” the documents show. “Bankman-Fried indicated that the situation could correct itself if they raised more equity, and cryptocurrency prices went up.”

But the situation did not improve. In early November, the run on deposits sent FTX into free fall. The executive known as CC-1 made initial calculations indicating “that FTX would be able to satisfy all customer withdrawals,” according to the documents. “Bankman-Fried then indicated to CC-1, in substance and in part, that CC-1 had overlooked a separate, hidden account that included an approximately $8 billion liability owed to by Alameda.”

The Aftermath of FTX’s Downfall

The sudden collapse of the crypto exchange has left the industry stunned.

  • A Spectacular Rise and Fall: Who is Sam Bankman-Fried and how did he become the face of crypto? “The Daily” charted the spectacular rise and fall of the man behind FTX.
  • How FTX Operated: FTX called itself an exchange. But it was vastly different from stock exchanges, which are highly regulated and barred from engaging in many of the activities that the crypto company pursued. 
  • Bankman-Fried’s Bail Negotiations: Intense legal wrangling led to the disgraced crypto mogul paying virtually nothing to live with his parents ahead of his upcoming trial.
  • Ryan Salame: The former FTX executive, who told regulators about wrongdoing at the exchange and was a big Republican donor, has emerged as a central player in the scandal.

In the communications, the U.S. authorities also warned the Bahamas that Mr. Bankman-Fried was a flight risk. “Prosecutors have reason to believe that, were Bankman-Fried to learn he was under investigation by U.S. authorities, and therefore possibly also criminally charged, he would likely flee the Bahamas, and would also seek to destroy evidence.”

The U.S. claimed that Mr. Bankman-Fried “personally accumulated billions of dollars from his involvement in the criminal conspiracy” and “has the means, and may soon have the motive, to flee the Bahamas.”

Sam Bankman-Fried was arrested by the Bahamian authorities in December.Credit…Eva Marie Uzcategui for The New York Times

The day after his arrest, Mr. Bankman-Fried appeared in court in the Bahamas, where a judge denied him bail and sent him to the island’s notorious Fox Hill prison. But even as the American government argued behind the scenes that Mr. Bankman-Fried was a flight risk, U.S. prosecutors negotiated with his lawyers to secure a deal that would allow him to make bail in the United States.

Mr. Bankman-Fried’s legal team has argued that his decision to stay put in the Bahamas even as his company collapsed in November showed he never intended to flee.

In late December, Mr. Bankman-Fried agreed to the extradition, and was soon released under strict conditions that require him to remain confined to his parents’ house in Palo Alto, Calif. In court, Nicolas Roos, an assistant U.S. attorney prosecuting the case, told a judge that Mr. Bankman-Fried’s wealth had “diminished significantly” and that his family and community ties helped justify a bail package.

This month, Mr. Bankman-Fried briefly returned to New York to plead not guilty to the charges. From his childhood home near the Stanford University campus, he has begun compiling a detailed defense.

“I didn’t steal funds, and I certainly didn’t stash billions away,” he wrote in a post on the online platform Substack last week. “Nearly all of my assets were and still are utilizable to backstop FTX customers.”

He has also argued that FTX’s American subsidiary, FTX US, was fully solvent and should still be able to refund its customers. “It’s ridiculous that FTX US users haven’t been made whole and gotten their funds back yet,” he wrote.

Mr. Bankman-Fried stepped down as chief executive of FTX when the company filed for bankruptcy. Since the filing, the company’s new leadership has recovered more than $5 billion of cash and crypto assets, one of its lawyers said at a hearing last week.

Matthew Goldstein contributed reporting.

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