Business partners turn on Sam Bankman-Fried

New York
CNN
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The stunning collapse of one of the most prominent cryptocurrency companies soon turned into… legal battle pitting former executives and ex-partners against each other.

Last week, when FTX founder Sam Bankman-Fried was extradited to the US from the Bahamas, two of his former business partners pleaded guilty to multiple counts of fraud and conspiracy.

Carolyn Ellison, the 28-year-old former CEO of cryptocurrency hedge fund Alameda, has apologized before a New York federal judge, saying she and her former colleagues knowingly stole billions of dollars from clients of Bankman-Fried’s FTX Exchange and sought to do so. Cover it up, according to court transcripts.

“I’m really sorry for what I did,” Ellison told the court. “I knew it was wrong.”

Ellison told the court that Alameda had nearly unlimited borrowing facilities at FTX, and that it knew the exchange would need to use customer money to fund loans to the hedge fund. It also agreed to keep the unusually close relationship between the two companies hidden from investors and customers.

From July through October, Ellison told the court, Ellison agreed with Bankman-Fried and others to provide “materially misleading financial statements to Alameda’s lenders,” and prepared balance sheets that disguised the extent of Alameda’s borrowing, according to transcripts from the Dec. 19 and recently opened hearings.

Ellison has been charged with seven felony counts, including conspiracy to commit wire fraud and money laundering. She and Bankman-Fried were close business partners who dated briefly.

Ellison said she knows FTX executives have created an arrangement that allows Alameda to access an unlimited line of credit without having to post collateral or pay interest on negative balances, according to the transcript.

“It was my understanding that if Alameda FTX accounts had large negative balances in any given currency, that meant that Alameda was borrowing money that FTX clients had deposited on the exchange,” Ellison said in court.

Another associate, former FTX chief technology officer Gary Wang, pleaded guilty to four counts to similar charges.

Wang told the court that part of his role at FTX included making changes to the exchange’s code that would give Alameda “special privileges” over FTX.

“Between 2019 and 2022, as part of my work at FTX, I was directed and agreed to make certain changes to the platform code,” Wang said in court. “I made these changes, which I knew would be special privileges for Alameda Research on the FTX platform. I did so knowing others were representing to investors and clients that Alameda had no such special privileges and it was likely that people were investing in and using FTX in part on a basis those distortions.”

“I knew what I was doing was wrong,” he added.

Wang pleaded guilty during a hearing that began at 11 a.m. on Dec. 19, and Ellison did the same later that day, beginning at 4:30 p.m. as SBF remained in the Bahamas, according to court transcripts.

Wang faces up to 50 years in prison under the federal sentencing guidelines indicated in court. Ellison faces up to 110 years in prison for the seven charges to which she pleaded guilty, according to federal sentencing guidelines.

Both are out on bail as negotiated in their plea agreements. Sentencing for Ellison and Wang is scheduled for December 19, 2023.

Both Ellison and Wang are cooperating with federal prosecutors, making potentially incriminating witnesses against Bankman-Fried, who has repeatedly denied intentionally defrauding clients and investors.

Bankman Fried, 30, appeared Thursday in a US courtroom in New York, where a federal judge He was released on $250 million bail. He is required to surrender his passport and remain under house arrest at his parents’ home in Palo Alto, California.

Although $250 million is an exceptional amount, Bankman-Fried won’t have to pay it unless he violates the terms of his bail agreement or fails to appear in court. The atypical bail plan was approved as part of his commitment to waive the extradition fight.

After his court appearance, Bankman-Fred Foreman In the business class lounge at New York’s John F. Kennedy International Airport. Crypto reporter Tiffany Fong also tweeted a photo showing Bankman-Fried on an American Airlines flight.

Bankman-Fried’s legal team confirmed to CNN Business that he arrived in Palo Alto and was home with his parents. His lawyer declined to comment on Ellison and Wang’s guilty pleas.

A federal judge said Thursday that Fred Bankman will stand trial on eight felony counts including fraud and conspiracy at an unspecified future date.

Prosecutors allege that Bankman-Fried orchestrated “one of the largest financial frauds in American history,” stealing billions of dollars from FTX clients to cover losses at Alameda and enrich himself. If convicted, he will spend the rest of his life in prison.

Bankman-Fried, prior to his arrest in the Bahamas earlier this month, had sought to portray himself as a down-on-his-luck businessman who went down on his skates. He has repeatedly apologized to customers and FTX employees, saying that he “fed up,” While denying that he has intentionally defrauded anyone.

— CNN’s Lauren Del Valle and Cara Scannell contributed to reporting.